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For about 50 years, the Department of Energy (DOE) and its predecessors have used contracting policies that were developed during the crisis of World War II. Since that time, billions in taxpayer dollars have been spent on contracts where competition was the exception, almost any contractor’s cost was reimbursed, and lax oversight of contractors was the practice. In 1990, DOE began taking initial steps toward improving its contracting. The current Secretary of Energy, after acknowledging that DOE was not in control of its contractors, is continuing to reform DOE’s contracting. DOE is the largest civilian contracting agency in the federal government. In fiscal year 1995, DOE had contract obligations of $17.5 billion, or about 91 percent of the Department’s total fiscal year 1995 obligations. Its contracting practices are rooted in the development of the atomic bomb under the Manhattan Project during World War II. This Project was a unique undertaking to produce atomic capability under emergency conditions and under circumstances of utmost urgency, extreme risk, and unprecedented security. Special contracting arrangements were developed by DOE’s predecessor agencies with participating industry and academic organizations, including the government’s agreement, with few exceptions, to fully reimburse all of the contractors’ costs and completely indemnify contractors against any liability incurred from their involvement on the project. From these roots, DOE’s contracting took two separate paths—(1) the path for management and operating (M&O) contracts, the direct descendants of the Manhattan Project, under which several current contracts were originally awarded during World War II and (2) the path for non-M&O contracts. The M&O contracts, which accounted for 82 percent ($14.3 billion) of DOE’s fiscal year 1995 contract obligations, have been governed in key procurement areas by DOE’s own unique procurement regulations. M&O contracts are for the operation, maintenance, or support of government-owned research, development, production, or testing facilities, both nuclear and nonnuclear. The non-M&O contracts, which account for the remaining 18 percent ($3.2 billion) are governed by the governmentwide Federal Acquisition Regulation (FAR). As a result of the two different paths, these contracts have distinct differences. For example, noncompetitive procurement has been the normal practice for M&O contracts, while competitive contracting has been the norm for non-M&O contracts. In early 1990, we designated DOE’s contract management as one of 16 high-risk areas in the federal government warranting close attention over a period of several years. We did so because we believed that DOE was highly vulnerable to waste, fraud, abuse, and mismanagement as a result of DOE’s extensive reliance on contracting and its history of inadequate oversight of contractors. From this effort, we have issued a series of reports and testimonies on DOE’s contracting practices that have contributed to Congress’s deliberation on DOE’s budget and have provided an important impetus for DOE’s efforts to reform its M&O contracts. (See the end of this report for a list of related GAO products and testimonies.) DOE’s contract reform initiatives encompass a myriad of efforts. This report focuses on important changes being made in the areas of competition, performance goals, and incentives but does not cover all aspects of DOE’s contract reform effort. Reforming M&O contracts has been an elusive and longstanding DOE goal. For the fiscal 1989, 1990, and 1991 Federal Managers’ Financial Integrity Act reports, the Secretary of Energy identified contract management as a material weakness and recommended actions to correct some of the weaknesses. In April 1992, we reported that the Secretary’s recognition of contract management weaknesses, commitment to strengthening contract controls, and actions to address some contracting weaknesses were important first steps for reform. However, we concluded that the weaknesses would not be corrected in the near future because the corrective actions would take several years to implement. In May 1993, the Secretary of Energy told the Congress that DOE was not in control of its M&O contractors and was not in a position to ensure the effective and efficient expenditure of taxpayer dollars. To find solutions to its contracting problems, the Secretary announced the creation of a Contract Reform Team, chaired by the Deputy Secretary of Energy, to do a “top-to-bottom” review of DOE’s contracting mechanisms and practices. In February 1994, the Contract Reform Team published its report, Making Contracting Work Better and Cost Less. In the report, the Reform Team focused its efforts on M&O contracting and identified a number of problems that needed correction, including the following: Loose accountability for contractors’ performance and few controls to ensure that funds are spent on the highest priorities. Few controls over contractors’ costs. Fees that did not properly reflect the quality of the contractor’s performance. Insufficient fee incentives to encourage excellent performance. The reimbursement of costs that the government should not reimburse. Insufficient competition and a strong bias for existing contractors. Insufficient financial accountability. To correct these problems, the Reform Team recommended 47 specific actions to make DOE’s contracting work better and cost less. The Secretary subsequently added another recommendation to the Reform Team’s list regarding diversity among participating contractors and subcontractors. These 48 recommendations included requirements to develop items, such as policy, guidance, and plans to correct identified problems. The policy and guidance provide a framework for reform, but their actual implementation will require a period of years, as the current contracts are either competitively awarded or renewed and the reform provisions incorporated into the contracts. Chief among the Contract Reform Team’s goals, represented by several recommendations, was a new contract form that the Reform Team proposed—the Performance-Based Management Contract. Key elements of this contract included the following: Clearly stated, results-oriented, performance goals and indicators of performance. Incentives for contractors to meet and exceed the performance goals effectively and efficiently. Criteria and incentives for contractors to seek opportunities to subcontract work that could be performed better by firms other than the M&O contractor. Incentives for cost-saving. Improved financial accountability. Concerned about the results of DOE’s undertaking, the Chairman, Subcommittee on Energy and Power, House Committee on Commerce requested, in January 1996, that we review DOE’s contract reform efforts and focus on the key contracting areas of competition and performance goals. Specifically, we (1) determined the status of the Contract Reform Team’s recommendations; (2) evaluated the effect of the initiatives on competition for M&O contracts, which are used to manage and operate DOE’s facilities; (3) evaluated DOE’s initial efforts at inserting performance goals in its M&O contracts; and (4) evaluated DOE’s early use of incentive contracts to control the costs of its M&O contracts. To determine the status of DOE’s actions in response to the Contract Reform Team’s recommendation, we analyzed the Contract Reform Team’s report and identified the actions that the recommendations required. We then reviewed DOE’s documentation supporting the actions to determine if they met each requirement of the individual recommendations. To determine the timeliness of each action, we compared the original and amended deadlines with the actual dates that the actions were completed. We discussed each action with the staff of the Contract Reform Project Office and staff of the DOE organizations that acted on the Reform Team’s recommendations. To evaluate the effect of contract reform on competition for M&O contracts, we reviewed the Contract Reform Team’s report and recommendations and reviewed DOE’s interim and final policy for the award of M&O contracts. We identified each decision to award contracts including those listed in the Secretary of Energy’s July 5, 1994, decision memorandum to those decisions made by the end of August 1996 and obtained information from DOE showing whether these contracts had been competitively awarded previously. We then analyzed the information provided by DOE to determine if the new decisions reflected an increase in competition from past procurements. Since DOE did not provide specific justification for each of its noncompetitive decisions in the July 5, 1994, decision memorandum, we could not evaluate whether these decisions were appropriate. To evaluate DOE’s use of performance goals for M&O contracts, we reviewed the requirements of the Government Performance and Results Act of 1993, DOE’s strategic plan, and the Secretary’s performance agreements with the President for fiscal years 1995 and 1996. Additionally, we reviewed the performance goals and indicators contained in the contracts for the Rocky Flats Environmental Technology Site, the Nevada Operations Office’s Support, the Argonne National Laboratory, and the Thomas Jefferson National Accelerator Facility (formerly called the Continuous Electron Beam Accelerator Facility). We compared the performance goals from these contracts with the goals identified in DOE’s strategic plan and annual performance agreements. We also discussed the goals and plans with DOE’s strategic planning staff, contract reform staff, and contracting staff involved with the contracts we reviewed. To evaluate the use of cost incentives on incentive contracts, we reviewed DOE’s M&O procurement regulations and the FAR for the negotiation of contract prices. To evaluate two alternative ways in which DOE applied cost incentives to its M&O contracts, we reviewed the two contracts that used contract types that typically are used to control costs. These included contracts for the Oak Ridge facility and the Waste Isolation Pilot Plant. These two contracts used incentive contracts that are typically used to provide a cost incentive in their pricing arrangement. We discussed the contracts with DOE contracting staff involved in the setting of incentives for these contracts and with cognizant contracting officials at DOE’s headquarters. We provided DOE with a draft of this report for its review and comment. The Department provided us with written comments on the draft report, which are presented and evaluated in chapters 2 through 5 and are reprinted in appendix II. We performed our review from March 1996 through November 1996 in accordance with generally accepted government auditing standards. DOE is making headway in developing policies, procedures, and guidelines in response to the Contract Reform Team’s report. Together, these reform actions, among others, should serve as the framework for contract reform. At the end of August 1996, DOE reported completing 47 of the 48 actions needed to respond to the Reform Team’s recommendations. Our analysis indicates, however, that DOE has not completed nine actions in accordance with the Reform Team’s recommendations. Moreover, DOE is well behind its original schedule for completing reform actions, which will add to the time that is needed to fully and properly implement contract reform for its contracts. Furthermore, DOE staff that developed reform actions have reported potential problems with implementation. In subsequent chapters in this report, we identify examples of problems that DOE has encountered as it begins to implement contract reform. As a result of its review of DOE’s contracting practices, DOE’s Contract Reform Team made 47 recommendations in its February 1994 report to make DOE’s contracting work better and cost less. Shortly after the Reform Team’s report was published, the Secretary of Energy added a 48th recommendation concerning diversity. For the most part, the Reform Team’s recommendations dealt with the development of policies, procedures, guidance, or plans involving such key contracting issues as competitive procurement, performance goals, and performance and cost-reduction incentives. or each recommendation, the Reform Team prescribed a specific reform action to be taken, established a specific deadline for the action, and assigned a specific DOE organization with the responsibility for developing the reform action. (See app. I for a list of the specific reform actions and their status.) In March 1994, the Secretary established an executive committee to oversee the implementation of contract reform, and in June 1994, the committee established the Contract Reform Project Office within the Office of the Deputy Secretary. The purpose of the Project Office is to provide DOE organizations having responsibility for completing actions with guidance as well as to shepherd completed reform actions through the approval process. Among its other duties, the Project Office ensures that (1) recommendations have been assigned to the proper departmental organizations for action, (2) desired reform goals have been clarified, and (3) systems have been established to track reform efforts. The Project Office considers a reform action complete when the action has been officially approved by the executive committee. DOE states that it has completed action on 47 recommendations. However, nine of DOE’s actions were not performed in accordance with the Reform Team’s requirements. DOE’s Contract Reform Project Office staff explained that all of their completed actions complied with the intent of the Reform Team. We reviewed the documentation for each of DOE’s completed actions performed in response to the Reform Team’s recommendations and found that nine actions did not meet the specific requirements of the Reform Team’s recommendations. For example, to operate DOE’s facilities in a more efficient and cost-effective manner, the Reform Team recommended that DOE establish a preference for its M&O contractors to subcontract various functions, such as laundry and cafeteria services, unless the M&O contractor could perform these functions at a lower cost. The Reform Team further recommended that contractors be provided with incentives to encourage the contractors to subcontract these services. However, DOE’s proposed regulation, published in the Federal Register in June 1996, did not include provisions for the incentives that were recommended by the Reform Team. According to Project Office officials, the incentives were unnecessary because the proposed regulation would require contractors to subcontract for these services where appropriate. However, the Project Office officials stated that several DOE field offices are currently providing their contractors with incentives to subcontract these services. Furthermore, in an effort to implement performance-based contracting methods for support service contracts, the Reform Team recommended that DOE develop a plan for converting cost-reimbursement support service contracts to performance-based contracts, when applicable. Although DOE provided illustrations of potential application of performance-based methods to support services and identified specific program and field offices that are now planning to convert some of their support service requirements to performance-based support, DOE did not develop an actual plan with targets and milestones for converting these possible support services as required by the Reform Team. Project Office officials and program office officials who were assigned to develop actions in response to recommendations stated that while actions may not have strictly adhered to the requirements of the Reform Team’s report, these actions, nevertheless, achieved their intended goals. For example, the Reform Team recommended that DOE reduce its current audit backlog in order to improve the ability of DOE managers to administer financial operations. In doing so, the Reform Team advised DOE to identify ways to provide the Defense Contract Audit Agency with sufficient funding to permit additional resources to be assigned to DOE’s non-M&O contracts. Before providing the Defense Contract Audit Agency with funds, however, the Reform Team recommended that the costs and benefits of obtaining such additional resources as well as any plausible alternatives be assessed. In response, DOE provided the Defense Contract Audit Agency with funding in fiscal year 1995 to reduce DOE’s current audit backlog with plans to continue funding until the current backlog is eliminated. However, DOE neither performed a cost-benefit analysis nor suggested any viable alternatives as recommended in the contract reform report. Although DOE has made progress in its efforts to write new policy, guidelines, and plans, it has substantially exceeded its deadlines for 45 of 47 completed reform actions. DOE exceeded its deadlines by an average of 11 months, and 13 actions were from 18 months to 26 months late.Moreover, many of the original deadlines had been subsequently extended by the executive committee at the request of cognizant departmental organizations. However, even the extended deadlines have been exceeded as well. According to Project Office officials, unanticipated circumstances often caused delays in the processing of actions. For example, some of these delays were caused by the review process. Moreover, Project Office officials said that a considerable amount of time was consumed in an attempt to achieve greater participation from departmental organizations in reviewing and commenting on actions. Delays were also encountered in the assigning of actions to specific departmental organizations. For example, Project Office officials mentioned that the Office of Procurement and Assistance Management opposed being assigned responsibility for six action items because these actions were inherently field related, which the officials believed, could best be handled by the Office of the Associate Deputy Secretary for Field Management. Project Office officials further pointed out that the reform actions were done by staff on a part-time basis because the reform action work was in addition to their normal duties. Moreover, because many of the actions were new approaches that crossed lines of responsibility, they often required considerable internal coordination among the offices that shared such responsibility. According to the officials, other factors such as newly established initiatives, downsizing, and retirements also caused delays in completing actions. Although it is too soon to assess the overall effectiveness of the reform actions on achieving DOE’s contract reform goals, early indications suggest that delays, limited available resources, and overly broad guidance may inhibit implementation. The deadlines for the vast majority of the reform actions were missed. Of those reform actions that are now reported as complete, many have been completed recently. For example, 49 percent were completed during fiscal year 1996. Because of these delays in setting the framework of contract reform, successful implementation of the new policies will be pushed further into the future. Several task teams have expressed concerns about whether available resources can adequately support the reform actions they developed. For example, the task team with responsibility for developing specific performance goals and indicators for real and personal property reported that numerous stakeholders expressed concerns that implementation may be problematic “because of the lack of resources and baselines to be measured against.” We raised similar concerns in a 1995 report on property management at DOE’s Rocky Flats site. In the report, we concluded that without accurate data on property, neither DOE nor its contractor can determine how much property is present at the site and how much has been lost or stolen. Furthermore, the task team charged with developing generic and specific performance goals and indicators for business management as well as environment, safety, and health expressed similar concerns. The task team recommended that “prior to commencing implementation, detailed planning, including an assessment of the impact on staffing and infrastructure and the ability to adjust to such impact, must be done.” The team further reported that the performance goals and indicators were developed “at a high level and may not directly apply to an individual contract being incentivized.” The team finally added that many of the examples contained in its report were based on site-specific goals that would need to be replaced with goals that are relevant to each contractor. Project Office officials reiterated that it may take years to determine whether many of these actions will make DOE contracting work better and cost less. However, the Project Office expects to issue its own report on the impact of the contract reform actions in late 1996. Project Office officials stated that they will not assess each action individually but will assess the cumulative impact of the actions on such things as competition, performance goals, and incentives. Although, DOE has made significant progress in setting a framework for contract reform through the issuance of new policies, guidance, and plans, the real test of contract reform will be in the implementation of these reforms in contracts. These changes will take time to come to fruition because (1) it will take time for DOE’s existing contracts to be replaced by new ones incorporating reform measures, (2) some reform actions are still works-in-progress and will continue to evolve, and (3) DOE was late in completing almost all of its reform actions. Because of the magnitude of DOE’s reforms, some of which are directly opposed to its previous contracting policy, we believe that implementation problems are to be expected. These problems must be identified and corrected during implementation for contract reform to succeed. For this reason, we believe it is vital for the continued monitoring of contract reform implementation by the Secretary of Energy and other top DOE officials. Since contract reform has been a high priority of the Secretary, we are not making any recommendations along this line. While we recognize that having new policies in place is an important step toward ensuring that reform occurs, the actual implementation of contract reform and these policies should not lose momentum nor priority. DOE believes that our draft report did not provide a comprehensive overview of their reform efforts and failed to address the extent to which contract reform has made contracting work better and cost less. We believe that DOE has taken some very important steps in reforming its contracting problems. DOE has (1) changed its policy and adopted competitive awards as its new contracting standard, (2) included performance goals in its contacts, and (3) moved quickly to implement the use of incentive contracts to control costs. In our opinion, the broad strategy presented by DOE is inextricably linked with contract reform and, more particularly, the 48 action items. Furthermore, the completion of the policies, procedures, and guidance developed under the action items is the backbone of sustained contract reform. Therefore, the status of these action items provides a reasonable assessment of DOE’s progress and the framework for future assessments as DOE’s overall effort evolves. Furthermore, DOE’s new contacts are not based on final policy, and they had been in effect for only about 1 year. Thus, it will take years to determine the extent to which DOE has met its goal of making contracting work better and cost less. DOE believes that our report does not address what the Department has done to make each of the 48 action items a reality, and it attached specific comments relating to these items. Our detailed responses addressing the specific items that DOE questioned is discussed in appendix II. In response to one of the most significant recommendations of the Contract Reform Team, DOE has changed its policy from one of making noncompetitive M&O contract awards to one that adopts full and open competition as the norm for M&O contract awards. For various reasons, however, the majority of M&O contracts continue to be extended on a noncompetitive basis. Of the 24 decisions made between July 1994 and August 1996, DOE decided to extend 16 on a noncompetitive basis while competitively awarding 8. Furthermore, for three University of California contracts, DOE made the decision to extend the contracts prior to completing negotiations despite the Contract Reform Team’s recommendation to the contrary. As a result, DOE has placed itself in the same weak negotiating position that it has maintained for years and that contract reform was designed to prevent. The Contract Reform Team recommended, and DOE put in place, a policy to overturn years of noncompetitive contracting with M&O contractors. Prior to contract reform, DOE’s procurement regulation authorized competition for M&O contracts when it appeared likely that the government’s position might be meaningfully improved in terms of cost or performance unless it was determined that to change contractors would be contrary to the best interests of the government. As a result of this policy and practice, the Contract Reform Team concluded that noncompetitive contracting had become the norm in M&O contracting. The Contract Reform Team was critical of this noncompetitive policy stating that because, in part, of the close working relationships with particular contractors, contracts were routinely extended every 5 years, thus resulting “in many contractors continuing to perform for decades.” The Reform Team further said that this practice created a bias that favored the incumbent contractor and that a new policy favoring competition would improve DOE’s contracting by encouraging new contractors to participate in M&O awards because they would understand that DOE and the incumbent contractor would no longer have perpetual relationships. Finally, the Reform Team noted that DOE’s decisions to extend individual M&O contracts were made before negotiations were held with the contractors. As a result, DOE’s negotiating position with its contractors was weakened. DOE established an interim policy on September 28, 1994, that changed its M&O contract award policy to one favoring full and open competition. As recommended by the Contract Reform Team, the policy provided that competitively awarded M&O contracts would include a basic contract term of 5 years or less and may include an option to extend the term of the contract for 5 additional years or less and a maximum term limit of 10 years. As recommended, the policy also provided for noncompetitive extensions of M&O contracts, in exceptional circumstances, where competition was “incompatible with the effective and efficient discharge of Departmental programs or is otherwise incompatible with the paramount interest of the United States.” In these instances, the Secretary of Energy was to authorize the use of noncompetitive procedures to extend an existing contract, and the extension of the contract was to be conditioned upon the successful negotiation of DOE’s objectives. DOE’s final policy, which became effective on August 23, 1996, adopted a standard of full and open competition in the award of M&O contracts, including performance-based management contracts. The policy further states that an M&O contract may be awarded or extended without providing for full and open competition only when justified under one of the exceptions provided under the Competition in Contracting Act of 1984. The seven exceptions provided by the act include identified and specific circumstances such as where only one source can perform the work or when an agency’s need for an item is of unusual and compelling urgency.The policy states that noncompetitive extensions shall be considered conditional upon the successful negotiation of the contract. Additionally, the Secretary must authorize all awards that do not use full and open competition. From July 5, 1994 to August 31, 1996, DOE made 24 decisions to competitively award or noncompetitively extend M&O contracts. Of these 24 decisions, 16 were to noncompetitively extend contracts and 8 were to competitively award contracts. Additionally, decisions were made on four other former M&O contracts that either brought them to an end or converted them to cooperative agreements. The 16 contracts that DOE noncompetitively extended or plans to noncompetitively extend include 12 contracts that, according to DOE, have never been competitively awarded. The average age of these 16 contracts is about 35 years. Table 3.1 lists contracts that DOE either noncompetitively extended or plans to noncompetitively extend. The eight contracts that DOE has competitively awarded or is planning to competitively award include four prior contracts that were competitively awarded in the late 1980s, according to DOE. These include the contracts for the Savannah River, Hanford Reservation, Hanford Environmental Health Center, and Mound facilities. However, the Oak Ridge contracts, which DOE plans to competitively award, will replace contracts that were noncompetitively awarded. On the other hand, the new competitively awarded contracts for the Idaho, Nevada, and Rocky Flats facilities each replaced several contracts that were both competitively and noncompetitively awarded. Table 3.2 presents a list of the competitively awarded procurements or procurements that are planned for competition. In reaching its decisions on whether to competitively award or noncompetitively extend a contract, DOE considered such things as the transition of its facilities to environmental restoration facilities; the long-standing relationships with its incumbent contractors at research and development laboratories and the need to make special arrangements with contractors on whose property the facilities were situated (some of DOE’s laboratories are located on the campuses of universities); and the need to maintain core competencies in nuclear weapons design, production, and dismantlement during the transition to a post-Cold War society. We discussed the results for the 24 contract decisions with the Deputy Assistant Secretary for Procurement and Assistance Management, the Director of the Contract Reform Project Office, the Deputy Associate Deputy Secretary for Field Management, and other DOE staff. They explained that the new noncompetitive contracts are really new contracts that include new clauses and new requirements. In addition, they stated that there is increased competition for former M&O work, which is being competitively awarded through DOE’s privatization efforts. For example, at the Hanford facility, the procurement for the Tank Waste Remediation System, which in the past would have been done noncompetitively by the current M&O contractor, is now being competitively awarded as a separate procurement. Finally, the procurements for sites that had a change in their missions or were in transition from one mission to another were competitively awarded and the contracts were noncompetitively extended for those where there was a significant amount of continuity with the contractor. Although contrary to a recommendation by the Contract Reform Team, DOE may have weakened its bargaining position with the University of California when it conditionally decided to extend the contracts prior to their negotiation. “Under these circumstances, it would be unrealistic to consider the introduction of an unknown and untested management team to these critical scientific and technical endeavors.” “The loss of such resources by transferring to a different contractor is equally incompatible with our program requirements.” At the end of the decision, the Secretary explained that any award to the University is contingent on improvements in the terms of the current contracts. We discussed this decision with the Deputy Assistant Secretary for Procurement and Assistance Management, the Director of the Contract Reform Project Office, and the Deputy Associate Deputy Secretary for Field Management and were told that regardless of the statements, DOE has the resolve to competitively award these contracts if it does not obtain the contract reforms that it is seeking from the university. Additionally, the officials explained that they were very careful in the wording of the decision and that the comments about the university only reflected its scientific capabilities and not its business management, which must be improved. DOE’s new policy on competition became effective on August 23, 1996. As a result, the timing of our work did not give us the opportunity to review DOE’s justifications for noncompetitive procurement under the new policy. However, we note that the new policy adopts a standard of full and open competition. DOE’s policy also adopts the provision of the Competition in Contracting Act, as implemented by the FAR, that provides specific exceptions to the act’s requirements for full and open competition. Under these exceptions, DOE can continue to justify its noncompetitive procurements and not fulfill the intent of its own competition policy. The Competition in Contracting Act was enacted in 1984 to increase the use of competitive procurement in the federal government. Although the act requires full and open competition, it provides seven exceptions to full and open competition that can permit noncompetitive procurement. One exception that DOE could use to justify noncompetitive procurements for many of its M&O contracts is the exception that authorizes noncompetitive procurements to maintain an essential engineering, research, or development capability to be provided by a federally funded research and development center. Although this exception is available to DOE, in the past, DOE has successfully awarded M&O contracts competitively to operate its research centers at the Sandia National Laboratory and the Idaho National Engineering Laboratory. Additionally, within the last few months, DOE has decided to competitively award the future contract for the Oak Ridge National Laboratory—another research center. We believe that DOE should continue its efforts to competitively award its research centers whenever feasible. In the event that DOE does need to use this exception to justify a noncompetitive procurement, we believe that, whenever feasible, DOE should use noncompetitive procedures only after segregating the research work from other activities of its M&O contractors. For example, in 1995, we reported that about 50 percent of the funds spent by M&O contractors in fiscal year 1994 under 19 contracts for research centers was for research and development activities. The remaining funds were spent on such things as the environmental restoration of facilities contaminated with hazardous and nuclear waste. Thus, about 50 percent of the M&O contractors’ funds were not directly associated with research activities. DOE could maximize its competitive awards by separating the nonresearch work from that of the research center and competitively awarding the nonresearch work. We discussed the new competition policy and its potential use in regard to the research centers with the Deputy Assistant Secretary for Procurement and Assistance Management, the Director of the Contract Reform Project Office, and the Deputy Associate Deputy Secretary for Field Management. They told us that DOE shares our concern about the granting of exceptions from competition for all of the work done at research facilities. Furthermore, they told us that DOE is also concerned with the number of its federally funded research and development centers and is considering a reduction in the number of research centers it now operates. Bringing competition into DOE’s contracting could be the single most significant aspect of the contract reform initiative. However, DOE’s new policy is only as good as its implementation. After nearly 2 years of experience under contract reform and after 24 decisions, DOE’s actions show that it has a long way to go before it realizes the benefits of competition. Although DOE officials told us that DOE is improving its existing contracts through noncompetitive negotiations, it is doing just that—negotiating in a noncompetitive environment. This does not identify new potential contractors as contract reform intended. Only competition will do that. DOE believes that our draft report did not adequately acknowledge the impact of the Department’s new competition policy. Specifically, DOE believes that real changes have occurred in its contract competition culture and practices and that the proposed extension of the three laboratory contracts conforms to its policy. First, DOE states that in all cases where noncompetitive extensions have been sought, the Department subjected each decision to a rigorous examination of the facts and circumstances. Also, DOE states that rather than using the existing contract as a basis for negotiation, the Department developed administrative mechanisms to ensure that contract reform terms and conditions were the basis for negotiation. While we agree that DOE has changed its competition policy, the Department decided in two-thirds of its decisions to noncompetitively extend M&O contracts. Furthermore, the Contract Reform Team’s report concluded that contracts should be competitively awarded except for unusual circumstances. We believe that such a large proportion of noncompetitively extended contracts suggests that DOE still has a long way to go before realizing the benefits of competitive contracting. Although DOE believes that it is improving its existing contracts by negotiating in a noncompetitive environment, it is not obtaining the benefits of competition. Second, DOE states that extending the three laboratory contracts was contingent on incorporating contract reform provisions and achieving other negotiation objectives. As noted in our draft report, the Secretary’s decision to extend these contracts stated that considering other contractors was unrealistic and incompatible with program requirements. Once DOE stated that only one contractor could do this work, DOE effectively weakened its negotiation position. Even though the Secretary also noted that any resulting contract was contingent on the incorporation of reform measures, we believe that DOE’s actions to date, give the appearance that the decision to extend these contracts was made prior to the completion of successful negotiations and therefore is inconsistent with the intent of contract reform. One of the key elements of DOE’s new Performance-Based Management Contracts is their inclusion of clearly stated, results-oriented performance goals and indicators to determine if the performance was achieved.However, as DOE seeks to implement its new contracting approach together with its strategic planning initiative, contract weaknesses are becoming apparent. DOE’s new contracts do not always contain a clear linkage between the contract goals and those of the Department. In addition, some contract provisions allow contractors to dispute either the total amount of the contract incentive or the amount of the incentive provided for a specific goal. Because DOE relies heavily on its contractors to carry out its missions, it is essential that the goals in DOE’s contracts be aligned with DOE’s strategic goals. Additionally, DOE’s contracts should not harm the Department’s authority to allocate incentives to the performance of contract goals. DOE officials agree that their efforts to put reforms and initiatives in place quickly resulted in inconsistencies. They see these early stages of implementing contract reform and strategic planning as a learning process. Two DOE initiatives—contract reform and strategic planning—are closely aligned. The conversion of M&O contracts into Performance-Based Contracts is a major goal of the Contract Reform Team’s report and DOE has been converting its management and operating contracts to Performance-Based Contracts. The Reform Team concluded that earlier M&O contracts included loose accountability for performance with few quantitative controls to ensure that funds were spent on the highest priorities. While DOE was incorporating performance goals in its new contracts, it also was working on its strategic planning initiative. During its strategic planning efforts, DOE developed a strategic plan that includes performance goals to be achieved and performance indicators to determine if the goals were achieved. Considering that DOE’s M&O contractors were provided with about 74 percent of DOE’s total fiscal year 1995 obligations, it is clear that DOE cannot fulfill its strategic goals without directing the work of its M&O contractors. Therefore, DOE’s contract reform and strategic planning initiatives are closely linked. In February 1995, DOE developed contract reform guidance for the use of performance goals, indicators, and incentives in M&O contracts. Among other things, the guidance stated that (1) a top-down approach should be used to link DOE’s strategic plan to subordinate strategic plans and ultimately into specific goals and indicators in contracts and (2) performance goals and indicators should be traceable to the successive levels of strategic plans. Additionally, the guidance indicated that goals and indicators must be derived from the site where the contract work is to be performed. Under the Government Performance and Results Act of 1993 (GPRA), most federal agencies, including DOE, will be required to set strategic goals, measure performance, and report on the degree to which their goals are met. Specifically, by September 30, 1997, they will be required to prepare a strategic plan covering at least a 5-year period that describes, among other things, (1) general goals and objectives for the major functions and operations of the agency, (2) how the agency intends to achieve these goals and objectives, and (3) how the goals of the strategic plan are related to those to be used in annual performance plans. In later years, agencies will be required to prepare annual performance plans with goals that are related to those of the strategic plans and program evaluation reports that show the success at accomplishing their goals. Finally, the GPRA identifies the drafting of strategic plans, annual performance plans, and program performance reports as inherently governmental functions that must be performed by federal employees. DOE is ahead of the deadlines imposed by GPRA’s requirements and published its first departmental strategic plan in April 1994. The plan identifies five programmatic business lines and four critical success factors. The plan includes performance goals and indicators to determine if the goals for the business lines and success factors have been achieved. Additionally, the Secretary of Energy developed performance agreements between herself and the President for fiscal years 1995 and 1996. DOE considers these performance agreements to be similar to the annual performance plans that will be required by GPRA in future years. Although DOE cannot fulfill its strategic goals without the work of its M&O contractors, it is difficult to find a connection between DOE’s overall strategic plan goals, its performance agreement goals, and its M&O contracts. Without a clear connection, DOE is not assured that its contractors are focused on the Department’s identified goals. Additionally, it will be difficult for DOE to quantify, in the performance reports required by GPRA, its success in meeting goals. DOE’s strategic plan and annual performance agreements identify its five departmental lines of business and its four critical success factors. The performance goals and indicators are then listed together with the lines of business and the success factors. We reviewed four contracts that were awarded after the development of DOE’s strategic plan in 1994 to determine if the contracts’ performance goals could be traced to the strategic plan’s goals. We also compared contract goals with the performance agreement goals using the fiscal year performance agreement that was in effect when the contract was awarded. In some cases, a contract goal could be clearly linked to the strategic plan goal. For example, a goal of the departmental strategic plan under the business line “science and technology” is to “Provide new insights into the nature of matter and energy, address challenging problems, and create a climate in which breakthroughs occur.” The contract for the Argonne National Laboratory under its “science and technology” area included a corresponding contract goal to “Provide new insights the nature of matter and energy.” Although, through experience, DOE may find a need for more specific goals in the individual contracts, such clear linkage to the strategic plan’s business lines and goals can help DOE’s contract efforts and contract results focus on the identified goals of the Department. In other cases, contract goals were difficult to link to the strategic plan or the current fiscal year’s performance agreement. For example, the M&O contract that supports the Nevada Operations Office included goals grouped under seven categories. However, the seven contract categories were not the same as the nine departmental business lines and key success factors. As a result, we could not link the contract goals to those of the strategic plan. A DOE Nevada operations office official explained that specific goals were in the contract even though the Nevada office’s mission was uncertain. Additionally, the office noted a lack of direction from DOE headquarters during the negotiation of performance goals for the contract. Some contract provisions give the contractors the right to legally dispute DOE’s determination of the total amount of contract incentives available or the amount of incentives that can be applied to specific contract goals. Such provisions can compromise DOE’s ability to place priorities on its contract work because these incentives are used to motivate contract performance. The setting of the goals by DOE is clearly important because DOE needs to maintain its authority to direct the work. However, the setting of incentives is also important. Incentives are used to motivate contractors’ efforts that might not otherwise be emphasized. Without the authority to identify the amount of incentives necessary to motivate the contractor, DOE loses an important contracting tool that helps it direct the contract work. DOE’s procurement regulation for its award-fee contracts, a type of contract providing an incentive for contractor performance, likewise emphasizes that the government has the unilateral right to identify the criteria to evaluate the contractor’s performance and the percentage of award fee to be allocated to the individual criterion. However, for the four new M&O contracts identified in table 4.1, we found that the contract language in each contract was different for determining how goals would be determined and how incentives would be allocated to the goals. For example, under the Rocky Flats contract, the contractor can propose goals to add to the contract, but if there is a disagreement between the contractor and DOE, the contractor may legally dispute the amount of an incentive to be applied to a goal. On the other hand, the Hanford contract specifically states that the final determination of goals and the distribution of incentives will be made solely by DOE and the contractor cannot dispute DOE’s decision. DOE’s field offices gave us different reasons for using these provisions. For example, contracting staff at Rocky Flats and Nevada told us they included the provisions because they considered these provisions as typical standard provisions in DOE contracts; contracting staff at Idaho said they incorporated language prohibiting disputes on goal setting to protect the government’s interests and to minimize disputes; and the chief counsel at DOE’s Richland office, which manages the Hanford contract, stated that Richland incorporated language prohibiting disputes on goal setting and the amount of incentives applied to each goal because Richland considered the setting of goals and incentives to be basic to DOE’s ability to direct the work of the contractor in fulfilling the government’s requirements. Language permitting contractors to dispute how DOE will apply incentives to goals can compromise DOE’s ability to place priorities on the work that it deems necessary at its facilities. DOE personnel are in the early stages of implementing contract reform and strategic planning and are still learning about the processes. Although DOE officials agree that the linkage should exist, they cite their attempts to put things in place quickly as reasons for the differences in actual practice. With changes occurring simultaneously and different offices initiating different actions, inconsistencies are occurring in implementation. DOE’s strategic planning staff and contract reform staff agreed with us that there should be a clear linkage of departmental strategic plan goals to those of the M&O contracts. They explained that at present, this clear linkage does not exist, in part, because of DOE’s changing mission and the learning process involved in these new initiatives. They also explained that DOE focused on moving forward with changes and that at times, policy and guidance did not precede the actual implementation of the contract reform and strategic-planning implementation. Because of the concurrent development of guidance and its actual implementation, several different strategies have been followed in DOE’s contracts. A clear linkage of goals in M&O contracts, annual performance agreements, and strategic plans is needed to manage DOE’s complex and varied missions. Such linkage should help DOE in directing the performance of its missions and reporting on its success in accomplishing mission goals. Additionally, contracts that contain provisions that impinge on DOE’s authority to set incentives have the potential to detrimentally affect DOE’s ability to perform its missions. We recommend that the Secretary of Energy require that the goals written into the M&O contracts be clearly linked to DOE’s strategic plan and annual performance goals and a mandatory standard contract clause be included in all M&O contracts that gives DOE the exclusive authority to set contract goals and incentives that support the strategic plans and missions of the Department. Although DOE generally agrees with our two recommendations, it was concerned over two issue related to the linkage of contract performance goals and departmental goals. Specifically, DOE believes that (1) our analysis did not consider subordinate goals, such as program goals, that would better link departmental goals with contract goals and (2) we should have taken a larger sample of contracts in our analysis of performance goals. In analyzing DOE’s goals, we considered the provisions of GPRA and did not find the linkage between agency and contract goals. We reviewed DOE’s strategic plan, annual performance agreements, strategic plans for DOE’s five business lines and key success factors, and site-strategic plans. We discussed our results with staff of DOE’s Office of Strategic Planning, Budget and Program Evaluation and the Contract Reform Project Office and explained to them that we could not track the goals from the Departmental Strategic Plan, through the subordinate program plans, and into the M&O contracts. In selecting the contracts for detailed review, we chose from 11 contracts that were awarded at the time of our selection. From these, we selected four because they had the most thorough provisions for performance goals. On the basis of this selection process, we believe our detailed analysis was sufficient to suggest that as DOE moves forward with contract reform and strategic planning, it needs to ensure that contract goals are clearly identified with departmental goals. Another key element of the Contract Reform Team’s new Performance-Based Management Contract is the inclusion of incentives to control contract costs. As DOE begins to use incentive contracts to control costs, its M&O procurement regulations are not providing the necessary direction for the placement of these incentives in contracts by DOE’s contracting officers. For a cost incentive to be effective, the contracting officer must establish a reasonable target price to motivate the contractor to effectively manage costs. Although the FAR provides considerable direction on the pricing of contracts, DOE’s M&O regulations do not. Since DOE’s contracting officers are not required to follow the FAR for pricing M&O contracts, they are largely left on their own to determine how best to accomplish this task. Our analysis of two DOE contracts—where one contracting officer used important aspects of the FAR requirements and the other did not—show that when the FAR requirements were used, DOE was able to affect the contractor’s performance. Incentive contracts can be used to effectively reduce costs. However, to be effective, incentives need to be properly set within the pricing structure of the contract. Although the FAR provides direction and procedures for the pricing of contracts, DOE’s M&O procurement regulation only provides guidance for the setting of fees. Two basic incentive contracts used by government contracting officers to control costs are the fixed-price-incentive and cost-plus-incentive contracts. Under each of these contracts, the contracting officer’s goal is to negotiate a target cost and a profit or fee that motivates the contractor to effectively manage costs. The incentive should provide the contractor with an incentive to reduce costs and a disincentive to overrun costs. Typically, incentives are expressed as a sharing ratio between the government and the contractor. For example, a sharing ratio of 50/50 indicates that for each dollar of cost reduction below the target cost, the government saves 50 cents and the contractor increases its profit by 50 cents, while for each dollar over the target cost, the government’s costs increase by 50 cents and the contractor’s profit or fee is reduced by 50 cents. These contracts provide the contractor with a clear understanding of how its cost performance will affect its profits or fee and can be effective tools to control costs. However, in order for them to be effective, the contracting officer needs to properly negotiate the target cost of the contract. Under the FAR, a key responsibility of the government contracting officer is to obtain supplies and services at fair and reasonable prices. In the negotiation of contract prices, the contracting officer must determine a fair and reasonable price through an analysis of proposed costs and/or prices. This analysis may include the review and evaluation of individual cost elements, such as materials, labor, and subcontract prices that support the contractor’s overall proposed price. For contracts expected to cost $500,000 or more, the contractor may be required to submit cost or pricing data that include all the facts that prudent buyers and sellers would reasonably expect will affect price negotiations significantly. These data are then certified by the contractor as being accurate, current, and complete as of the date of agreement on the contract price or another date agreed to by the contracting officer and the contractor. For a cost analysis, contracting officers generally are to request a technical analysis of the contractor’s proposed costs. This technical analysis is done by specialists who advise the contracting officer on costs for such things as material and labor. In addition, the contracting officer may have the proposal reviewed by an auditor. DOE’s M&O procurement regulations do not require contracting officers to negotiate costs and prices, determine fair and reasonable prices, obtain cost or pricing data, nor analyze proposed costs. Instead, contract costs are determined by the M&O contractors, who then submit this information to DOE as the basis for the Department’s annual budget process. This process reflects DOE’s historical long-term relationship with its M&O contractors and not the typical arm’s-length relationship between buyers and sellers. As part of the budget process, M&O contractors prepare their own budget requests for the upcoming fiscal year in accordance with DOE’s policy. The budget requests are reviewed by DOE personnel in accordance with DOE’s budget formulation process. M&O contract funding is then determined by the amount of funds appropriated by the Congress and the amount of funds that DOE obligates to the M&O contracts. DOE is including various different cost reduction and cost incentive clauses in its contracts as a contract reform. However, as discussed in the two case studies below, DOE’s process did not provide its contracting officers with the needed direction to price their incentive contracts. As DOE begins to implement contract reform and adopt cost incentive contracts the need for cost guidance becomes important. Therefore we reviewed DOE’s two incentive contracts used under contract reform to determine the possible impact of the absence of guidance for price negotiations. One of these contracts included both a fixed-price-incentive provision and cost-plus-incentive provision and the other contract included only a cost-plus-incentive provision. The experiences of DOE’s contracting officers at the Oak Ridge Facility and the Waste Isolation Pilot Plant, who used these contracts, demonstrates how contracting officers developed cost incentives in the absence of procedures. The Oak Ridge Facility Contract involves work for DOE’s national security and the environmental management and uranium enrichment facilities programs at Oak Ridge, Tennessee; Paducah, Kentucky; and Piketon, Ohio. The contract is structured as a cost-plus-award-fee contract and it includes a base fee. The award fee includes three parts: (1) performance fee, (2) cost reduction fee, and (3) remaining award fee. In addition, the contract established a cost-plus-incentive-fee arrangement for performing work assigned for specific task orders. We reviewed Oak Ridge’s efforts at negotiating a cost-plus-incentive-fee arrangement on one of the task orders that included this incentive arrangement. We selected the first task order negotiated under the contract—for a demolition project—because it had a large dollar value and the work performed on the task order was nearing completion. As of March 31, 1996, DOE had issued 17 task orders estimated to cost $144 million under the contract with a total available fee of $13 million for these task orders. Table 5.1 shows the amounts negotiated between the contracting officer and the M&O contractor for the one task order and the amount that DOE expects the completed work will actually cost. On the surface, the task order pricing arrangement appears to have been successful. However, as explained below, the contractor received the incentive because DOE accepted the contractor’s unsubstantiated target costs (which were significantly higher than actual costs) as part of the contract. A major cost element of the task order was the M&O contractor’s proposed subcontract cost, which the contractor estimated at $10.9 million without obtaining actual bids from any subcontractors. Although DOE’s contracting officer requested a technical analysis of the estimated subcontract costs from an independent engineering firm, the contracting officer did not require the contractor to support its subcontract cost estimate with actual bids from prospective subcontractors. The engineering firm advised the contracting officer that the subcontract should cost about $4.9 million. However, the contracting officer did not use the engineering firm’s advice because the project manager believed that the engineering firm’s estimates were too low. The task order’s target cost was then negotiated with a final subcontract amount of $10 million. After the cost and fees were agreed to on the task order, the M&O contractor obtained competitive bids for the subcontract work that were much less than the negotiated amount. According to the contracting officer and the project manager, the winning bid was about $3.5 million—or about $6.5 million below the task order cost of $10 million. Under the incentive agreement, the M&O contractor will receive a target fee of $935,000 if the project cost comes within the target range of $18.7 million to $19.7 million and could earn an additional incentive fee of up to $654,500 for underrunning the target cost to as low as $17 million. Additionally, the incentive fee was based on a sharing ratio in which the contractor receives 40 percent of the cost underrun. For example, if the target cost was underrun by $1 million, the contractor would receive 40 percent of the underrun, or $400,000. Since the total potential incentive was limited to $654,500, the contractor is limited to that amount even though its costs were expected to be much lower than the $18.7 million to $19.7 million target. On this task order, the M&O contractor earned the entire incentive fee simply by obtaining competitive subcontract bids and not through any effort associated with the work. DOE’s Oak Ridge officials acknowledged the problem that this situation created and to counter it, adopted a “capping” policy on fee amounts that could be paid to the M&O contractor for cost reductions resulting from subcontract costs that are lower than the negotiated cost. The capping policy limits the fee amount that the contractor can receive to a prenegotiated amount. Although this policy limits the incentive fee that the M&O contractor can earn by shopping for bids after task order prices are negotiated, it is only a partial solution. We believe that additional guidance is needed. The Waste Isolation Pilot Plant contract is for a repository for the disposal of transuranic wastes resulting from defense activities and programs. The contract is a multiple incentive contract including both a fixed-price-incentive and a cost-plus-award fee that acts much like a cost-plus-incentive to control contract costs. In addition to the cost incentives, this contract also included performance incentives. In pricing the contract, the contracting officer started with the M&O contractor’s budget request for fiscal year 1995. The budget request had been reviewed and approved by DOE during the budget process. In addition, the contracting officer requested that DOE specialists evaluate the budget amounts. After the budget request was approved by DOE, the M&O contractor identified two work items that could be performed at less cost by a subcontractor. These new amounts were then negotiated into the contract and represented a decrease from the amount that had been submitted in the budget request and earlier approved by DOE. Although not required by DOE’s M&O procurement regulations, the contracting officer obtained a certificate of current cost or pricing data from the contractor in accordance with the FAR because she did not believe that the DOE M&O procurement regulations were adequate for contract pricing of incentive contracts. Table 5.2 shows the negotiated costs for the incentive parts of the contract, the actual costs incurred, and the fees earned. The contracting officer believed that the cost incentive provision served as the catalyst for the substantial cost reduction under the cost-plus-award-fee part of the contract. Although we did not evaluate the incurred costs to determine the reasons for the reduction in cost, both the contractor and the contracting officer said that the contractor’s efficiencies and improved performance contributed to the reduction in the estimated cost of the work. For the fiscal year 1996 price negotiations, the contracting officer went a step further toward the FAR requirements, again on her own initiative, by (1) requesting that the contractor submit cost or pricing data and (2) analyzing the contractor’s documentation that supported about 48 percent of the proposed costs for the contract. We discussed our findings regarding DOE’s incentives under these two contracts with the Deputy Assistant Secretary for Procurement and Assistance Management, the Director of the Contract Reform Project Office, and the Deputy Associate Deputy Secretary for Field Management. They acknowledged that DOE’s regulations are inadequate for the pricing of contracts and the use of incentives tied to the contract pricing. Specifically, they noted that the basic problem is that DOE’s M&O costs are budget based and not cost based. They explained that incentives should not be based on the budgeted amounts but should be based on negotiated contract costs. Under contract reform, DOE planned to increase the use of incentive contracts. However, in the absence of M&O procurement regulations governing the negotiation of contract prices, DOE’s ability to control costs under this type of contract is limited. When the FAR was used, DOE was able to reduce its contract costs. To continue DOE’s reforms that are aimed at placing more cost risk on its contractors through the use of cost incentives and in a further effort to bring M&O contracting into the mainstream of federal contracting, we recommend that the Secretary of Energy adopt federal contract pricing policies such as those contained in the FAR. DOE agrees with our recommendation regarding the inclusion of cost incentives based on those included in the FAR. Furthermore, DOE has a draft fee policy that contains a requirement that contracts (cost plus incentive fee, fixed price incentive fee, and firm fixed price) in the future will be developed pursuant to FAR Part 16. However, FAR Subpart 15.8 provides specific guidance on the analysis of prices and costs and the documentation of price negotiations. DOE’s draft policy should include provisions from this part of the FAR that are appropriate for the pricing of M&O contracts. DOE also believes that our discussion of cost incentives is limited by the number of contracts that we reviewed. However, our primary purpose was to determine the impact of the lack of DOE regulations on how to set these incentives. We looked at two contracts because one case demonstrated the benefits of applying the FAR to this process and the other case showed the impact of not having a regulation. In addition, DOE’s comments questioned our reference to Oak Ridge’s capping policy on fee amounts. DOE officials acknowledged problems with cost incentives at Oak Ridge and adopted a capping policy to limit the fees that could be earned and to provide a check on potential errors in estimating unique projects. Although this policy may have some benefits, it does not fully resolve the identified contract pricing problems. | Pursuant to a congressional request, GAO reviewed certain aspects of the Department of Energy's (DOE) contract reform initiative. GAO found that: (1) DOE has completed action on 47 of the 48 contract reform recommendations, but 9 of the completed actions did not meet the requirements of the Contract Reform Team; (2) DOE also missed its deadlines for completing the required new policies, guidance, and plans that serve as the framework for contract reform by an average of 11 months; (3) the missed deadlines have added to the time needed to implement contract reform; (4) while DOE has changed its policy and adopted competitive contract awards as the new standard for management and operating (M&O) contracts, in practice, DOE continues to make noncompetitive awards for these contracts; (5) DOE's contracting offices are including performance goals in their M&O contracts, but the contract goals are not always clearly linked to those of the Department; (6) DOE's contracting offices have moved quickly to implement another important reform by using incentive contracts, but the negotiation of these incentives did not always prove effective; and (7) since DOE is authorized to use its own procurement regulation for M&O contracts, the contracting officers have been left to use their own judgment and have achieved different results with the use of these incentives. |
Examinations involving offshore tax evasion take much more time to develop and complete than examinations of other types of returns, but when offshore examinations are completed, the resulting median assessment is almost three times larger than for all other types of examinations. However, because of the 3-year statute, the additional time needed to complete an offshore examination means that IRS sometimes has to prematurely end offshore examinations and sometimes chooses not to open an examination at all, despite evidence of likely noncompliance. Some offshore examinations exhibit enforcement problems, such as technical complexity, which are similar to those where Congress has granted a statute change or exception in the past. In a separate report being publicly released today, we suggest that Congress lengthen the statute of limitations for cases involving offshore activity. IRS generally uses the term “offshore” to mean a country or jurisdiction that offers financial secrecy laws in an effort to attract investment from outside its borders. IRS examinations, both offshore and nonoffshore, are generally of one of three types—correspondence, office, or field. The most complex examinations are done through revenue agent field visits to taxpayer locations, that is, field examinations. Most offshore examinations from 2002 through 2005 were of this type. Generally, unless a taxpayer’s tax return involves fraud or a substantial understatement of income, or unless the taxpayer agrees to an extension, the statute of limitations for IRS to assess additional taxes is 3 years from when IRS receives the taxpayer’s tax return. Taking an examination past the statute of limitations date may result in disciplinary action against the responsible revenue agent and his or her manager. Comparing offshore and nonoffshore examinations, IRS examination data from fiscal years 2002 through 2005 showed that it takes IRS longer both to develop a potential offshore examination case after a return is filed and to conduct the examination itself. The median of offshore case total cycle time—the time that elapses between a return being filed and IRS’s closing of the examination of that return—was almost 500 calendar days longer than for nonoffshore cases, a 126 percent difference. Offshore examinations also required significantly more direct examination time, with an average of 46 hours spent directly on offshore examinations and 12 hours on nonoffshore examinations. IRS officials told us that the longer time needed to complete offshore examinations is because of the inherent difficulty in identifying and obtaining information from foreign sources, often dilatory and uncooperative tactics on the part of taxpayers and their representatives, and technical complexity. About half of all offshore examinations resulted in a recommended assessment of additional taxes due compared to approximately 70 percent of nonoffshore examinations. While fewer offshore examinations resulted in assessments, the median assessment of all types of offshore examinations was nearly three times larger than for nonoffshore examinations. Although assessments were larger, the greater number of hours of direct examination time meant that assessment dollars per hour of offshore direct examination time were about half that of nonoffshore examinations—$1,084 per hour from offshore examinations and $2,156 from nonoffshore examinations. IRS created guidance for continuing offshore examinations past the 3-year point. Subject to management approval, agents can carry on the examination past the 3-year point based on their judgment that, given additional time, they will ultimately prove that the examination met one of the criteria necessary for IRS to make an assessment after the 3-year statute date has passed. All of the examinations allowed to extend past the statute date under this guidance represent a gamble on the part of IRS that the examination will ultimately meet one of the exceptions to the statute and an assessment will be allowed under the law. IRS records show that 1,942 offshore examinations were taken past the 3-year statute period from fiscal years 2002 through 2005. IRS ultimately made assessments on 63 percent of these examinations and these assessments were significantly higher than assessments from all other types of examinations, with a median assessment of about $17,500 versus about $5,800 from offshore examinations that were closed within the 3-year statute of limitations. The median assessment for all nonoffshore examinations that went past the statute date was about $4,900 versus about $2,900 from all nonoffshore examinations closed within 3 years. IRS databases do not allow systematic analysis of the approximately 700 offshore examinations that did not result in an assessment, so we do not know if these were accurate returns or if the agent discovered tax evasion but it did not rise to the level of fraud or substantial understatement of income. Revenue agents and managers told us that because IRS has only 3 years from the time the taxpayer files a tax return, and offshore cases take longer than nonoffshore cases to identify and develop, some case files are not opened for examination because insufficient time remains under the statute to make the examination worthwhile. They added that, in order to avoid violating the statute, they will often choose case files to examine with more time remaining under the 3-year statute of limitations over case files that have less time remaining and with more likely or more substantial possible assessments. Similarly, IRS revenue agents and managers sometimes close cases without examining all issues rather than risk taking the examination past the statute period, losing revenue, and facing disciplinary action. Congress has lengthened or made exceptions to the statute in the past. For example, Congress changed the statute in 2004 to provide IRS with an additional year to make assessments in the case of unreported listed transactions. Since many offshore schemes exhibited enforcement problems similar to those of unreported listed transactions, it follows that a similar statute extension could be granted for certain offshore transactions. IRS officials and individuals from the tax practitioner and policy communities told us of both advantages and disadvantages of an exception to the statute for taxpayers involved in offshore financial activity. For example, an advantage was increased flexibility for IRS to direct enforcement resources to egregious cases. A disadvantage was lack of closure for taxpayers. In our report discussed earlier, we suggest that Congress make an exception to the 3-year civil statute of limitations assessment period for cases involving offshore activity. In e-mail comments on a draft of our report, IRS expressed agreement that a longer statute makes sense and should enhance compliance. For tax year 2003, withholding agents reported that individuals and businesses residing abroad received about $293 billion in income from U.S. sources. The QI program provides IRS some assurance that tax is properly withheld and reported to IRS. However, a low percentage of U.S source income flows through QIs. In addition, although QIs are subject to external reviews, the auditors conducting these reviews are not required to follow up on indications of fraud or illegal acts. Further, IRS does not make effective use of the data it receives from withholding agents to ensure that withholding agents perform their duties properly. To address our objectives for the QI program, we reviewed various IRS documents and interviewed IRS and Department of the Treasury (Treasury) officials and private practitioners involved in the development and implementation of the QI program. We also reviewed various studies and reports on foreign investment and banking practices. A GAO investigator created a shell corporation and opened a bank account for that corporation to test the due diligence exercised by withholding agents. We also analyzed IRS data on U.S. source income that flowed overseas for tax years 2002 and 2003. The qualified intermediary data were reported by withholding agents and edited by IRS, and do not include an unknown amount of activity that was unreported. We determined that these data were sufficiently reliable for the purposes of describing the qualified intermediary program by (1) performing electronic testing for obvious errors in accuracy and completeness and (2) interviewing agency officials knowledgeable about the data, specifically about how the data were edited. We reviewed the auditing requirements contained in the QI agreement and other standards, such as the U.S. Government Auditing Standards and the international standard on agreed-upon procedures (AUP) and visited IRS’s Philadelphia Campus, which is responsible for processing the information returns submitted by QIs. Money is mobile and once it has moved offshore, the U.S. government generally does not have the authority to require foreign governments or foreign financial institutions to help IRS collect tax on income generated from that money. In 1913, the United States enacted its first legislation establishing that U.S. persons and nonresident aliens were subject to withholding at source before the investment income leaves U.S. jurisdiction. Subsequent legislation made withholding applicable to dividends and certain kinds of bond income earned by nonresident aliens, foreign corporations, foreign partnerships and foreign trusts and estates. The Internal Revenue Service issued a comprehensive set of withholding regulations for nonresident aliens in 1956. These regulations have been changed over the years to reflect statutory changes or perceived abuses by taxpayers. To attract foreign investment, the tax rules were further adapted to exclude several types of nonresident alien capital income from U.S. taxation, such as capital gains from the sale of personal property, interest income from bank deposits and “portfolio interest,” which includes U.S. and corporate debt obligations. The latter exemption helps finance the U.S. national debt by offering a U.S. tax free rate of return for foreigners willing to invest in U.S. bonds. Most of the U.S. source income flowing offshore likely is paid to nonresident aliens but some may be paid to U.S. persons. The income may be paid directly to nonresident aliens located offshore, for example when a company pays dividends to a foreign stockholder, or may flow through one or more U.S. or foreign financial intermediaries, such as banks or brokerage firms. Whether this income paid to nonresident aliens is subject to U.S. tax and, if so, how much depends on a number of factors, including the type of income and whether the recipient is a resident of a country with which the United States has negotiated a lower tax rate. If U.S. source income is subject to U.S. tax, the payor of that income has to report information about the recipient and the type and amount of income to IRS, and in some cases would be required under U.S. law to withhold the taxes due from the recipient. Any entity required to perform these withholding and reporting duties is known as a “withholding agent.” The difference in taxation, withholding, and reporting for nonresident aliens and U.S. persons can motivate some U.S. individuals or businesses to seek to appear to be nonresident aliens. Among the types of U.S. source investment income paid to nonresident aliens, some is exempt from U.S. tax and some is taxable. Payors must report this income to IRS and withhold where appropriate. For example, some types of income paid to nonresident aliens, such as bank deposits and portfolio interest are exempt from taxation by U.S. statute. Payors of this income do not have to withhold tax on this income but are required to report certain information to IRS about the amounts of income paid and to whom. Other types of investment income paid to nonresident aliens, such as the gross proceeds on the sale of personal property, such as securities in a U.S. corporation, are also exempt from U.S. tax but financial intermediaries are neither required to withhold taxes on the income nor report information on the payment of the income to IRS. Some U.S. investment income, such as dividends, is subject to a statutory tax rate of 30 percent. Payors of this income generally are to withhold the 30 percent tax if the recipients do not reside in a nation that has negotiated a treaty with a lower tax rate or cannot show they are in fact residents in the treaty country. The payors also have to report to IRS certain information covering the amount of income paid and to whom. About $5 billion of this capital income was withheld for tax year 2003, implying that about $83 billion of this income was exempt from tax or was taxed at lower tax treaty rates (known as treaty benefits). IRS established the QI program in 2000. Under the QI program, foreign financial institutions sign a contract with IRS to withhold and report U.S. source income paid offshore. The QI program, and the larger withholding regime, is rooted in the 1980s when Congress expressed concerns about tax evasion by U.S. persons using foreign accounts, treaty benefits claimed by those who were ineligible, and the effect of tax havens and secrecy jurisdictions on the U.S. tax system. With these considerations in mind, and a general view that the old regulations were simply not being followed, IRS began a long, consultative process of developing new rules to balance a number of objectives, including a system to routinely report income and withhold the proper amounts, dispense treaty benefits, meet the U.S. obligation to exchange information with foreign tax authorities and encourage foreign investment in the United States. Chains of payments are routine in modern global finance, and the QI system of reporting is designed to reflect this normal course of business. For example, a small local bank in a foreign country may handle the accounts of several owners of U.S. investments. The bank may aggregate the funds of each of these individual investors into an omnibus account that it, in turn, invests in a regional bank. The regional bank may handle a number of omnibus accounts that it, in turn, aggregates and invests in some U.S. securities. The return on these securities will flow out of the United States and reverse this chain of transactions until each of the original investors gets their pro rata share of profit. See figure 1 for examples of tiered financial flows. Although QIs generally agree to be withholding agents for their customers, QIs may opt out of primary withholding and reporting responsibilities for designated accounts—including those owned by U.S. persons, ceding those responsibilities and liabilities to financial institutions upstream in that chain of payments. Eventually, the responsibilities and liabilities associated with these accounts may fall to the last payor within the United States (and therefore within the jurisdiction of IRS). Even though this income may be paid to account holders in QIs or nonqualified intermediaries (NQI), the reporting and withholding might be executed by U.S. institutions. The United States maintains a network of bilateral treaties designed to set out clear tax rules applying to trade and investment between the United States and each nation in order to promote the greatest economic benefit to the United States and its taxpayers. Each treaty is intended to eliminate double taxation of taxpayers conducting economic activity in the United States and another nation by allocating taxing rights between the two countries, establishing a mechanism for dealing with disputes between the two taxing authorities, providing exchange of information between the two taxing authorities, and reducing withholding taxes. Reductions of withholding taxes are negotiated with each treaty partner individually and the benefits are reciprocal—so U.S. residents may benefit from a reduced tax rate for investing abroad, just as foreign investors may be for investing in the United States. As of January 2007, 54 tax treaties were signed, including for all members of the Organization of Economic Cooperation and Development (OECD). Compared to U.S withholding agents, IRS has additional assurance that QIs are properly withholding the correct amount of tax on U.S. source income sent offshore. QIs accept several responsibilities that help ensure that their customers qualify for treaty benefits. First, because QIs are in overseas locations, they are more likely to have personal contact with nonresident aliens or other persons who may claim exemptions or treaty benefits than would U.S. withholding agents. This direct relationship may increase the likelihood that the QI will collect adequate ownership information and be able to accurately judge whether its customers are who they claim to be. Second, QIs accept enhanced responsibilities for providing assurance that customers are in fact eligible for treaty benefits and exemptions. All withholding agents are expected to follow the same basic steps when determining whether to withhold taxes on payments of U.S. source income made to nonresident alien customers. The withholding agents must determine the residency of the owner of the income and the kind and amount of U.S. source income, which governs the customers’ eligibility for no (if the type of income is exempt from U.S. tax) or reduced taxation (if a lower taxation rate has been set in a treaty). However, under their contract, QIs must obtain acceptable account opening documentation regarding the customer’s identity. When determining whether a customer qualifies for treaty benefits, the kinds of documents QIs may use are approved by IRS based upon the local jurisdiction “know your customer” (KYC) rules. When customers wish to claim treaty benefits, they must also submit an IRS Form W-8BEN, known as a withholding certificate, or other acceptable documentation. On the withholding certificate the customer provides various identifying information and completes applicable certifications, including that the customer is a resident of a country qualifying for treaty benefits and that any limitations on benefits (LOB) provisions in the treaty are met. Because QIs agree to follow specified account opening procedures in all cases, regardless of whether a QI performs withholding itself or it passes the responsibility to another withholding agent, there is enhanced assurance that the residency and nationality of the account holder has been accurately determined and thus correct withholding decisions will be made. Third, and importantly, QIs agree to contract with independent third parties to review the information contained in a sample of accounts, determine whether the appropriate amount of tax was withheld, and submit a report of the information to IRS. These reviews are discussed in greater detail later in this statement. In contrast, U.S. withholding agents generally have not yet been subject to external reviews for this purpose. IRS officials believe that those U.S. withholding agents that participated in IRS’s 2004 Voluntary Compliance Program were effectively subject to external review because under the program they had to provide IRS essentially the same information that IRS would have reviewed in an audit. IRS is preparing to audit all of the U.S. withholding agents that did not participate in the Voluntary Compliance Program. However, because U.S. withholding agents generally rely on identity documentation from downstream intermediaries, even when U.S. withholding agents have been audited by IRS, there is less assurance that nonresident aliens actually qualified for the benefits. Although account opening and withholding procedures for QIs may give IRS greater assurance that treaty benefits are properly provided by QIs than by U.S. withholding agents, QIs provide IRS less information to use in targeting its enforcement efforts than do U.S. withholding agents. One of the principal incentives for foreign financial institutions to become QIs is their ability to retain the anonymity of their customer list. QIs report customer income and withholding information to IRS in the aggregate for groups of similar recipients receiving similar benefits. This is known as “pooled reporting.” NQIs also can pool results when reporting to upstream withholding agents, but nevertheless, must identify all of the individual customers for which they have provided treaty benefits. Although pooling restricts the information available to IRS on individuals receiving treaty benefits, to the extent that QIs do a better job of ensuring treaty benefits are properly applied up front, IRS has less need for after-the-fact enforcement. The accuracy of the pooled reporting by QIs is also subject to the external reviews of QIs’ contractual performance. Although the QI program provides IRS some assurance that treaty benefits are being properly applied, a low percentage of U.S. source income flows through QIs and U.S. taxpayers may inappropriately receive treaty benefits and exemptions as owners of foreign corporations. As shown in table 1, for tax year 2003, 87.5 percent of U.S. source income reported to IRS was reported by U.S. withholding agents, not QIs. Thus, the overwhelming portion of this income flowed through channels that provide somewhat less assurance of proper withholding and reporting than exists under the QI program. More than 90 percent of the U.S. source income QIs paid their customers for tax year 2003, or nearly $34 billion, flowed through QIs that each handled $4 million or more of U.S. source income. These QIs and the income they handled were subject to external review (as discussed later in this statement, smaller QIs can obtain a waiver from external reviews). Overall, QIs withheld taxes from U.S. source income at more than twice the rate of U.S. withholding agents, 3.7 percent versus 1.5 percent. The jurisdiction of recipients of U.S. source income is a major determinant of the applicable withholding rate and the degree of cooperation IRS may expect from foreign governments in enforcing U.S. tax administration. Bilateral tax treaties are one means of reducing withholding taxes that treaty partners may impose on their residents. In general, a treaty provides enhanced assurance that both nations’ tax rules will be properly applied. When a treaty does not exist, tax administration can be furthered by agreements to exchange information. As of November 2006, 15 nations had Tax Information Exchange Agreements (TIEA) with the United States. To countervail harmful tax practices, the OECD encourages countries to develop and practice administrative transparency and effective exchange of tax information in their local tax administrations. A number of countries have made formal commitments to work toward these principles. However, because of their continued unwillingness to agree to these two principles, five countries are on the OECD’s list of “uncooperative tax havens.” Finally, 165 other jurisdictions receive U.S. source income but do not fall into any of these categories. Although the vast majority of U.S. source income flows outside the QI system, the preponderance flows through countries with which the United States has tax treaties, as shown in figure 2. As shown in table 2, for tax year 2003 about 80 percent of U.S. source income flowed through treaty countries with 88 percent of that flowing through U.S. withholding agents. The data indicate that persons in the treaty countries received the preponderance of U.S. source income and the lowest withholding rates, because of a combination of reduced withholding rates negotiated by treaty and residents receiving certain kinds of income that are exempt by statute. About $28 billion flowed through TIEA countries, and recipients received significant withholding tax reductions–without mutually beneficial treaties. Persons in jurisdictions committed to OECD’s principles, that is, “committed jurisdictions,” and OECD-identified “uncooperative tax havens” accounted for relatively little U.S. source income. Withholding agents in other and undisclosed countries not falling into any of these categories received about $29 billion in U.S. source income for tax year 2003, and dispensed about $8 billion in withholding tax reductions that year. A close look at the data points to some potential problems with the withholding and reporting activities for tax year 2003. Both U.S. withholding agents and QIs reported transactions in unknown or unidentified jurisdictions. For example, for tax year 2003, $19 billion of income was reported ($7.8 billion through U.S. withholding agents and $11.3 billion through QIs), on which $500 million was withheld ($100 million through withholding agents and $400 million through QIs) from undisclosed countries. In a separate analysis, we calculated that $5 billion of treaty benefits and exemptions were given that were not associated with any particular country. And other data analysis indicates that both U.S. withholding agents and QIs reported transactions with “unknown recipients” across all jurisdictions. For tax year 2003, U.S. withholding agents and QIs reported a combined $7 billion of U.S. source income paid to offshore unknown recipients, from which $233 million was withheld at a rate of 3.4 percent. The transactions with unknown or unidentified jurisdictions and with unknown recipients indicate a significantly reduced rate of withholding without proper documentation or reporting to IRS, since eligibility for a reduced rate of withholding must be determined by the claimants’ documented residency and type of investment. U.S. tax law enables the owners of offshore corporations to shield their identities from IRS scrutiny, thereby providing U.S. persons a mechanism to exploit for sheltering their income from U.S. taxation. Under U.S. tax law, corporations, including foreign corporations, are treated as the taxpayers and the owner of their income. Because the owners of the corporation are not known to IRS, individuals are able to hide behind the corporate structure. In contrast to tax law, U.S. securities regulation, and some foreign money laundering and banking guidelines treat shareholders as the owners. Even if withholding agents learn the identities of the owners of foreign corporations while carrying out their due diligence responsibilities, they do not have a responsibility to report that information to IRS. However, if it provides them with actual knowledge or reason to know that the claim for reduced withholding in the withholding certificate or other documentation is unreliable for purposes of establishing residency, new supporting documentation must be obtained. Bilateral treaties may reduce or eliminate U.S. taxes on income that would otherwise be taxable to nonresident alien recipients, including foreign corporations, but generally not for U.S. persons. Similarly, the U.S. tax exemption for foreign recipients of portfolio interest, created to encourage foreign investors to purchase U.S. government and corporate debt, eliminates their tax on this type of income. The exemption is not available to U.S. persons, or to persons who own 10 percent or more of the debtor corporation or partnership as well as certain other restrictions. Withholding agents generally may accept a withholding certificate at face value, and so may grant treaty benefits or a portfolio interest exemption to a foreign corporation that is owned by a U.S. person or persons. IRS regulations permit withholding agents (domestic and QIs) to accept documentation declaring corporations’ ownership of income at face value, unless they have “a reason to know” that the documentation is invalid. Consequently, it may be possible for U.S. persons to establish a corporation offshore, submit a withholding certificate to the withholding agent(s) and receive a reduced rate of withholding. In these situations where the foreign corporation is owned by a U.S. person or persons, it is incumbent upon the owners to report their corporate ownership and any income appropriately taxable to them on their own U.S. tax returns. There is no independent third-party reporting of that income to IRS. Generally, compliance in reporting income to IRS is poor when there is not third party reporting to IRS. Foreign corporations received at least $200 billion, or 68 percent, of the $293 billion in total U.S. source income for tax year 2003 (see table 3). From this income, almost $3 billion was withheld (an effective withholding rate of 1.4 percent) representing more than $57 billion of treaty benefits and exemptions. About half of all foreign corporate investment in the United States that year was in debt instruments which are paid U.S. tax free to qualified investors. The preponderance of tax withheld from corporations was derived from dividends. To test the level of due diligence exercised by withholding agents, a GAO investigator using an assumed identity created a shell corporation and then sought to establish an overseas bank account for that corporation. Our investigator approached a European QI to open an account. The QI required our investigator to provide documentation sufficient to establish his identity as an officer of the corporation and documentation showing the source of the funds to be invested. Further, a representative from the QI contacted the investigator and questioned him in detail to ensure compliance with KYC standards and requested to meet with him in person. The investigator discontinued the effort and did not open an account with the QI. Our investigator also contacted an NQI in the Caribbean to open an account. The NQI requested that the investigator provide documentation of his identity and a letter explaining the purpose of the corporation. In addition, the NQI contacted a U.S. bank where the investigator had an account and requested a letter of reference. The NQI opened an account for our investigator. We did not then make an investment to earn U.S. source income in part because of the relatively large minimum investments required by QI and NQI firms we contacted. Thus, we were able to open a solely owned foreign corporation that was not actually an active business but do not know whether a QI or NQI intermediary would then have questioned a withholding certificate had we made an investment and claimed treaty benefits. Because QIs agree to have external auditors perform oversight of their compliance with required procedures, IRS has greater assurance that taxes are properly withheld and treaty benefits are properly dispensed by QIs than by U.S. withholding agents. However, within their limited scope, QIs’ auditors are not responsible for following up on possible indications of fraud or illegal acts that could have an impact on the matters being tested as they would under U.S. Government Auditing Standards. In addition, IRS obtains considerable data from withholding agents but does not make effective use of the data to ensure that withholding agents perform their duties properly. In designing the QI program, IRS, Treasury, and intermediaries and their representatives had the objective of achieving an appropriate balance to obtain appropriate assurance that QIs meet their obligations without imposing such a burden that intermediaries would not participate in the program. As discussed earlier, IRS generally does not have the legal authority to audit a foreign financial intermediary, but IRS requires specific periodic procedures to be performed by external auditors to determine whether QIs are documenting customers’ identities and accurately withholding and reporting to IRS. The QI agreement requires each QI to engage and pay for an external auditor to perform “agreed upon procedures” (AUP) and submit a report of factual findings to the IRS’s QI program office for the second and fifth years of the agreement. The QI selects the external auditor, but IRS must approve it after considering the external auditor’s qualifications and any potential independence impairments. IRS selected AUPs as the type of engagement to monitor QI compliance because of their flexible and scalable attributes. AUPs differ from a full audit in both scope of work and the nature of the auditor’s conclusions. As shown in table 4, in performing a full audit, an auditor gathers sufficient, appropriate evidence to provide assurance regarding the subject matter in the form of conclusions drawn or opinions expressed, for example, whether the audited entity is in material compliance with requirements overall. Under AUPs the external auditor performs specific work defined by the party requesting the work, in this case, IRS. In general, such work would be specific but less extensive, and less expensive, than the amount of work an auditor would do to provide assurance on the subject matter in the form of conclusions or an opinion. Thus, withholding agents would likely be more willing to participate in the QI program with a required AUP review than a full audit, which they would have to pay for under the program requirements. AUPs can provide an effective mechanism for oversight when the oversight needs relate to specific procedures. IRS developed a three-phase AUP process to focus on key performance factors to address specific concerns while minimizing compliance costs. In phase 1 procedures, the external auditor is required to examine all or a statistically valid sample of accounts with their associated documentation and compile information on whether the QI followed withholding requirements and the requirements of the QI agreement. IRS reviews the data from phase 1 AUPs and determines whether significant concerns exist about the QI’s performance. If concerns exist, IRS may request that additional procedures be performed. For example, additional procedures may be requested if the external auditor identified potential problems while performing phase 1 procedures. IRS defines the work to be done in a phase 2 review based on the specific concerns surfaced by the phase 1 report. Phase 3 is necessary only if IRS still has significant concerns after reviewing the phase 2 audit report. In phase 3, IRS communicates directly with the QI management and may request a face-to-face meeting in order to obtain better information and resolve concerns about the QI’s performance. IRS cited high rates of documentation failure, underreporting of U.S. source income and under-withholding as the three most common reasons for phase 3 AUPs. Data from the 2002 audit cycle shows that IRS required phase 2 procedures for about 18 percent of the AUPs performed. IRS moved to phase 3 procedures for 35 QIs, which is around 3 percent of the 2002 AUPs performed. Of the QIs that had phase 3 reviews, IRS met face-to-face with 13 and was ultimately satisfied that all but 2 were in compliance with their QI agreements. The remaining 2 were asked to leave the QI program. Since the QI program’s inception in 2000, there have been 1,245 terminations of QI agreements. Of the 1,245 terminations, 696 were the result of mergers or consolidations among QIs and not related to noncompliance with the QI agreements. Aside from the 2 terminations mentioned above, the remaining 549 terminations were of QIs that failed to file either an AUP report of factual findings or requests for an AUP waiver by the established deadline. IRS grants waivers of the AUP requirement if the QI meets certain criteria. A QI may be eligible for a waiver if it can demonstrate that it received not more than $1 million in total U.S. source income for that year. In order to be granted a waiver, the QI must file a timely request that includes extensive data on the types and amounts of U.S. source income received by the QI. Among items required with the waiver request are a reconciliation of U.S. source income reported to the QI and U.S. source income reported by the QI to IRS; the number of QI account holders; and certifications that the QI was in compliance with the QI agreement. IRS evaluates the data provided with the waiver request to determine if AUPs are necessary despite the relatively small amount of U.S. source income, and will deny the waiver request if the data provided raises significant concerns about the QI’s compliance with the agreement. About 3,400 QIs (around 65 percent of the QIs at that time) were approved for audit waivers in 2005. The largest 5 percent of the QIs accounted for about 90 percent of the withholding based on data from the 2002 audit cycle. One notable difference between the AUPs used for the QI program and AUPs that would be done under U.S. Government Auditing Standards is that the QI contract is silent on whether external auditors have to perform additional procedures if information indicating that fraud or illegal acts that could materially affect the results of the AUP review come to their attention. Absent specific provisions in the contract, the auditors perform the QI AUPs in accordance with the International Standard on Related Services (ISRS) 4400. Our U.S. Government Auditing Standards, known as the Yellow Book, are more stringent on this topic than the ISRS standards. Yellow Book standards state that auditors should be alert to situations or transactions that could indicate fraud, illegal acts, or violations of provisions of contracts. If the auditor identifies a situation or transaction that could materially affect the results of the engagement the auditor is to extend procedures to determine if the fraud, illegal acts, or violations of provisions of contracts are likely to have occurred and, if so, determine their effect on the results of the engagement. The auditor’s report would include information on whether indications of fraud or illegal acts were encountered and, if so, what the auditors found. Therefore the report would provide IRS with the information necessary to pursue the indications of fraud or illegal acts through phase 2 procedures. Data that IRS needs to effectively administer the QI program are not readily available for use and in some instances no longer exist. Consequently, IRS has difficulty ensuring that refunds claimed by withholding agents are accurate and is less able to effectively target its enforcement efforts. All withholding agents, whether QIs or not, are to report withholding information on their annual withholding tax returns (Forms 1042) and information returns (Forms 1042-S). Forms 1042 are filed on paper. Forms 1042-S may be filed electronically or on paper. The law requires withholding agents filing more than 250 returns to file electronically; consequently, most U.S. financial institutions file the information returns electronically, while most QIs file on paper. When returns are paper filed, IRS personnel must transcribe information from the paper returns into an electronic database in order to efficiently and effectively make use of the data. Data on both paper and electronically filed returns must also be reviewed for errors. Data from Forms 1042 have been routinely transcribed and checked for errors. However, since the inception of the QI program, IRS has not consistently entered information from the paper Forms 1042-S into an electronic database. In years when data were not transcribed, the unprocessed paper 1042-S forms were stored at the Philadelphia Service Center in Philadelphia and then destroyed a year after receipt in accordance with record retention procedures. Additionally, for certain tax years, the electronically filed Forms 1042-S did not go through computerized error resolution routines. For tax year 2005 IRS’s Large and Midsize Business Division transferred $800,000 in funding to the service center to fund transcribing paper Forms 1042-S and performing error resolution for all Forms 1042-S. IRS officials anticipate funding 2006 transcription and error resolution although as of March 2007, this had not yet occurred. Figure 3 shows the dual processing procedures IRS uses for receiving, checking and validating the Form 1042-S data it receives. Because the Form 1042-S data have not been routinely transcribed and corrected, IRS lacks an automated process to use the Form 1042-S information return data to detect underreporting on the Form 1042 or to verify refunds claimed. Forms 1042 are due in March and the withholding agents might report owing IRS more if they under-withheld the amount of tax their customers’ owed, or might claim a refund if they over-withheld. After performing simple consistency and math checks on the Forms 1042, IRS accepts the returns as filed and either bills withholding agents that did not include full payment or refunds amounts to those whose Forms 1042 indicates they over-withheld taxes due. Because the Forms 1042-S information returns have not been routinely transcribed, IRS has not been able to automatically match the information return documents to the annual tax return data, which is one of IRS’s most efficient and effective tools to ensure compliance. IRS had planned to perform such automatic document matching, but IRS suspended the plans for matching the Form 1042-S and Form 1042 data since funding has not been available to routinely transcribe Form 1042-S data. Therefore, when Forms 1042-S had been electronically filed or transcribed, IRS has only been able verify the accuracy of Forms 1042 by individually retrieving the 1042-S data stored in the Chapter Three Withholding (CTW) database, a time-consuming and seldom used process. When Forms 1042-S were not transcribed, IRS was only able to verify Forms 1042 by manually retrieving and reviewing the paper 1042-S. Further, for years when transcription did not occur, if a QI filed an amended return after the paper Forms 1042-S were destroyed, IRS could not even perform a manual verification and had to take the amended return claiming a refund at face value provided other processing criteria were met. IRS has no information to determine whether or how often such erroneous or fraudulent refunds might occur. Properly transcribed and corrected 1042-S data would have other uses as well. For instance, IRS officials said that such data could be used to check whether the AUP information submitted by QI withholding agents is reliable. For U.S. withholding agents, Form 1042-S information might be used to determine whether to perform audits. Several other units within IRS, as well as Treasury, the Joint Committee on Taxation and congressional tax-writing committees also could use these data to research and evaluate tax policy and administration issues and to identify possibly desirable legislative changes. We are considering recommendations in a forthcoming report on the QI program regarding IRS’s data management. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact Michael Brostek, Director, Strategic Issues, at (202) 512-9110 or brostekm@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 Jonda Van Pelt, Assistant Director; Jeffrey Arkin; Susan Baker; Perry Datwyler; Amy Friedheim; Evan Gilman; Shirley Jones; David L. Lewis; Donna Miller; John Mingus; Danielle Novak; Jasminee Persaud; Ellen Rominger; John Saylor; Jeffrey Schmerling; Joan Vogel; and Elwood White. 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. | Offshore tax evasion is difficult for the Internal Revenue Service (IRS) to address. IRS examines tax returns to deal with offshore evasion that has occurred. IRS's Qualified Intermediary (QI) program seeks to foster improved tax withholding and reporting. GAO was asked to testify on two topics. First, GAO was asked to provide information on (1) the length of, and assessments from, IRS's examination of tax returns with offshore activity and (2) the impact of the 3-year statute of limitations on offshore cases. Second, for the QI program, GAO was asked to address (1) program features intended to improve withholding and reporting, and (2) whether weaknesses exist in the U.S. withholding system for U.S. source income and QI external reviews and IRS's use of program data. GAO relied on prior work for the first topic. For the QI program, GAO used the latest data that were available and corroborated by IRS. Examinations involving offshore tax evasion take much more time to develop and complete than other examinations--a median of 500 more days for cases from fiscal years 2002 to 2005, but their resulting median assessment is almost three times larger than for all other examinations. Nevertheless, because they take more staff time, offshore examinations yielded tax assessments per hour of staff time that were about one-half of that for all other examinations. Because of the 3-year statute of limitations, the time needed to complete an offshore examination means that IRS sometimes prematurely ends offshore examinations or decides not to open an examination, despite evidence of likely noncompliance. Congress has granted a statute change or exception when enforcement challenges similar to those found in offshore cases have arisen in the past. QIs are foreign financial institutions that contract with IRS to withhold and report U.S. source income paid offshore to foreign customers. The QI program provides IRS some assurance that QIs are properly withholding and reporting tax on U.S. source income paid offshore. QIs (1) are more likely to have a direct working relationship with customers who claim reduced tax rates under tax treaties, (2) accept responsibilities for ensuring customers are in fact eligible for treaty benefits, and (3) agree to have independent parties review a sample of accounts and report to IRS. However, a low percentage of U.S. source income flows through QIs. For tax year 2003, about 12.5 percent of U.S. source income flowed through QIs. About 87.5 percent flowed through U.S. withholding agents, which provide somewhat less assurance of proper withholding and reporting than do QIs. In addition, U.S. persons may be able to evade taxes by masquerading as foreign corporations. The contractually required independent reviews of QIs' accounts do not require auditors to follow up on indications of illegal acts, as would reviews under U.S. Government Auditing Standards. While IRS obtains considerable data from withholding agents, it does not make effective use of the data to ensure proper withholding and reporting has been done. |
FmHA, a lending agency within the U.S. Department of Agriculture (USDA), provides direct government-funded loans to farmers who are unable to obtain financing elsewhere at reasonable rates and terms. FmHA’s assistance is intended to be temporary. Once farmers have become financially viable, they are to “graduate” to commercial sources of credit. FmHA provides loan services through a highly decentralized organization consisting of a national program office in Washington, D.C.; a finance office in St. Louis, Missouri; and a nationwide structure of field offices comprising 47 state offices, about 250 district offices, and about 1,700 county offices. As we reported in April 1992, FmHA has lost billions of dollars through its farm loan program and billions more is at risk. Our report noted that, as of September 1990, about 70 percent of the agency’s direct loan portfolio of almost $20 billion was held by borrowers who were delinquent or whose loans had been restructured as a result of or to avoid delinquency. We concluded that FmHA and the Congress shared responsibility for these problems, which stem from (1) ineffective implementation of standards for loan making, loan servicing, and property management and (2) loan and property management policies, some congressionally directed, that conflict with fiscal controls designed to minimize risk. We also reported that FmHA’s problems will continue until the Congress tells the agency how to better balance its mission of assisting financially troubled farmers with its obligation to provide that assistance in a businesslike and fiscally responsible manner. Although our previous work examined certain types of loan-servicing actions that result in FmHA’s reducing portions of a borrower’s debt, we have not, until this report, specifically examined the debt relief provided through the agency’s debt settlement process. Under this process, which essentially represents the final resolution of unpaid loans, FmHA county office officials try to identify and evaluate the financial resources a borrower may have that could be used to offset loan losses. Final approval of debt relief is granted by officials in either FmHA’s state or national offices. As table 1 shows, FmHA has four options for settling debts, each of which results in writing off debt. FmHA forgave billions of dollars in loans through debt settlements without always taking aggressive action to protect the government’s interests. More specifically, although FmHA has procedures and policies intended to produce fair recoveries, FmHA’s compliance reviews of a limited number of debt settlement cases indicate that field office officials often do not follow these procedures. FmHA officials we spoke with noted that problems in adhering to the procedures stemmed from, among other things, (1) competing program objectives that create incentives to write off large amounts of delinquent loans in an attempt to “clean up” the loan portfolio and (2) limited staff resources. During fiscal years 1991 through 1993, FmHA wrote off about $3.4 billion worth of outstanding direct farm loans through debt settlements. Table 2, which summarizes the amount of debt written off by settlement type, shows that most of the debt—about $2.9 billion—was canceled or charged off with no payments to FmHA by the borrowers. The amount already written off through debt settlements may be just the tip of the iceberg because FmHA continues to have a large number of problem loans that may eventually be subject to settlement. Specifically, as of January 1994, FmHA classified $7.6 billion—about 45 percent of its $16.7 billion in outstanding principal and interest—as at risk because the loans were held by borrowers with questionable repayment ability and/or inadequate loan security. FmHA has established procedures for its field office officials to use when settling debts. These procedures, intended to reduce losses during the process, include verifying a borrower’s income and searching for undisclosed assets. However, FmHA’s internal control reviews, as well as our work, indicate that field office officials often do not follow these procedures and thus do not fully protect the government’s interests. FmHA’s Coordinated Assessment Review, referred to as CAR, is a key internal control review that includes assessing field office officials’ compliance with debt settlement policies and procedures. CARs of debt settlements consist of reviewing a small sample of completed cases, usually five per state. During fiscal years 1993 and 1994 (through May 1994), FmHA completed CARs of debt settlement cases in 15 states. As table 3 shows, the rates of noncompliance ranged from 18 to 39 percent on five key standards intended to protect the government’s interests during debt settlements. Our review of fiscal year 1993 debt settlement cases at six FmHA county offices in three states also disclosed (1) problems with adherence to these five key debt settlement standards and (2) a lack of aggressive efforts to minimize loan losses—that is, FmHA did not pursue information indicating that additional collections could have been possible during the debt settlement process. In summary, of the 57 debt settlement cases we reviewed that resulted in large losses, the federal investment may not have been adequately protected in 16, or about 28 percent. In settling these debts, FmHA recovered a total of $5,800 from these 16 borrowers and wrote off $3.7 million. The following cases illustrate these findings: Case 1. FmHA officials in Louisiana canceled $393,000 in debt with no payment by the borrower without having conducted a record search. As a result, FmHA was unaware of an inheritance of approximately 160 acres in real estate and $61,000 in certificates of deposit that possibly could have been used to offset the loan losses. The lack of a record search was particularly puzzling because the county office’s file contained a notation that the inheritance had occurred and a payment to FmHA was possible. County office officials could not explain the note, and state officials said that the failure to protect federal interests had been an oversight. Case 2. Because of what FmHA state and county officials in Texas described as an oversight, a deceased borrower’s $131,000 debt was canceled without the county office’s filing a claim with a local probate court. Our review of this case—which included reviewing the probate court’s records, comparing the amount of outstanding debt with the value of real and personal property owned by the borrower’s estate, and consulting with USDA’s Office of General Counsel—disclosed that about $47,000 was available for payment on the debt if the claim had been filed. Case 3. FmHA officials in Mississippi canceled a $202,000 debt without a payment offer from a partnership consisting of two brothers who reported a total annual income of $123,000 (about $64,500 and $58,500, respectively). Both borrowers submitted documentation claiming that they were unable to repay any part of their FmHA debt because their expenses exceeded their income. Their expense statements included the following information: Both brothers claimed over $15,000 in annual payments to other creditors and expensive gifts to charities; one brother claimed the cost of operating three automobiles, while the other claimed the cost of operating two; and one brother claimed college education costs for his son and daughter-in-law as well as living expenses for that son and his family. FmHA state officials told us that they did not consider these expenses to be excessive, and the supervisor of FmHA’s county office questioned whether the agency should require borrowers to lower their standard of living in order to repay their debt. Case 4. FmHA officials in Louisiana canceled $509,000 in debt without offsetting payments that the borrower had received from USDA’s Agricultural Stabilization and Conservation Service. These payments averaged $30,000 per year. FmHA made this decision knowing that (1) the borrower’s loan defaults could be partially attributed to excessive spending and poor management and (2) the borrower had been referred to USDA for legal action because he had failed to properly dispose of property he had pledged as security for the debt. FmHA state and county officials told us that they had chosen not to use the payments from the Agricultural Stabilization and Conservation Service to offset the loan losses because they did not want to create undue hardship for the borrower. FmHA has placed little emphasis on minimizing losses during debt settlements. FmHA’s approach is illustrated in part by internal performance goals that create work priorities and incentives that are counter to aggressive protection of the government’s interests. Specifically, FmHA’s field office staff have annual performance goals for resolving delinquent loan accounts, but they do not have balancing goals that would encourage recoveries through the debt settlement process. As a result, several officials at FmHA’s state and county offices noted that protecting the government’s interests is not a high priority among staff. Also, officials at FmHA’s national and field offices said that debt settlements are used primarily to “clean up” the loan portfolio by writing off delinquent debt. FmHA’s management has also placed little emphasis on overseeing field offices’ implementation of the agency’s policies and practices for ensuring maximum recoveries. In fact, the debt settlement process was not part of internal control review through CARs until 1993. Also, 13 of the 34 CARs of debt settlements scheduled for fiscal years 1993 and 1994 were not performed because of other higher-priority work. According to several officials in FmHA’s state and county offices, insufficient staff resources also inhibit implementing the agency’s policies and procedures on debt settlements. We did not verify the extent to which staffing was a problem. However, an official in one state office said that county offices do not always have adequate staff to complete all assigned duties and, as a result, are unable to give proper attention to some activities, including protecting the government’s interests when settling debts. Also, the supervisor of a county office said that the office’s limited staff resources are targeted more toward eliminating delinquent accounts than toward protecting the government’s interests during debt settlements. The lending criteria that FmHA follows in making farm loans expose the agency to potential losses. Specifically, the Consolidated Farm and Rural Development Act of 1961, as amended (P.L. 87-128, Aug. 8, 1961), which provides FmHA’s basic authority for making and servicing farm loans, does not prohibit borrowers who receive debt relief through debt settlements from obtaining additional farm loans. We identified borrowers who obtained new FmHA farm loans after benefiting from debt relief through debt settlements. Specifically, during fiscal years 1991-93, 86 borrowers, who had received about $20 million in debt relief when their accounts with FmHA were settled, obtained about $13 million in new direct or guaranteed loans. For example, one borrower who went through debt settlement in April 1991, receiving $500,351 in debt relief, subsequently received a direct loan of $25,100 in April 1993. Our review showed that some borrowers who obtained additional loans after receiving debt relief through debt settlements became delinquent again. Specifically, although their loans were relatively new—1 to 3 years old—six of the 86 borrowers had already become delinquent again. The following examples illustrate this cycle of delinquency. A borrower who received $278,318 in debt relief in December 1990 obtained two new direct farm loans totaling $65,000 in February 1992; he was $4,087 behind on payments in September 1993. Another borrower, after receiving $1.9 million in debt relief in March 1991, obtained a $120,000 guaranteed loan in September 1991; he was $9,467 behind on payments in September 1993. Concerns over providing new loans to borrowers who have defaulted on previous FmHA loans are not new. For example, in our December 1992 report, we pointed out that FmHA made about $93 million in loans to borrowers who had received large amounts of debt relief under loan-servicing actions other than debt settlements. Such lending practices have been justified on the basis of the agency’s responsibility to help financially strapped farmers remain in farming. However, as we have also previously reported, FmHA has another, sometimes conflicting responsibility—to be fiscally prudent and protect the taxpayers’ dollars. Lending to borrowers who have defaulted on previous loans undermines the agency’s responsibility in this area. These lending practices can also detract from FmHA’s overall mission of assistance because they encourage farmers to rely on FmHA as a continuous source of credit rather than a temporary one. Billions of dollars in FmHA loans has been written off with little or no recovery under debt settlements. In some respects, these losses are not totally unexpected because FmHA’s loans are targeted to borrowers who are financially stressed. By the time a borrower’s financial situation has deteriorated to the point that debt settlement may be an option, the borrower may have few resources that could be used to offset potential loan losses. However, FmHA does not take sufficient action to identify and recover payments from those with the resources to reduce their debts. FmHA’s internal control reviews as well as our own work indicate that FmHA’s field offices often do not implement the agency’s procedures and policies intended to protect federal interests during debt settlements. FmHA’s management has provided few incentives for the field offices to aggressively implement debt settlement procedures. The agency does not have performance goals that would encourage the field offices to maximize recoveries during the debt settlement process. However, it does have goals for reducing the levels of delinquent debt. As a result, field offices may view debt settlements more as a means of cleaning up their loan portfolios than as a final opportunity to minimize loan losses. Additionally, we question the reasonableness of FmHA’s making new direct loans and providing loan guarantees to individuals whose past performance resulted in significant losses through debt settlements. We recognize that some borrowers may find themselves subject to the debt settlement process for reasons beyond their control (e.g., crop losses due to a natural disaster). Our concern is not with these borrowers but rather with those whose own action or inaction resulted in their failure to repay loans. Overall, the problems we found with debt settlements are symptomatic of a much larger, more fundamental problem that we highlighted in our April and December 1992 reports: The agency’s congressionally defined mission—to lend money to farmers who cannot obtain loans elsewhere—often conflicts with normal fiscal controls and policies designed to minimize risk and reduce losses. Until the Congress clarifies how FmHA should better balance these conflicting missions, problems similar to the ones we describe in this report will continue. To provide FmHA’s field office officials with incentives to better protect the federal government’s interests during the debt settlement process, we recommend that the Secretary of Agriculture direct the FmHA Administrator to establish goals for maximizing recoveries on outstanding loans being resolved through debt settlements. To strengthen FmHA’s loan-making standards, we recommend that the Congress amend the Consolidated Farm and Rural Development Act to prohibit direct loans and loan guarantees to borrowers whose accounts were previously settled through debt settlements except in cases in which these borrowers were unable to repay their loans through no fault of their own. The Congress should require the Secretary to (1) establish guidance describing the circumstances under which the exception would apply, (2) closely supervise the borrowers who receive new loans under this exception, and (3) require these borrowers to move to commercial credit within a specified time period. In commenting on a draft of this report, FmHA pointed out that we had reviewed a very small sample of debt settlement cases and that conclusions based on such a sample may be questionable. We appreciate the limitations of conclusions drawn from small samples. However, our conclusions are not based solely on information obtained through the cases we reviewed. Rather, these cases are only one of several indications of the problems that form the basis for our concerns about the debt settlement process. For example, FmHA’s own internal control reviews identified problems similar to those found in the cases we examined. Limited recoveries under debt settlements are another reason for concern—almost $3 billion has been written off in recent years without any payments being made by the borrowers. In short, we believe that there is sufficient reason to raise questions about how well the federal government’s interests are protected in debt settlements. FmHA generally agreed with our recommendation to establish goals for maximizing recoveries during debt settlements but was not clear about how this recommendation will be implemented. In line with the intent of the recommendation, FmHA noted that USDA’s Loan Resolution Task Force, established to resolve delinquent loans, has developed a process designed to ensure that debt settlements are properly implemented through centralized management. This process was scheduled to go into effect in October 1994. FmHA also stated that it is working on a new internal review system that will cover debt settlements. It is too early to determine the extent to which these and other proposed actions will address the problems discussed in this report. An earlier draft of this report contained a recommendation that FmHA prohibit loans to all borrowers who received debt relief through debt settlements. FmHA noted that this prohibition might unnecessarily penalize those individuals who failed to repay their loans for reasons beyond their control. We have revised the recommendation to accommodate such exceptions. However, we would caution against having the exception become the standard mode of operation. Furthermore, as indicated in the revised recommendation, we believe any borrower receiving a new loan under this exception should be closely supervised and required to move to commercial credit within a specified period of time. We recognize that implementing our recommendation to generally prohibit additional loans to borrowers whose past debts have been settled may require trade-offs concerning the program’s goal of assisting farm borrowers. Ultimately, the Congress will have to weigh these difficult trade-offs and determine the direction that FmHA should go. FmHA’s specific comments and our evaluation of them are presented in appendix I. We performed our work between July 1993 and July 1994 in accordance with generally accepted government auditing standards. Our objectives, scope, and methodology are discussed in appendix II. We are sending copies of this report to the appropriate congressional committees; interested Members of Congress; the Secretary of Agriculture; the Administrator, FmHA; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. This work was performed under the direction of John W. Harman, Director, Food and Agriculture Issues, who may be reached at (202) 512-5138 if you or your staff have any questions. Other major contributors to this report are listed in appendix III. The following are GAO’s comments on the July 28, 1994, letter from the Farmers Home Administration. 1. As discussed in the agency comments section of our report, these cases are only one of several indications of the problems that form the basis for our concerns about the debt settlement process. 2. We updated the report to recognize the Secretary’s reorganization plan. 3. FmHA expressed its concern that prohibiting loans to borrowers whose accounts are resolved through debt settlement could eliminate the use of its leaseback/buyback and homestead protection programs. In these programs, borrowers who default on FmHA loans are given preference in reacquiring the farms that they had pledged as security for those loans. FmHA may finance these transactions. Implementing our recommendation would not eliminate these loan-servicing programs—former owners would still retain preference for reacquiring their farms. However, we recognize that it would be difficult for some former owners to take advantage of this preference without FmHA financing. 4. As discussed in the agency comments section of our report, we revised our draft recommendation to accommodate borrowers who fail to repay loans because of circumstances beyond their control. This review was undertaken as part of a special effort to address federal programs subject to a high risk of waste, abuse, and mismanagement. To gain a complete understanding of FmHA’s debt settlement process, we reviewed FmHA’s regulations, operating instructions, and other guidance to field offices. We also interviewed officials at the agency’s Office of Farmer Programs in Washington, D.C., and at state and county field offices. Computerized program records were provided by FmHA’s Finance Office in St. Louis, Missouri, and information on CARs was obtained in the form of summaries of state performance reviews from FmHA’s Washington, D.C., headquarters. For our review of individual debt settlement cases, we used records from FmHA’s Finance Office to identify the three states—Louisiana, Mississippi, and Texas—with the largest dollar amounts of debt written off through debt settlements during fiscal year 1993. We then used detailed statistics on borrowers from these states to select the two counties in each state with the highest number of debt settlements. Finally, for the two selected counties, we eliminated all the cases settled through bankruptcy or resulting in a debt write-off of less than $100,000. We reviewed the remaining 57 cases by making field visits to the six county offices to examine files on borrowers, search public records, and discuss debt settlements with county officials to evaluate whether the federal government’s interests were adequately protected. We then discussed the results of our case reviews and general debt settlement issues with FmHA state officials and, where necessary, with USDA’s Office of General Counsel. To evaluate the extent of new loans to borrowers whose past debts had been settled, we matched information on debt settlements and loan obligations in data bases provided by the St. Louis Finance Office. Reid H. Jones, 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. 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. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Farmers Home Administration's (FmHA) debt settlements, focusing on: (1) how well FmHA protects government interests during debt settlements; and (2) additional FmHA loans to borrowers whose previous debts were forgiven. GAO found that: (1) FmHA is not adequately protecting government interests during debt settlements; (2) FmHA wrote off about $3.4 billion in outstanding farm loans during fiscal years (FY) 1991 through 1993 without receiving any payments from borrowers on most of the loans; (3) FmHA has $7.6 billion in problem loans that may be subject to future settlements; (4) FmHA officials do not always follow FmHA debt settlement procedures such as developing a complete inventory of borrowers' financial resources, using the borrowers' resources to offset loan losses, or offsetting loans with other government payments; (5) FmHA does not emphasize minimizing loan losses during debt settlements; (6) problems in implementing debt settlement procedures include competing work priorities and limited staff resources; (7) borrowers in default are not prohibited from receiving new loans; (8) in FY 1991 through 1993, FmHA approved new loans worth $13 billion to 86 borrowers who had $20 million in debts forgiven; and (9) some of these borrowers became delinquent on their new loans. |
Since the mid-1990s, large and mid-sized U.S. corporations have increasingly used syndicated loans as a source of credit. Federal banking regulators collect data on large loan commitments and loans shared by three or more commercial banks as part of the Shared National Credit (SNC) Program. SNC program data show that outstanding loan commitments held by commercial banks increased from $448 billion in 1990 to more than $1 trillion in 2003 (see fig. 1). Most loan commitments and loans to large and mid-sized corporations are made as part of a syndicated loan package. A syndicated loan can include several components, including a revolving credit line, a 364-day back-up facility, and a term loan. A revolving credit line or revolver—the equivalent of a corporate credit card—allows borrowers to draw down, repay, and re- borrow specified amounts on demand. A 364-day facility is a specific type of revolving credit line that has a maturity of less than 1 year and is commonly used as a backup line by corporations that issue commercial paper. A term loan is a loan that borrowers repay in a scheduled series of repayments or a lump-sum payment at maturity. Syndicated loans are arranged by a commercial or investment bank, which is referred to as the “lead bank.” Large commercial and investment banks compete to lead syndications and offer a potential borrower a syndicated loan package that specifies various fees for loan commitments and terms for loans. For large syndicated loans, there may be one or more lead banks. The lead bank finds potential lenders and arranges the terms of the loan on behalf of the lending group, which can include commercial or investment banks and institutional investors, such as mutual and hedge funds and insurance companies. However, each participating lender has a separate credit agreement with the borrower for the lender’s portion of the syndicated loan. In 2003, 3 large commercial banks arranged 59 percent of U.S. syndicated loans, and 10 large commercial banks arranged 84 percent of syndicated loans. Borrowers pay members of the lending group various fees associated with syndicated loans. For example, borrowers pay the lead bank(s) fees to arrange and administer the syndication. They also pay an up-front fee to all participants in the syndicate upon the closing of a loan. Other fees that borrowers pay the lenders include: a commitment fee, which is paid to lenders on undrawn amounts under a revolving credit or a term loan prior to usage; a facility fee, which is paid against the entire amount of a revolving credit regardless of usage and is often charged instead of a commitment fee; and a usage fee, which is paid when the utilization of a revolving credit falls below a certain minimum. Borrowers also make interest and principal payments to the lenders for amounts that are drawn under loan commitments and loans. Figure 2 illustrates an example of a hypothetical syndicated loan package. The U.S. syndicated loan market can be divided into two segments, investment grade and leveraged. The investment-grade segment is confined to the most creditworthy borrowers. In 2003, most syndicated loans to investment-grade borrowers were loan commitments that generally remained unfunded (see fig. 3). The leveraged segment is composed mainly of lesser quality borrowers, defined either by their credit rating or the higher interest rate charged on their loans. Figure 3 also shows that syndicated loans to leveraged borrowers were almost exclusively funded loans or partially or fully funded loan commitments. After a syndicated loan is closed and allocated among participating lenders, these lenders can adjust their loan portfolios by trading these instruments in the secondary loan market. This trading generally occurs through dealer desks established by large commercial and investment banks. Commercial banks and other financial institutions have increasingly used the secondary market to trade loans. In 2003, the volume of secondary loan market trading totaled $144.57 billion. Loan commitments and loans expose lenders to credit risk—the possibility of loss due to a borrower’s default or inability to meet contractual payment terms. Commercial and investment banks can use credit default swaps— essentially insurance against borrower default or other credit event—to transfer to another party (the guarantor) the credit risk from a loan commitment or loan, without actually selling the asset. When a commercial or investment bank purchases a credit default swap, they agree to make periodic payments to a guarantor who is contractually obligated to pay the bank in the event of a specified credit event, such as loan repayment delinquency, default, or credit-rating downgrade (see fig. 4). According to the International Swaps and Derivatives Association (ISDA), global credit default swap contract amounts totaled $3.78 trillion in December 2003. However, only a small portion of this amount was used for reducing the credit risk associated with loan commitments. Under current accounting standards, designed to reflect their respective business models, commercial and investment banks account for loan commitments differently. Commercial banks use a mixed attribute model to account for their various products and services. As a result, some financial assets and liabilities, including loan commitments, are measured at the historical transaction price (cost), some at the lower of cost or market value, and some at fair value. The historic transaction price (cost) of a loan commitment is the value of the loan commitment service fees at the time a firm extends the commitment. In contrast, investment banks generally follow a fair value accounting model in which they report inventory, which may include loans or loan commitments, at fair value. The fair value of a loan commitment is the price at which it can be exchanged between willing, knowledgeable parties without any compulsion such as a forced liquidation or distress sale. Changes in the fair value of an investment banks inventory are included in earnings in the periods in which the changes occur. FASB has established these different accounting models because investment and commercial banks have different business models. For example, commercial banking activities have traditionally included accepting deposits, originating loans, and holding loans. These banks generally have the intent and ability to hold the vast majority of their loan commitments and loan portfolios until maturity and usually have a relatively small amount of loans held for sale. Investment bank activities have traditionally included buying, holding as inventory, and selling various financial instruments. Investment banks generally do not hold loan commitments and loans until maturity. The objective of a fair value measurement is to estimate an exchange price for an asset or liability in the absence of actual transactions. The estimate is based on a hypothetical transaction between willing parties presumed to be market place participants representing unrelated buyers and sellers that have a common level of understanding about factors relevant to the asset or liability that are willing and able to participate in the same market that the asset would be traded in. Because fair value presumes the absence of compulsion or duress, prices derived from a forced liquidation or distress sale would not be used as the basis for the estimate. Fair value estimates use various market inputs. In an active market, quoted prices represent actual transactions that are readily and regularly available to provide pricing information on an ongoing basis. In determining whether a market is active, the emphasis is on the level of activity for a particular asset or liability. Inputs may be also used from other less active markets. Examples of market inputs that may be considered in a fair value measurement include, but are not limited to, quoted prices that are adjusted as appropriate, interest rates, default rates, prepayments, and liquidity. We conducted our work in Charlotte, N.C.; New York City, N.Y.; Norwalk, Conn.; San Francisco, Calif.; and Washington, D.C., between November 2003 and October 2004, in accordance with generally accepted government auditing standards. (See app. I for more details on our objectives, scope, and methodology.) Although some investment bankers have contended that commercial banks systematically underprice loan commitments, commercial bankers and other industry observers told us that the different characteristics of loan commitments and loans—purpose, collateral requirements, and price structure—limited direct price comparisons. For example, a loan commitment gives a company the option to borrow in the future under certain terms and conditions, while a loan provides borrowers with actual funds. In addition, lenders typically charge fees for making credit available under a loan commitment and an interest rate for loans (including loans drawn under prior loan commitments). Commercial bankers said that they consider several factors when establishing the price of loan commitments and loans, including the profitability of the existing business relationship with the borrower, the maturity of the loan or loan commitment, the creditworthiness of the borrower, the price of loans to similar borrowers, the price of existing borrower debt, and financial models. While both loan commitments and loans offer firms access to credit, these instruments serve different purposes. Investment-grade loan commitments are frequently used as backup lines of credit for borrowers that issue commercial paper. Commercial bankers and rating agencies told us that these lines are not expected to be drawn unless a firm loses access to the commercial paper market. Because—as we have indicated earlier—access to the commercial paper market is limited to companies with high credit ratings, loss of access to this market does not, by itself, mean that a firm that draws its loan commitment is in danger of defaulting. In most cases where investment-grade borrowers drew upon their loan commitments, they repaid the amount borrowed in full or otherwise performed in accordance with the repayment terms for the amount borrowed. In contrast to investment-grade borrowers, leveraged borrowers are expected to partially or fully draw down on their loan commitments. Funded loans are predominately used by leveraged borrowers that do not have access to lower cost credit in the commercial paper market. Loan commitments and loans also have different price structures, with lenders typically charging one or more fees for making credit available under a loan commitment and an interest rate on funded loans expressed as a spread or markup over a benchmark rate. Loan commitments and loans also differ in security. Loan commitments to investment-grade borrowers are typically unsecured—no collateral is pledged—and have few restrictive financial covenants, while leveraged loans are typically secured and have more covenants. While a loan commitment gives a firm an option to borrow funds under pre- specified terms, a loan actually provides these funds to the firm. These differences between the purpose of loan commitments and loans, together with differences in their price structure and collateral requirements, make it difficult to compare the price of loan commitments with loans. Commercial bankers said that they considered several factors in establishing the price of loan commitments and loans. For investment- grade borrowers, the profitability of the banking relationship a bank has with the borrower was one factor. Commercial banks establish relationships with corporate customers and evaluate the overall profitability of these relationships in terms of the various products and services customers use and the prospects for additional business in the future. Commercial bankers said that the extent and profitability of the existing business they had with an investment-grade borrower would affect the decision to participate in a syndicated loan and the price they would set if they were syndicating the loan. As we previously reported, commercial bankers also told us that they considered the need to set a price that provided an attractive return to other investors in the syndication. For leveraged loans, industry experts told us that pricing depended on the riskiness of the transaction, but one commercial banker told us that customer relationships also played a role. Creditworthiness—a measure of a borrower’s ability to meet debt obligations—was another factor considered in establishing the price of loan commitments and loans. As table 1 shows, the average fees for investment-grade loan commitments were lower than for leveraged loan commitments between 1999 and 2003, which demonstrates that lenders charge higher fees for leveraged or more risky loan commitments. In addition, the lower average fees for investment-grade loan commitments might reflect the fact that lenders generally do not anticipate having to provide the funds they have committed. Table 1 also shows that the average fees for investment-grade loan commitments increased around 16 percent between 1999 and 2003, while the average fees for leveraged loan commitments decreased around 2 percent during the same time period. Table 2 shows the average annual charge over benchmark rate for investment-grade and leveraged loans between 1999 and 2003. Lenders also charge higher average annual charges over the benchmark rate for leveraged loans than for investment-grade loans, which reflects the greater risk of loss for leveraged loans. Between 1999 and 2003, the average annual charge over benchmark rate increased about 39 percent for investment- grade loans and around 13 percent for leveraged loans. However, in neither case could we determine whether the increase reflected overall higher charges for all loans or represented an increase in the proportion of riskier loans. Commercial bankers also told us that they considered the maturity of a loan commitment or loan in establishing the price of these instruments. As table 3 shows, the average fees for investment-grade loan commitments with maturities of 1 year or more were higher than for 364-day facilities, a reflection that the longer the maturity the greater the risk the loan will be drawn. Commercial bankers also said that they took into account the recent prices of syndicated loans to borrowers with similar credit ratings, and the price of a corporation’s bonds and other debt instruments. However, most commercial bankers we met with reported that they did not consider the price of credit default swaps when determining the price of loan commitments. Further, commercial bankers told us that they used financial models to predict whether the price of a loan commitment or loan would meet their minimum profitability target. These models predict how a particular loan commitment will impact the risk and return of the institution’s overall portfolio. During our review, some investment bankers asserted that investment- grade loan commitments were not profitable on a stand-alone basis. Commercial bankers agreed that the price of these commitments was not very profitable on a stand-alone basis and that they generally look to the entire relationship with the customer to meet their profitability hurdles. Commercial bankers added that competition from other loan market participants constrained the prices they could charge, since investment- grade borrowers generally had syndication offers from more than one lender. When determining the price of investment-grade loans, some commercial bankers noted that competition limited their ability to raise fees and they described themselves as price “takers” rather than price “setters.” Further, federal banking regulators told us that loan commitments are not legally required to be profitable on a stand-alone basis. We were told that loan commitments rarely trade in the secondary market, primarily for two reasons. First, commercial banks did not want to jeopardize their relationship with borrowers that might object to such a sale, and second, institutional investors—such as the mutual and hedge funds and insurance companies that are significant participants in the secondary market—were reluctant to buy instruments that might require funding in the future. Because loan commitments are rarely traded, the available data, which showed increases in secondary trading, were mostly for funded loans. Moreover, we found no comprehensive publicly available data about the actual prices of loans (or loan commitments) traded in the secondary market. For example, a loan pricing data firm compiles and makes some data publicly available about the volume of secondary loan market trading based on information solicited from key market participants. As figure 5 shows, from 1991 to 2003, overall secondary loan market trading increased from about $8 billion to about $145 billion. Officials from a loan market trade association said that institutional investors, attracted by the higher returns provided by loans as compared to bond and equity instruments, largely contributed to the growth in secondary loan market trading. The officials added that the development of standardized loan trade documentation and other market practices also facilitated the growth in secondary loan market trading by improving market liquidity. Loan market trade association officials also said that there were no comprehensive data publicly available about the actual prices for loan commitments or loans traded in the secondary market. Loans are privately placed based upon negotiated terms. As such, institutions that buy or sell these instruments are not required to report actual trade prices. For certain loans, the trade association independently compiles and makes publicly available data on dealer quotes. However, the officials noted that the dealer quotes do not represent actual trade prices or offers to trade; rather, they are estimates provided by bank loan traders. Because loan commitments rarely trade, similar dealer quote data are not collected for these instruments. Some investment bankers contended that certain loan commitments were underpriced at origination, as evidenced by the price of these commitments in the secondary market. However, the available evidence we reviewed did not support the investment bankers’ contentions. In one case, officials from one investment bank said that they participated in a revolving line of credit where the initial trading levels in the secondary market were between 89 and 92 cents on the dollar. They said that, in their opinion, this immediate decline in value implied an initial loss to the participants and was evidence that the credit had been underpriced at origination. Commercial bankers, credit rating agency officials, and other loan market participants told us that the secondary market for loan commitments was illiquid, compared with that for other securities. As a result of this illiquidity, officials from one commercial bank said that investors are able to buy loan commitments at a discount when large amounts of a syndicated loan are placed on the market. The officials added that these investors are often able to sell smaller amounts of these commitments at a later time for a higher price. Investment bank officials acknowledged that the trading levels for the revolving line of credit, which had sold for between 89 and 92 cents on the dollar, had risen to between about 97 and 98 cents on the dollar in the secondary market. Investment bankers provided information on 3 other cases where loan commitments that sold at a discount in initial trading had current trading levels of more than 99 cents on the dollar. This increase in market value would have significantly reduced any initial loss to the investment banks and may indicate that the initial decline in value was in response to other market factors and the commitments were not necessarily underpriced. While some commercial banks reported that they used credit default swaps to reduce the credit risk on their loan and loan commitment portfolios, only limited information was available on the extent of this practice. Officials at two investment banks believed that credit default swaps and loan commitments were similar instruments, but we found that credit default swaps and loan commitments were substantially different. Commercial bankers, loan market experts, officials from rating agencies, and other industry observers also agreed that credit default swaps and loan commitments were different financial instruments. Based on our analysis of the characteristics of credit default swaps and loan commitments, we found that it was not feasible to use credit default swap prices to determine whether loan commitments were underpriced because of the differences between the two instruments. As previously discussed, credit default swaps are essentially insurance against borrower default, and commercial banks and other financial institutions use these instruments to reduce or diversify credit risk exposures. Commercial banks are required to report the total amount of their credit default swap and other credit derivative contracts in quarterly reports submitted to federal banking regulators, but banks do not have to distinguish between amounts they hold to reduce credit risk and amounts they hold for trading purposes. Officials from the six commercial banks we visited said that they used credit derivatives to reduce the risk on between 2 and 12 percent of their loan and loan commitment portfolios and held most of these instruments for trading purposes–primarily customer service transactions. A credit rating agency report on credit default swaps reached a similar conclusion. Officials at two investment banks we visited said that credit default swaps and loan commitments were similar financial instruments. For example, officials at one investment bank said that credit default swaps and loan commitments were similar financial instruments because those who sold the protection offered by credit default swaps and those who made loan commitments were exposed to similar risks of credit losses. They added that a credit default swap and a loan commitment were both similar to a put option. In a put option, the option purchaser has the right, but not the obligation, to sell an asset to the put option seller at a specified price on or before the option’s exercise date, and the purchaser pays a premium to the seller for the put option. The officials noted that if a swap was triggered by a credit event, the beneficiary had the right to payment of the swap’s full value from the guarantor, who would then be exposed to any losses associated with the credit event. These officials asserted that the same risk existed in a loan commitment, because the borrower has the right to draw the full amount of the commitment and would not exercise this right unless its credit rating had deteriorated to near default levels and it could not raise funds in the financial markets. However, we found that credit default swaps and loan commitments were substantially different. We analyzed the characteristics of each instrument and sought the opinions of commercial bankers and other industry observers. As table 4 shows, credit default swaps and loan commitments differed in terms of the trigger event, pricing, trading, and financial covenants. For example, the trigger for a credit default swap is a clearly defined indication of the borrower’s credit impairment, which typically includes bankruptcy, insolvency, and delinquency, or may even result from a credit-rating downgrade. However, the trigger for a loan commitment does not necessarily indicate credit impairment on the part of the borrower. A loan commitment may serve as a backup for commercial paper, and the issuer may have to use the line for reasons other than impaired credit. We also found differences in the payment schedule of credit default swaps and loan commitments. For credit default swaps, the beneficiary makes fixed payments—either on a quarterly or annual basis— to the guarantor. For loan commitments, the fees that lenders charge typically vary based on the credit rating for investment grade borrowers and financial ratios for leveraged borrowers. As previously discussed, officials from commercial banks we visited reported holding most credit default swap contracts for trading purposes, but these same officials also noted that loan commitments were generally not traded. Finally, loan commitment contracts typically include financial covenants, or a series of restrictions that dictate, to varying degrees, how borrowers can operate and carry themselves. These covenants are designed to protect lenders against the borrower’s potential future credit deterioration. Credit default swap contracts do not contain such financial covenants. Commercial bankers, loan market experts, officials from rating agencies, and other industry observers also agreed that credit default swaps and loan commitments were different financial instruments. According to officials at the two investment banks we visited, credit default swap and loan commitment prices were similar enough to allow for meaningful price comparisons. However, as previously discussed, we found that credit default swaps and loan commitments were substantially different financial instruments. Commercial bankers and other loan market participants also told us that prices of the two financial instruments should not be directly compared without adjusting for differences between the instruments. For example, officials at one commercial bank told us that they first adjust for differences in financial covenant protection and recovery rates before using credit default swap prices in estimating the value of their total loan commitment portfolio. These officials also told us that the directional movements in credit default swap prices had informational value regarding the fair value of their loan commitment portfolio—that is, as credit default swap prices increased, the fair value of their loan commitments decreased. However, these officials cautioned that the adjusted prices for credit default swaps were likely to be different from the actual sales price of the portfolio if the instruments were to be sold. Because of substantial differences between credit default swaps and loan commitments, we found that it was not possible to use credit default swap prices to determine whether loan commitments were underpriced. Under current accounting standards, designed to reflect their different business models, commercial and investment banks account for loan commitments differently. We found that following different accounting standards caused temporary differences in recognizing the fees from loan commitments. Further, we found that the revenue from loan commitments was relatively small compared with revenue from other bank operations and these differences would be resolved by the end of the commitment period. We did not find any evidence that the differences in accounting treatment offered the commercial banks with a consistent competitive advantage over investment banks. Further, both commercial and investment banks have similar fair value footnote disclosure requirements and generally provide similar information in their footnotes about the fair value of various financial instruments, including loan commitments. We found that the banks included in the scope of this review used similar methods to estimate the fair value of financial instruments and that the level of detail in their financial statement disclosures varied. However, all the financial statement disclosures we reviewed appeared to be in accordance with current accounting guidance, and we did not identify any objections to the disclosures by the banks’ independent auditors. According to FASB, which sets the private sector accounting and reporting standards, commercial and investment banks follow different accounting standards for similar transactions involving loan commitments because of the differences in their business models. As previously discussed, most commercial banks use varying accounting models depending on the type of activity being accounted for—known as a mixed attribute model. With this model, some financial assets and liabilities are measured at historical cost, some assets at the lower of cost or market value, and some at fair value. In contrast, investment banks generally follow a fair value accounting model in which they report changes in the fair value of inventory, which may include loans or loan commitments, in income during the periods in which the changes occur. FASB officials told us that many believe it is appropriate for commercial and investment banks to follow different accounting models because the institutions have different business models. For example, commercial banking activities have traditionally included accepting deposits, originating loans, and holding loans. These banks generally have the intent and ability to hold the vast majority of their loan commitments and loan portfolios until maturity and usually hold a relatively small amount of loans for sale. Some commercial bankers told us that the mixed attribute model more closely reflects the commercial bank’s operations than the fair value model. Investment bank activities have traditionally included buying, holding as inventory, and selling various financial instruments. As we previously reported in our October 2003 report on bank tying, investment banks often do not hold loan commitments until maturity. Officials at the two investment banks we spoke with stated that the fair value accounting model more closely reflects their operations than other models and asserted that this accounting model should be used by all banks. When commercial banks make loan commitments, they must follow FASB’s Statement of Financial Accounting Standards (FAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, which directs them to book the fees received for loan commitments as deferred revenue (see app. II). The way this revenue is recognized depends upon the likelihood that the loan commitment will be exercised. When this likelihood is remote, the bank will recognize the revenue in equal portions over the loan commitment period. However, if it is likely that the commitment will be exercised, the bank will defer recognizing all the fee revenue for this commitment until the loan is drawn. The fee revenue from the commitment is then recognized over the life of the loan. If this loan commitment remains unexercised, the income would be recognized in total when the commitment period expired. Currently, commercial banks are not allowed to recognize changes in the fair value of loan commitments in their earnings. Investment banks are generally required to follow the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, Brokers and Dealers in Securities, which directs them to record the fair value of loan commitments. When using the fair value model, investment banks must recognize, in income, gains or losses resulting from changes in the fair value of a financial instrument, such as a loan commitment, during the period the change occurs. Although commercial and investment banks follow different models to account for loan commitments, both firms are subject to the same fair value footnote disclosure requirements in which they report the fair value of all loan commitments in their financial statement footnotes along with the method used to determine fair value. As a result, financial analysts and investors are presented with similar information about the commercial and investment banks’ loan commitments in the financial statement footnotes. According to FAS 107: Disclosures about Fair Value of Financial Instruments, in the absence of a quoted market price, firms may estimate fair value based on, among other things, the value of (1) the quoted price of a financial instrument with similar characteristics, (2) option or matrix pricing models, or (3) the discounted value of future cash flows expected to be received. As we previously reported in our October 2003 report on bank tying, Securities and Exchange Commission (SEC) officials and the banking regulators told us the footnote disclosures included with financial statements were an integral part of communicating risk. They considered the statement of position and statement of operations alone to be incomplete instruments through which to convey the risk of loan commitments. They emphasized that to fully ascertain a firm’s financial standing, footnotes must be read along with the financial statements. We found that the banks included in the scope of this review used similar methods to estimate the fair value of financial instruments and the level of detail in their financial statement disclosures varied. For example, all of the commercial bank footnotes we reviewed stated that fair values were based on quoted market prices, when available. If quoted market prices were not available, the banks used other methods such as internally developed models, or based their fair value estimates on the price of similar financial instruments. Some bank footnotes acknowledged that the fair values were significantly affected by assumptions used in developing the estimate, such as the timing of future cash flows and the discount rate, and further recognized that the estimated fair values would not necessarily be realized in an immediate sale of the financial instrument. For some of the commercial bank’s footnotes that we reviewed, the fair value of loan commitments was not explicitly stated, apparently because these amounts may not have been material to the financial statements and therefore did not warrant separate disclosure. Despite the differences in the methods banks used to estimate the fair value of financial instruments and the level of detail presented, all of the financial statement disclosures appeared to be presented in accordance with current disclosure guidance. We found no instances of independent auditors’ taking exception to these disclosures in the audit opinions. As part of our review, we asked bank officials if, for various decision- making purposes, they assigned different values to their loan commitments than the values reported on the financial statements and related fair value footnotes. Four of the commercial banks included in our review and both investment banks included in our sample responded to our request for information and stated that they consistently used the same values for internal decision-making purposes that they used in their financial statements. During our discussions of accounting disclosures, one investment bank official we spoke with asserted that the most appropriate method of determining the fair value of loan commitments and reporting these values in the financial statement footnotes was to use the value of a related credit default swap because this official viewed the two financial instruments as similar. FASB staff told us that generally accepted accounting principles do not prescribe a specific method to estimate the fair value of financial instruments that could be universally adopted by all banks. While the price of a credit default swap could be used under current accounting guidance as the market price of similar traded financial instruments with a similar credit rating, interest rate, and maturity date, this was only one possible method. Some of the other possible methods of estimating the fair value of a financial instrument that does not regularly trade include option pricing models or estimates based on the discounted value of future cash flows expected to be received. Moreover, commercial bank officials and FASB staff told us that a credit default swap did not exist for every borrower that had a loan commitment. As previously discussed, the price of the credit default swap would likely need to be adjusted to account for the various other differences between it and a loan commitment. One commercial bank that we spoke with used credit default swaps as a basis for estimating the fair value of their loan commitments. However, officials at this bank stated that they first adjusted the swap price for the various differences between the two financial instruments, cautioned that the resulting estimate was unlikely to represent the actual sales price of the loan commitments, and primarily used the adjusted credit default swap price to assess directional changes in the estimated fair value of their loan commitment portfolio. Because commercial and investment banks follow different accounting models, they would likely report different values for a similar loan commitment or a loan resulting from an exercised commitment, and recognize different amounts of the related deferred revenue. Further, revenue from fee income would be relatively small compared with revenue from other bank activity. In addition, because investment banks use fair value accounting, the volatility of the fair value of loan commitments would be reflected more transparently in their financial statements than a commercial bank’s financial statements, because investment banks must recognize these changes in income as they occur. In contrast, commercial banks do not recognize changes in the fair value of the loan commitment, its related deferred revenue, or the related loan if it were drawn. The differences in accounting between commercial banks and investment banks are temporary, and, as demonstrated by the examples in appendix II, whether a commercial bank or an investment bank recognizes more fee revenue first would depend on various market conditions including interest rates and spreads. Similarly, any differences between the fair value of a loan or loan commitment on an investment bank’s books and the net book value of a similar loan or loan commitment on a commercial bank’s books would be eliminated by the end of the loan term or commitment period. Moreover, based on our review of the banks’ financial statements, we found that the revenue commercial banks earn from loan commitments was apparently relatively minor compared with other sources of revenue, since it was not identified separately in the statement of income as source of income. Thus, differences in the amount and timing of recognizing service fee income would likely be relatively small. Further, as previously discussed, both commercial and investment banks are required to make similar footnote disclosures about the fair value of their financial instruments. Because these differences are relatively small and temporary, we found no evidence that following different accounting models provided the commercial banks with a consistent competitive advantage over investment banks. In addition, certain similarities in investment and commercial banks’ accounting treatment of loan commitments help mitigate any advantage one type of accounting may offer over the other. First, as previously discussed, both commercial and investment banks are required to make similar footnote disclosures about the fair value of their financial instruments. Second, when similar loan commitments held by a commercial bank and an investment bank are exercised and become loans, both firms are subject to the same accounting standards if the loan is held to maturity. In this situation, both commercial and investment banks are required to establish an allowance for probable losses based on the estimated degree of impairment of the loan commitment or historic experience with similar borrowers. While current accounting standards do not require fair value accounting for all financial instruments, FASB has recognized that commercial and investment banks engage in similar transactions and the board is concerned about having different accounting for those similar transactions. As new accounting guidance is issued, the board is considering eliminating the different business models where appropriate and has indicated a desire to require all entities to report all financial instruments at their current fair value where the conceptual and practical issues related to fair value measurement have been resolved. As we reported in our October 2003 report on bank tying, FASB has stated that it is committed to work diligently toward resolving, in a timely manner, the conceptual and practical issues related to determining the fair values of financial instruments. An FASB staff member wrote a paper that summarized the strengths and weaknesses of fair value accounting. In that paper, the staff member stated that fair value measurement for financial assets and liabilities, such as loans and loan commitments, provide more relevant information than the historical cost model. The author also wrote that the mixed-attribute model cannot cope with today’s complex financial instruments and risk management strategies and it is time for a better accounting model. In addition, the article stated that under the mixed-attribute model, few financial liabilities, such as deposit accounts, are measured at fair value, which can misrepresent the financial position of an entity that has a significant amount of financial liabilities. The paper further stated that changes in the economic environment during the past 20 years have increased the volatility of prices such as interest rates and the introduction of derivatives and other complex financial instruments have made the issue of how to measure financial instruments critical. According to the author, a market price of a financial instrument reflects the market’s assessment of the future cash flows that this instrument will provide under current conditions and an assessment of the risk that the amount or timing of these cash flows will differ from expectations. The article also stated that investors and creditors are primarily interested in assessing the amounts, timing, and uncertainty of future net cash inflows to an entity and, according to FASB staff, it seems logical that information based on the market’s assessment, under current conditions, would be more relevant to investors and creditors. Moreover, the FASB staff paper noted that in today’s highly fluid economic environment, significant changes often occur in short periods of time. These changes may influence management’s decision to hold a particular financial instrument to maturity or sell it and invest the proceeds elsewhere. The FASB staff concluded that the effects of these decisions might be important to investors’ and creditors’ evaluation of the entities’ performance. Officials at both investment banks that we spoke with asserted that accounting for loan commitments on a fair value basis was better than the mixed-attribute model that commercial banks use. Officials at one of these investment banks stated that the current accounting requirements created a disincentive for commercial banks to disclose the risks associated with loan commitments and their fair value. This investment bank official also stated that fair value accounting forces business discipline and asserted that commercial banks should not continue to reflect a loan commitment on their financial statements at a value exceeding its current fair value. According to the FASB staff paper, while most people agree that fair value is the most relevant measure for assets and liabilities that are actively traded, some believe applying this accounting model to all financial instruments may focus too much on current market information that does not necessarily reflect management’s intentions. The author noted that implementing fair value accounting that focuses on current market prices for all financial instruments would reflect the effects of transactions and events in which the entity did not directly participate. The author further stated that some have indicated that if management has the intent and ability to hold a financial asset or liability until maturity, the current market price is less relevant than if they were actively considering selling the instrument. Further, the FASB staff paper points out that opponents of the fair value model assert that the effects of management’s decisions to hold or sell a particular financial instrument should become apparent over time as the entity reports earnings that are higher or lower than the current market. Thus, the current mixed-attribute model seems to provide information that may be important to investors and creditors evaluation of the entities’ performance. The rating agency officials that we spoke with told us that they were comfortable with both historical cost and fair value accounting and could work equally well with either type of accounting information. These officials told us that the information in the bank’s financial statement footnotes provided enough information to assess a bank’s financial performance over time. In our October 2003 report on bank tying, we reported that a loan market expert told us that, although the discipline of using market-based measures works well for some companies, fair value accounting might not be the appropriate model for the entire wholesale loan industry. FASB staff that we spoke with acknowledged that progress in implementing fair value accounting for all financial instruments has not been required because all the implementation issues have not yet been resolved. In our October 2003 report on bank tying, we reported that FASB staff told us that, although measuring financial instruments at fair value has conceptual advantages, FASB has not yet decided when, if ever, it will require essentially all financial instruments held in inventory to be reported at fair value. FASB staff stated that it was important to carefully evaluate all aspects of fair value measurement to avoid unintended consequences. For example, in the absence of observable market data, such as the secondary market for loan commitments, an estimate of fair value would require significant judgment and the result would be imprecise. FASB staff stated that many constituents have expressed concerns that estimating fair value without an active market is too subjective and there is potential for management to manipulate the fair value of these financial instruments because of the significant level of discretion involved in choosing the assumptions that may be used to estimate fair value. As a result, the amount of revenue or losses from changes in the fair value that banks would report could be unreliable. Another significant issue that has not been resolved is the elimination of the banks’ allowance for loan losses account. This allowance account is essentially an estimate of the amount of probable loss in a bank’s loan portfolio. FASB staff told us that eliminating the allowance for loan losses is currently a controversial issue among commercial banks and the bank regulators who want to maintain the current accounting model. FASB staff also told us that commercial banks have asserted that the mixed attribute model more accurately reflects their operations than fair value accounting. FASB staff told us that the bank regulators use the allowance for loan losses as one of several factors that are considered in assessing a bank’s asset quality. As discussed previously, under fair value accounting, all financial instruments would be carried at a market price that reflects the market’s assessment of the future cash flows this instrument will provide under current conditions and an assessment of the risk that the amount or timing of these cash flows will differ from expectations. While market values for some portions of banks’ loan portfolios may be readily obtained, such as residential mortgages where there is an active secondary market, other segments of some banks’ portfolios, including loans to small and medium--sized businesses, are more unique and obtaining reliable fair values could be more problematic. As previously discussed, fair value estimates of these loans would require a significant amount of management judgment and the results would likely be imprecise. Until these issues have been resolved and more comprehensive guidance has been issued by FASB, the current mixed-attribute model will likely continue to be used by some entities while others use fair value. According to the FASB staff that we spoke with, the board is taking steps to improve the accounting guidance for fair value measurements and, on June 23, 2004, issued an exposure draft regarding fair value measurements. Prior to issuing this exposure draft, FASB noted that there was limited guidance for measuring assets and liabilities on a fair value basis and this guidance was dispersed among several accounting pronouncements. Differences in this guidance created inconsistencies, and concerns were raised about the ability to reliably estimate fair value, especially in the absence of quoted market prices. This exposure draft includes guidance that investment banks would follow to determine the fair value of loan commitments. Further, the exposure draft provides guidance that both commercial and investment banks would follow in determining the fair value of loan commitments and presenting this information in their footnote disclosures including the extent of fair value measurement, how fair value was determined, the amount of unrealized gains/losses, and the extent of market inputs that were used. In addition, the exposure draft provides examples of the financial statement footnotes to encourage more consistency in presentation. The exposure draft, among other things, also clarifies the definition of fair value and provides guidance on the hierarchy of techniques that can be used to determine fair value. FASB is currently re-deliberating the exposure draft and considering comments received from constituents during the comment period. According to FASB staff members, they expect to release the final guidance during the first half of 2005. FASB staff told us that they had other projects under way that could affect how commercial and investment banks account for loan commitments including revising revenue recognition guidelines and coordinating with the International Accounting Standards Board in an attempt to eliminate differences in accounting standards. In addition, FASB staff is also looking at the relevance and reliability of some attributes used to estimate fair value. The goal of this effort is to provide guidance for determining at what point an estimate becomes too unreliable to be reported in the financial statements. Although some investment bankers have contended that commercial banks systematically underprice loan commitments, the available evidence did not support these contentions. Because of fundamental differences in the purpose and structure of loan commitments and loans, commercial bankers, officials at credit-rating agencies, and other industry experts told us that price comparisons between these financial instruments are difficult. In addition, the evidence we reviewed from the secondary loan market did not indicate underpricing of loan commitments. In cases we reviewed where loan commitments had traded at a discount in initial trading, the same commitments had current trading levels closer to face value, which may indicate that the commitments were not necessarily underpriced. Further, because of the substantial differences between loan commitments and credit default swaps, it was not possible to use credit default swap prices to determine whether loan commitments were underpriced. Because commercial and investment banks currently follow different accounting standards, designed to reflect their different business models, there are differences in the financial statement presentation of some similar transactions such as loan commitments. Unlike commercial banks, investment banks recognize changes in the fair value of loan commitments in income during the period when the changes occur. As a result, the volatility of these fair value changes is reflected more transparently in an investment bank’s financial statements. We found that following different accounting rules caused temporary differences in recognizing the fees from loan commitments. We also found that revenue from loan commitment fees appeared to be relatively small compared with revenue from other bank activity. We did not find any evidence that the differences in accounting treatment offered the commercial banks a consistent competitive advantage over investment banks. It appears that the economic substance of loan commitments is recognized in the financial statements and related footnotes in a clear, measurable, and evident fashion under both the historic cost and fair value accounting approach. Further, both commercial and investment banks have similar fair value disclosure requirements and generally provide similar information on their financial statements about the fair value of various financial instruments, including loan commitments. Although one FASB staff member indicated that fair value accounting may offer advantages over the mixed-attribute model, in some instances, such as providing more relevant information than the historical cost model, significant implementation issues must be resolved before it can be applied to all financial instruments. It is important for FASB to continue working diligently toward resolving these issues to help ensure that financial statement users are provided with the most relevant and reliable financial information and to keep pace with today’s financial markets. Until these issues are resolved, commercial and investment banks will continue to follow different accounting models for similar financial instruments such as loan commitments. We requested comments on a draft of this report from FDIC, Federal Reserve, OCC, and SEC. FDIC, Federal Reserve, OCC, and SEC staff provided technical suggestions and corrections that we have incorporated where appropriate. We will provide copies of this report to the 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 staffs have any questions about this report, please contact me at (202) 512-8678 or hillmanr@gao.gov or Daniel Blair, Assistant Director at (202) 512-9401 or blaird@gao.gov. During our review, we sought the perspectives of commercial banks that were significant participants in the syndicated loan market. Officials from six large commercial banks agreed to meet with us as part our review. In 2003, these banks arranged about 67 percent of total U.S. syndicated loan volume. We also interviewed officials from two investment banks to obtain the perspectives of other loan market participants. To determine the differences between the price of loan commitments and loans, we examined data on loan commitments and loans compiled by a loan pricing data firm, analyzed the various characteristics of each instrument, and reviewed other financial literature related to the syndicated loan market. We also discussed the price of loan commitments and loans with commercial banks, investment banks, federal bank regulators, officials from credit rating agencies, officials from a loan pricing data firm and loan market trade association, and other industry observers. To determine what data were publicly available about the trading of loan commitments, we analyzed data on secondary loan market trading compiled by a loan pricing data firm and reviewed other financial literature related to secondary loan market trading. We also interviewed commercial bankers, investment bankers, and officials from a loan pricing data firm and loan market trade association to obtain their perspectives on secondary loan market trading. In addition, we discussed the trading of loan commitments with federal bank regulators, officials from credit rating agencies, and other industry observers. To determine the extent to which credit default swaps were used to reduce the risk of loan commitments, the similarities and differences between credit default swaps and loan commitments, and what, if anything, the prices of credit default swaps indicate about the prices of loan commitments, we analyzed data on credit default swaps compiled by federal banking regulators and a global trade association for derivatives and reviewed the financial statements of the 6 commercial banks for information on credit default swap usage. We also interviewed commercial bankers and investment bankers to obtain their perspective. In addition, we discussed the use of credit default swaps by commercial banks with federal bank regulators, officials from a global trade association for derivatives, officials from credit rating agencies, officials from a loan market data collection firm and trade association, and other industry observers. To determine whether the differences between commercial and investment bank’s accounting for loan commitments provide either firm with a consistent competitive advantage, we reviewed our previous comparative analysis of applicable accounting standards. We also updated our understanding of the accounting standards for loan commitments through interviews with officials from the Financial Accounting Standards Board (FASB). In addition, we obtained the perspectives of commercial bankers, investment bankers, federal banking regulators, officials from credit rating agencies, and other industry observers regarding the current accounting standards for loan commitments. To determine the strengths and weaknesses of fair value accounting, and the projects that FASB has under way that might change the way commercial and investment banks account for loan commitments, we reviewed a recently issued accounting exposure draft and conducted interviews with officials from FASB. We also discussed the merits of fair value accounting in interviews with commercial bankers, investment bankers, federal banking regulators, officials from credit rating agencies, officials from a loan market data collection firm and trade association and other industry observers. We assessed all data for reliability and found them to be sufficiently reliable for the purposes of our reporting objectives. We conducted our work in Charlotte, N.C.; New York City, N.Y.; Norwalk, Conn.; San Francisco, Calif.; and Washington, D.C., between November 2003 and October 2004, in accordance with generally accepted government auditing standards. Because commercial and investment banks follow different accounting models, there are differences in the financial statement presentation of some similar transactions. This appendix summarizes the differences, under generally accepted accounting principles in how commercial banks and investment banks account for loan commitments—specifically commercial paper back-up credit facilities—using hypothetical scenarios to illustrate how these differences could affect the financial statements of a commercial and investment bank. We use three hypothetical scenarios to illustrate the accounting differences that would occur between the commercial and investment banks for similar transactions if (1) a loan commitment were made, (2) the loan commitment was exercised by the borrower and the loan was actually made, and (3) the loan was subsequently sold. This appendix does not assess the differences in accounting that would occur between a commercial and investment bank if one entity decided to hold a loan to maturity while the other had the loan held for sale because these are not similar transactions. The examples in this appendix demonstrate that, as of a given financial statement reporting date, differences would likely exist between commercial and investment banks in the reported value of a loan commitment and a loan resulting from an exercised commitment, as well as the recognition of the related deferred revenue. In addition, the volatility of the fair value of loan commitments and the related loan, if the commitment were exercised, would be reflected more transparently in an investment bank’s financial statements, because an investment bank must recognize these changes in value in earnings as they occur in net income. In contrast, commercial banks are not allowed to recognize changes in the fair value of the loan commitment, its related deferred revenue, or the related loan (if drawn and held to maturity). The differences in accounting between commercial banks and investment banks are temporary, and, as the examples in the following sections show, whether a commercial bank or an investment bank recognizes more fee revenue first would depend on various market conditions including interest rates and spreads. Similarly, any differences between the fair value of a loan or loan commitment on an investment bank’s books and the net book value of a similar loan or loan commitment on a commercial bank’s books would be eliminated by the end of the loan term or commitment period. Further, both commercial and investment banks are required to make similar footnote disclosures about the fair value of their financial instruments. Thus, neither accounting model provides a clear and consistent advantage over the life of the loan commitment or the loan if the commitment were exercised. Since 1973, the Financial Accounting Standards Board (FASB) has been establishing private sector financial accounting and reporting standards. In addition, the American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee also provides industry- specific authoritative guidance that is cleared with FASB prior to publication. Where FASB guidance is nonexistent, as is currently the case in fair-value accounting for loan commitments, firms are required to follow AICPA guidance. Most commercial banks generally follow a mixed-attribute accounting model, where some financial assets and liabilities are measured at historical cost, some at the lower of cost or market value, and some at fair value. In accounting for loan commitments, banks follow the guidance in Statement of Financial Accounting Standards (SFAS) Number 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Broker-dealer affiliates and investment banks whose primary business is to act as a broker-dealer follow the AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities, where the inventory (that may include loan commitments) are recorded at the current fair value and the change in value from the prior period is recognized in net income. Further, FASB currently has a project on revenue recognition that includes, among other things, the accounting for loan commitment fees by investment banks and others. The purpose of that project includes addressing the inconsistent recognition of commitment fee income and may eliminate some of the accounting differences that exist between commercial and investment banks described in this appendix. FASB has stated that it is committed to work diligently toward resolving, in a timely manner, the conceptual and practical issues related to determining the fair values of financial instruments and portfolios of financial instruments. Further, FASB has stated that while measurement at fair value has conceptual advantages, all implementation issues have not yet been resolved, and the Board has not yet decided when, if ever, it will be feasible to require essentially all financial instruments to be reported at fair value in the basic financial statements. Although FASB has not yet issued comprehensive guidance on fair-value accounting, recent literature has stated that the fair-value accounting model provides more relevant information about financial assets and liabilities and can keep up with today’s complex financial instruments better than the historical cost accounting model. The effect of the fair-value accounting model is to recognize in net income during the current accounting period amounts that, under the historical cost model, would have been referred to as unrealized gains or losses because the bank did not sell or otherwise dispose of the financial instrument. Further, proponents of the fair-value accounting model contend that unrealized gains and losses on financial instruments are actually lost opportunities as of a specific date to realize a gain or loss by selling or settling a financial instrument at a current price. On the other hand, a disadvantage of fair value accounting exists when there is not an active market for the financial instrument being valued. In this case, the fair value is more subjective and is often determined either by various modeling techniques, based on the discounted value of expected future cash flows, or based on the value of credit derivatives. On the first day of an accounting period, Commercial Bank A and Investment Bank B each made a $100 million loan commitment to a highly rated company to back up a commercial paper issuance. This loan commitment was irrevocable and would expire at the end of three quarterly accounting periods. Because the loan commitment was issued to a highly rated company, both banks determined that the chance of the company drawing on the facility was remote. Both banks received $10,000 in fees for these loan commitments. Commercial Bank A followed the guidance in SFAS No. 91 and recorded this transaction on a historical cost basis, while Investment Bank B, subject to specialized accounting principles that require fair-value accounting, reported changes in fair value included the effect of these changes in earnings. Upon receipt of the loan commitment fee, Commercial Bank A would record the $10,000 as a liability, called deferred revenue, because the bank would be obligated to perform services in the future in order to “earn” this revenue. In practice, because of the relatively small or immaterial amounts of deferred revenue compared with other liabilities on a bank’s statement of position (balance sheet), this amount would not be reported separately and would likely be included in a line item called “other liabilities.” Commercial Bank A would follow the accounting requirements of SFAS No. 91 and recognize the revenue as service fee income in equal portions over the commitment period, regardless of market conditions—a practice often referred to as revenue recognition on a straight-line basis. Thus, at the end of the first accounting period, Commercial Bank A would reduce the $10,000 deferred revenue on its statement of position (balance sheet) by one-third or $3,333 and record the same amount of service fee revenue on the statement of operations (income statement). The same accounting would occur at the end of the second and third accounting periods, so that an equal portion of service revenue would have been recognized during each period that the bank was obligated to loan the highly rated company $100 million. Commercial Bank A would not report the value of the loan commitment on its balance sheet. However, the bank would disclose in the footnotes to its financial statements the fair value of this commercial paper back-up facility as well as the method used to estimate the fair value. Although AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities does not provide explicit guidance for how Investment Bank B would account for this specific transaction, the guide provides relevant guidance on accounting for loan commitments in general. This guide states that Investment Bank B would account for inventory, including financial instruments such as a commercial paper back-up facility, at fair value and report changes in the fair value of the loan commitment in earnings. When changes occurred in the fair value of the loan commitment, Investment Bank B would need to recognize these differences by adjusting the balance of the deferred revenue account to equal the new fair value of the loan commitment. Generally, quoted market prices of identical or similar instruments, if available, are the best evidence of the fair value of financial instruments. If quoted market prices are not available, as is often the case with loan commitments, management’s best estimate of fair value may be based on the quoted market price of an instrument with similar characteristics or may be developed by using certain valuation techniques such as estimated future cash flows using a discount rate commensurate with the risk involved, option pricing models, or matrix pricing models. A corresponding entry of identical value would be made to revenue during the period in which the change in fair value occurred. Once the commitment period ended, as described in the previous paragraph, the deferred revenue account would be eliminated and the entire balance recorded as income because the fair value of the expired loan commitment is zero. If market conditions changed shortly after Investment Bank B issued this credit facility and its fair value declined by 20 percent to $8,000, Investment Bank B would reduce the deferred revenue account on its statement of position (balance sheet) to $8,000, the new fair value. Investment Bank B would recognize $2,000 of service fee income, the amount of the change in value from the last reporting period, in its statement of operations (income statement). Investment Bank B would also disclose in its footnotes the fair value of this credit facility, as well as the method used to estimate the fair value. If during the second accounting period there was another change in market conditions and the value of this credit facility declined another 5 percent to $7,500, Investment Bank B would decrease the balance in the deferred revenue account to $7,500 and recognize $500 in service fee revenue. Further, Investment Bank B would disclose in its footnotes the fair value of this credit facility. During the accounting period in which the commitment to lend $100 million was due to expire, accounting period 3 in this example, the balance of the deferred revenue account would be recognized because the commitment period had expired and the fair value would be zero. Thus, $7,500 would be recognized in revenue and the balance of deferred revenue account eliminated. In this accounting period, there would be no disclosure about the fair value of the credit facility. Table 5 summarizes the amount of revenue Commercial Bank A and Investment Bank B would recognize and the balance of the deferred revenue account for each of the three accounting periods when there were changes in the value of the loan commitments. Commercial Bank A would recognize more service fee income in accounting periods 1 and 2 than Investment Bank B. However, this situation would be reversed in period 3, when Investment Bank B would recognize more revenue. Thus, differences in the value of the loan commitment and the amount of revenue recognized would likely exist between specific accounting periods, reflecting the volatility of the financial markets more transparently in Investment B’s financial statements. The magnitude of the difference is determined by the market conditions at the time and could be significant or minor. However, these differences would be resolved by the end of the commitment period, when both entities would have recognized the same amount of total revenue for the loan commitment. Commercial Bank A and Investment Bank B issued the same loan commitment described previously. However, at the end of the second accounting period, the highly rated company exercised its right to borrow the $100 million. The accounting treatment for this loan would depend upon whether the banks intended to hold or sell the loan. In practice, this loan could be either held or sold, and as a result, the accounting for both is summarized in the following sections. At the time the loan was made, Commercial Bank A would record the loan as an asset on its statement of position (balance sheet) at its principal amount less the balance of the deferred revenue account ($100 million - $3,334). Investment Bank B would initially record this loan at its historical cost basis, less the loan commitment’s fair value at the time the loan was drawn ($100 million - $7,500). Further, based on an analysis by the banks’ loan review teams, a determination of “impairment” would be made. According to SFAS 114, Accounting by Creditors for Impairment of a Loan, “a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” If the loan were determined to be impaired, SFAS 114 states that, the bank would measure the amount of impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the amount of impairment may be based on the loan’s observable market price, or the fair value of the collateral if the loan were collateral dependent. SFAS 114 directs both banks to establish an allowance for losses when the measure of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premium or discount) by creating a valuation allowance that reduces the recorded value of the loan with a corresponding charge to bad- debt expense. When there are significant changes in the amount or timing of the expected future cash flows from this loan, the banks would need to adjust, up or down, the loan loss allowance as appropriate so that the net balance of the loan reflects management’s best estimate of the loan’s cash flows. However, the net value of the loan cannot exceed the recorded investment in the loan. If the loan were not impaired under FAS 114, both banks would still record an allowance for credit losses in accordance with FAS 5, Accounting for Contingencies, when it was probable that a loss from impairment of the loan had occurred and the amount of the loss was reasonably estimable. Thus, both banks would establish an allowance for loss in line with historical performance for borrowers of this type. Because the loan was performing, both banks would receive identical monthly payments of principal and interest. Generally, these cash receipts would be applied in accordance with the loan terms and a portion would be recorded as interest income, and the balance applied would reduce the banks’ investment in the loan. At the end of the loan term, the balance and the related allowance for this loan would be eliminated. SFAS 91 also directs both banks to recognize the remaining unamortized commitment fee over the life of the loan as an adjustment to interest income. Because the borrower’s financial condition had deteriorated, both banks would likely have charged a higher interest rate than the rate stated in the loan commitment. As a result, at the time it became evident that the loan was to be drawn, Investment Bank B would record a liability on its balance sheet to recognize the difference between the actual interest rate of the loan and the interest rate a loan to a borrower with this level of risk would have been made at—in essence the fair value interest rate. Investment Bank B would also amortize this liability over the life of the loan as an adjustment to interest income. If Commercial Bank A and Investment Bank B’s policies both permitted the firms to only hold loans to maturity when the borrowers were highly rated, it is unlikely that the banks would keep the loan in the previous scenario and would sell the loan in the hypothetical scenario soon after it was made. The banks would follow different guidance that would provide similar results. Commercial Bank A would follow the guidance in the AICPA Statement of Position 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others that was issued in December 2001. According to this guidance, once bank management decides to sell a loan that had not been previously classified as held-for-sale, the loan’s value should be adjusted to the lower of historical cost or fair value and any amount that historical cost exceeds fair value should be accounted for as a valuation allowance. Further, any subsequent changes in the loan’s fair value that would be required to be adjusted through the valuation allowance, such as a further decline in fair value, would be recognized in income. However, if the fair value increased to the point where it exceed the historical carrying value, this gain would not be recognized in income unless the loan were sold. Investment Bank B would follow the guidance in the AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities, as it did with loan commitments, and account for inventory at fair value and report changes in the fair value of the loan in net income. For example, if bank management decided to sell the loan soon after it was drawn when some payments had been made to reduce the principal balance and the net book value of this loan was $88,200,000 (unpaid principal balance of $90,000,000 less the related allowance of $1,800,000) and the fair value was 97 percent of the unpaid principal balance or $87,300,000, both banks would recognize the decline in value of $900,000 in earnings. While the loan remained available-for-sale, any changes in its fair value would be recorded in income. For example, if the loan’s fair value declined further to $85,500,000, both banks would recognize the additional decline in value of $1,800,000 in earnings. Table 6 summarizes the accounting similarities between Commercial Bank A and Investment Bank B for the loan sale. Although the two banks followed different guidance, the effect of the loan sale is the same for both banks. In addition to those individuals named above, Emily Chalmers, Marshall Hamlett, Robert Pollard, and John Treanor made key contributions to this report. | Federal banking regulators reported that commercial banks held about $1.6 trillion in syndicated loans in 2003. Loan commitments--a promise to make a set amount of credit available in the future--represented $1 trillion (about 64 percent) of these loans. Issues have been raised whether commercial banks systematically underprice loan commitments and whether generally accepted accounting principles provide meaningful disclosure of the economics of these commitments. This report discusses (1) differences between the pricing of loan commitments and loans, and assesses data that are available about the trading of loan commitments; (2) the extent to which credit default swaps are used to reduce the credit risk from loan commitments, and what credit default swap prices indicate about the prices of loan commitments; and (3) differences between commercial and investment banks' accounting treatment of loan commitments, and the strengths and weaknesses of fair value accounting. Loan commitments and loans have different characteristics, making it difficult to directly compare the prices of these instruments. First, a loan commitment gives a company the option to borrow a certain amount in the future, while a loan actually provides funds to the borrower. Second, lenders typically charge fees for making credit contingently available through a loan commitment but charge interest on a loan. Third, loan commitments are typically unsecured--that is, borrowers do not have to pledge collateral--while loans are typically secured. Most of those we interviewed told us that loan commitments are rarely traded in the secondary market because selling them could jeopardize relationships with borrowers and because institutional investors were reluctant to purchase them. Some investment bankers expressed concerns that loan commitments were systematically underpriced, but the available information did not support such assertions. Commercial bankers told us that they used credit default swaps--contracts that can transfer the credit risk of a loan or loan commitment to another party--to reduce credit risk on small amounts of their loan commitment portfolios. Some investment bankers contended that credit default swaps and loan commitments were similar instruments and that credit default swap prices could provide information about the appropriateness of prices for loan commitments. We found that it was not possible to use credit default swap prices to determine the appropriateness of prices for loan commitments. Specifically, they differed in triggering events, payment schedule, trading, and financial covenants. Under current accounting standards, designed to reflect their respective business models, commercial and investment banks account for loan commitments differently, causing a temporary difference in the recognition of fee income. Further, revenue from fee income appeared to be relatively small compared with revenue from other bank activity and the difference would be resolved by the end of the commitment period. As a result, we did not find any evidence that following a different accounting model offered the commercial banks a consistent competitive advantage over investment banks. Further, commercial and investment banks have similar fair value financial statement disclosure requirements and, as a result, provide similar information about the fair value of their financial instruments. It appears that the economic substance of loan commitments is recognized in the financial statements and related footnotes in a clear, measurable, and evident fashion under both the historic cost and fair value approach. While some have indicated that fair value accounting might disclose more relevant information than the historical cost model, all the conceptual and implementation issues have not been resolved. Until these issues are resolved, commercial and investment banks will continue to follow different accounting models for loan commitments. |
Fiscal year 2002 was a year of challenges, not just for GAO but also for the Congress and the nation. The nation’s vulnerabilities were exposed in a series of events—America’s vulnerability to sophisticated terrorist networks, bioterrorism waged through mechanisms as mundane as the daily mail, and corporate misconduct capable of wiping out jobs, pensions, and investments virtually overnight. As the Congress’s priorities changed to meet these crises, GAO’s challenge was to respond quickly and effectively to our congressional clients’ changing needs. With work already underway across a spectrum of critical policy and performance issues, we had a head start toward meeting the Congress’ needs in a year of unexpected and often tumultuous events. For example, in fiscal year 2002 GAO’s work informed the debate over national preparedness strategy, helping the Congress determine how best to organize and manage major new departments, assess key vulnerabilities to homeland defense, and respond to the events of September 11 in areas such as terrorism insurance and airline security. GAO’s input also was a major factor in shaping the Sarbanes-Oxley Act, which created the Public Company Accounting Oversight Board, as well as new rules to strengthen corporate governance and ensure auditor independence. Further, GAO’s work helped the Congress develop and enact election reform legislation in the form of the Help America Vote Act of 2002 to help restore voter confidence. In fiscal year 2002, GAO also served the Congress and the American people by helping to: Contribute to a national preparedness strategy at the federal, state, and local levels that will make Americans safer from terrorism Protect investors through better oversight of the securities industry and Ensure a safer national food supply Expose the inadequacy of nursing home care Make income tax collection fair, effective, and less painful to taxpayers Strengthen public schools’ accountability for educating children Keep sensitive American technologies out of the wrong hands Protect American armed forces confronting chemical or biological weapons Identify the risks to employees in private pension programs Identify factors causing the shortage of children’s vaccines Assist the postal system in addressing anthrax and various management challenges Identify security risks at ports, airports, and transit systems Save billions by bringing sound business practices to the Department of Foster human capital strategic management to create a capable, effective, Ensure that the armed forces are trained and equipped to meet the nation’s defense commitments Enhance the safety of Americans and foreign nationals at U.S. Assess ways of improving border security through biometric technologies Reduce the international debt problems faced by poor countries Reform the way federal agencies manage their finances Protect government computer systems from security threats Enhance the transition of e-government—the new “electronic connection” between government and the public During fiscal year 2002, GAO’s analyses and recommendations contributed to a wide range of legislation considered by the Congress, as shown in the following table. By year’s end, we had testified 216 times before the Congress, sometimes on as little as 24 hours’ notice, on a range of issues. We had responded to hundreds of urgent requests for information. We had developed 1,950 recommendations for improving the government’s operations, including, for example, those we made to the Secretary of State calling for the development of a governmentwide plan to help other countries combat nuclear smuggling and those we made to the Chairman of the Federal Energy Regulatory Commission calling for his agency to develop an action plan for overseeing competitive energy markets. We also had continued to track the recommendations we had made in past years, checking to see that they had been implemented and, if not, whether we needed to do follow-up work on problem areas. We found, in fact, that 79 percent of the recommendations we had made in fiscal year 1998 had been implemented, a significant step when the work we have done for the Congress becomes a catalyst for creating tangible benefits for the American people. Table 2 highlights, by GAO’s three external strategic goals, examples of issues on which we testified before Congress during fiscal year 2002. Congress and the executive agencies took a wide range of actions in fiscal year 2002 to improve government operations, reduce costs, or better target budget authority based on GAO analyses and recommendations, as highlighted in the following sections. Federal action on GAO’s findings or recommendations produced financial benefits for the American people: a total of $37.7 billion was achieved by making government services more efficient, improving the budgeting and spending of tax dollars, and strengthening the management of federal resources (see fig. 1). For example, increased funding for improved safeguards against fraud and abuse helped the Medicare program to better control improper payments of $8.1 billion over 2 years, and better policies and controls reduced losses from farm loan programs by about $4.8 billion across 5 years. In fiscal year 2002, we also recorded 906 instances in which our work led to improvements in government operations or programs (see fig. 2). For example, by acting on GAO’s findings or recommendations, the federal government has taken important steps toward enhancing aviation safety, improving pediatric drug labeling based on research, better targeting of funds to high-poverty school districts, greater accountability in the federal acquisition process, and more effective delivery of disaster recovery assistance to other nations, among other achievements. As shown in table 3, we met all of our annual performance targets except our timeliness target. While we provided 96 percent of our products to their congressional requesters by the date promised, we missed this measure’s target of 98 percent on-time delivery. The year’s turbulent events played a part in our missing the target, causing us to delay work in progress when higher-priority requests came in from the Congress. We know we will continue to face factors beyond our control as we strive to improve our performance in this area. We believe the agency protocols we are piloting will help clarify aspects of our interactions with the agencies we evaluate and audit and, thus, expedite our work in ways that could improve the timeliness of our final products. We also believe that our continuing investments in human capital and information technology will improve our timeliness while allowing us to maintain our high level of productivity and performance overall. The results of our work were possible, in part, because of changes we have made to maximize the value of GAO. We had already realigned GAO’s structure and resources to better serve the Congress in its legislative, oversight, appropriations, and investigative roles. Over the past year, we cultivated and fostered congressional and agency relations, better refined our strategic and annual planning and reporting processes, and enhanced our information technology infrastructure. We also continued to provide priority attention to our management challenges of human capital, information security, and physical security. Changes we made in each of these areas helped enable us to operate in a constantly changing environment. Over the course of the year, we cultivated and fostered congressional and agency relations in several ways. On October 23, 2001, in response to the anthrax incident on Capitol Hill, we opened our doors to 435 members of the House of Representatives and their staffs. Later in the year, we continued with our traditional hill outreach meetings and completed a 7- month pilot test of a system for obtaining clients’ views on the quality of our testimonies and reports. We also developed agency protocols to provide clearly defined, consistently applied, well-documented, and transparent policies for conducting our work with federal agencies. We have implemented our new reporting product line entitled Highlights—a one-page summary that provides the key findings and recommendations from a GAO engagement. We continued our policy of outreach to our congressional clients, the public, and the press to enhance the accessibility of GAO products. Our external web site now logs about 100,000 visitors each day and more than 1 million GAO products are downloaded every month by our congressional clients, the public, and the press. In light of certain records access challenges during the past few years and with concerns about national and homeland security unusually high at home and abroad, it may become more difficult for us to obtain information from the Executive Branch and report on certain issues. If this were to occur, it would hamper our ability to complete congressional requests in a timely manner. We are updating GAO’s engagement acceptance policies and practices to address this issue and may recommend legislative changes that will help to assure that we have reasonable and appropriate information that we need to conduct our work for the Congress and the country. GAO’s strategic planning process serves as a model for the federal government. Our plan aligns GAO’s resources to meet the needs of the Congress, address emerging challenges and achieve positive results. Following the spirit of the Government Performance and Results Act, we established a process that provides for updates with each new Congress, ongoing analysis of emerging conditions and trends, extensive consultations with congressional clients and outside experts, and assessments of our internal capacities and needs. At the beginning of fiscal year 2002, we updated our strategic plan for serving the Congress based on substantial congressional input—extending the plan’s perspective out to fiscal year 2007 and factoring in developments that had occurred since we first issued it in fiscal year 2000. The updated plan carries forward the four strategic goals we had already established as the organizing principles for a body of work that is as wide- ranging as the interests and concerns of the Congress itself. Using the plan as a blueprint, we lay out the areas in which we expect to conduct research, audits, analyses, and evaluations to meet our clients’ needs, and we allocate the resources we receive from the Congress accordingly. Following is our strategic plan framework. Appendix I of this statement delineates in a bit more detail our strategic objectives and our qualitative performance goals for fiscal years 2002 and 2003. We issued our 2001 Performance and Accountability Report that combines information on our past year’s accomplishments and progress in meeting our strategic goals with our plans for achieving our fiscal year 2003 performance goals. The report earned a Certificate of Excellence in Accountability Reporting from the Association of Government Accountants. We issued our fiscal year 2002 Performance and Accountability Report in January 2003. Our financial statements, which are integral to our performance and accountability, received an unqualified opinion for the sixteenth consecutive year. Furthermore, our external auditors did not identify any material control weaknesses or compliance issues relating to GAO’s operations. During the past year, we acquired new hardware and software and developed user-friendly systems that enhanced our productivity and responsiveness to the Congress and helped meet our initial information technology goals. For example, we replaced aging desktop workstations with notebook computers that provide greater computing power, speed, and mobility. In addition, we upgraded key desktop applications, the Windows desktop operating system, and telecommunications systems to ensure that GAO staff have modern technology tools to assist them in carrying out their work. We also developed new, integrated, user-friendly Web-based systems that eliminate duplicate data entry while ensuring the reusability of existing data. As the Clinger-Cohen Act requires, GAO has an enterprise architecture program in place to guide its information technology planning and decision making. In designing and developing systems, as well as in acquiring technology tools and services, we have applied enterprise architecture principles and concepts to ensure sound information technology investments and the interoperability of systems. Given GAO’s role as a key provider of information and analyses to the Congress, maintaining the right mix of technical knowledge and expertise as well as general analytical skills is vital to achieving our mission. We spend about 80 percent of our resources on our people, but without excellent human capital management, we could still run the risk of being unable to deliver what the Congress and the nation expect from us. At the beginning of my term in early fiscal year 1999, we completed a self- assessment that profiled our human capital workforce and identified a number of serious challenges facing our workforce, including significant issues involving succession planning and imbalances in the structure, shape, and skills of our workforce. As presented below, through a number of strategically planned human capital initiatives over the past few years, we have made significant progress in addressing these issues. For example, as illustrated in figure 3, by the end of fiscal year 2002, we had almost a 60 percent increase in the percentage of staff at the entry-level (Band I) as compared with fiscal year 1998. Also, the proportion of our workforce at the mid-level (Band II) decreased by about 8 percent. Our fiscal year 2002 human capital initiatives included the following: In fiscal year 2002, we hired nearly 430 permanent staff and 140 interns. We also developed and implemented a strategy to place more emphasis on diversity in campus recruiting. In fiscal years 2002 and 2003, to help meet our workforce planning objectives, we offered voluntary early retirement under authority established in our October 2000 human capital legislation. Early retirement was granted to 52 employees in fiscal year 2002 and 24 employees in fiscal year 2003. To retain staff with critical skills and staff with less than 3 years of GAO experience, we implemented legislation authorizing federal agencies to offer student loan repayments in exchange for certain federal service commitments. In fiscal year 2002, GAO implemented a new, modern, effective, and credible performance appraisal system for analysts and specialists, adapted the system for attorneys, and began modifying the system for administrative professional and support staff. We began developing a new core training curriculum for managers and staff to provide additional training on the key competencies required to perform GAO’s work. We also took steps to achieve a fully democratically-elected Employee Advisory Council to work with GAO’s Executive Committee in addressing issues of mutual interest and concern. The above represent just a few of many accomplishments in the human capital area. GAO is the clear leader in the federal government in designating and implementing 21st century human capital policies and practices. We also are taking steps to work with the Congress, the Office of Management and Budget, and the Office of Personnel Management, and others to “help others help themselves” in the human capital area. Ensuring information systems security and disaster recovery systems that allow for continuity of operations is a critical requirement for GAO, particularly in light of the events of September 11 and the anthrax incidents. The risk is that our information could be compromised and that we would be unable to respond to the needs of the Congress in an emergency. In light of this risk and in keeping with our goal of being a model federal agency, we are implementing an information security program consistent with the requirements in the Government Information Security Reform provisions (commonly referred to as “GISRA”) enacted in the Floyd D. Spence National Defense Authorization Act for fiscal year 2001. We have made progress through our efforts to, among other things, implement a risk-based, agencywide security program; provide security training and awareness; and develop and implement an enterprise disaster recovery solution. In the aftermath of the September 11 terrorist attacks and subsequent anthrax incidents, our ability to provide a safe and secure workplace emerged as a challenge for our agency. Protecting our people and our assets is critical to our ability to meet our mission. We devoted additional resources to this area and implemented measures such as reinforcing vehicle and pedestrian entry points, installing an additional x-ray machine, adding more security guards, and reinforcing windows. GAO is requesting budget authority of $473 million for fiscal year 2004 to maintain current operations for serving the Congress as outlined in our strategic plan and to continue initiatives to enhance our human capital, support business processes, and ensure the safety and security of GAO staff, facilities, and information systems. This funding level will allow us to fund up to 3,269 full-time equivalent personnel. Our request includes $466.6 million in direct appropriations and authority to use estimated revenues of $6 million from reimbursable audit work and rental income. Our requested increase of $18.4 million in direct appropriations represents a modest 4.1 percent increase, primarily for mandatory pay and uncontrollable costs. Our budget request also includes savings from nonrecurring fiscal year 2003 investments in fiscal year 2004 that we propose to use to fund further one-time investments in critical areas, such as security and human capital. We have submitted a request for $4.8 million in supplemental fiscal year 2003 funds to allow us to accelerate implementation of important security enhancements. Our fiscal year 2004 budget includes $4.8 million for safety and security needs that are also included in the supplemental. If the requested fiscal year 2003 supplemental funds are provided, our fiscal year 2004 budget could be reduced by $4.8 million. Table 4 presents our fiscal year 2003 and requested fiscal year 2004 resources by funding source. During fiscal year 2004, we plan to sustain our investments in maximizing the productivity of our workforce by continuing to address the key management challenges of human capital, and both information and physical security. We will continue to take steps to “lead by example” within the federal government in connection with these and other critical management areas. Over the next several years, we need to continue to address skill gaps, maximize staff productivity and effectiveness, and reengineer our human capital processes to make them more user-friendly. We plan to address skill gaps by further refining our recruitment and hiring strategies to target gaps identified through our workforce planning efforts, while taking into account the significant percentage of our workforce eligible for retirement. We will continue to take steps to reengineer our human capital systems and practices to increase their efficiency and to take full advantage of technology. We will also ensure that our staff have the needed skills and training to function in this reengineered environment. In addition, we are developing competency-based performance appraisal and broad-banding pay systems for our mission support employees. To ensure our ability to attract, retain, and reward high-quality staff, we plan to devote additional resources to our employee training and development program. We will target resources to continue initiatives to address skill gaps, maximize staff productivity, and increase staff effectiveness by updating our training curriculum to address organizational and technical needs and training new staff. Also, to enhance our recruitment and retention of staff, we will continue to offer a student loan repayment program and transit subsidy benefit established in fiscal year 2002. In addition, we will continue to focus our hiring efforts in fiscal year 2004 on recruiting talented entry-level staff. To build on the human capital flexibilities provided by the Congress in 2000, we plan to recommend legislation that would, among other things, facilitate GAO’s continuing efforts to recruit and retain top talent, develop a more performance-based compensation system, realign our workforce, and facilitate our succession planning and knowledge transfer efforts. In addition, to help attract new recruits, address certain “expectation gaps” within and outside of the government, and better describe the modern audit and evaluation entity GAO has become, we will work with the Congress to explore the possibility of changing the agency’s name while retaining our well-known acronym and global brand name of “GAO.” On the information security front, we need to complete certain key actions to be better able to detect intruders in our systems, identify our users, and recover in the event of a disaster. Among our current efforts and plans for these areas are completing the installation of software that helps us detect intruders on all our internal servers, completing the implementation of a secure user authentication process, and refining the disaster recover plan we developed last year. We will need the Congress’ help to address these remaining challenges. We also are continuing to make the investments necessary to enhance the safety and security of our people, facilities, and other assets for the mutual benefit of GAO and the Congress. With our fiscal year 2003 supplemental funding, if provided, or if not, with fiscal year 2004 funds, we plan to complete installation of our building access control and intrusion detection system and supporting infrastructure, and obtain an offsite facility for use by essential personnel in emergency situations. With the help of the Congress, we plan to implement these projects over the next several years. As a result of the support and resources we have received from this Subcommittee and the Congress over the past several years, we have been able to make a difference in government, not only in terms of financial benefits and improvements in federal programs and operations that have resulted from our work, but also in strengthening and increasing the productivity of GAO, and making a real difference for our country and its citizens. Our budget request for fiscal year 2004 is modest, but necessary to sustain our current operations, continue key human capital and information technology initiatives, and ensure the safety and security of our most valuable asset—our people. We seek your continued support so that we will be able to effectively and efficiently conduct our work on behalf of the Congress and the American people. This appendix lists GAO’s strategic goals and the strategic objectives for each goal. They are part of our updated draft strategic plan (for fiscal years 2002 through 2007). Organized below each strategic objective are its qualitative performance goals. The performance goals lay out the work we plan to do in fiscal years 2002 and 2003 to help achieve our strategic goals and objectives. We will evaluate our performance at the end of fiscal year 2003. Provide Timely, Quality Service to the Congress and the Federal Government to Address Current and Emerging Challenges to the Well- Being and Financial Security of the American People To achieve this goal, we will provide information and recommendations on the following: the Health Care Needs of an Aging and Diverse Population evaluate Medicare reform, financing, and operations; assess trends and issues in private health insurance coverage; assess actions and options for improving the Department of Veterans Affairs’ and the Department of Defense’s (DOD) health care services; evaluate the effectiveness of federal programs to promote and protect the public health; evaluate the effectiveness of federal programs to improve the nation’s preparedness for the public health and medical consequences of bioterrorism; evaluate federal and state program strategies for financing and overseeing chronic and long-term health care; and assess states’ experiences in providing health insurance coverage for low- income populations. the Education and Protection of the Nation’s Children analyze the effectiveness and efficiency of early childhood education and care programs in serving their target populations; assess options for federal programs to effectively address the educational and nutritional needs of elementary and secondary students and their schools; determine the effectiveness and efficiency of child support enforcement and child welfare programs in serving their target populations; and identify opportunities to better manage postsecondary, vocational, and adult education programs and deliver more effective services. the Promotion of Work Opportunities and the Protection of Workers assess the effectiveness of federal efforts to help adults enter the workforce and to assist low-income workers; analyze the impact of programs designed to maintain a skilled workforce and ensure employers have the workers they need; assess the success of various enforcement strategies to protect workers while minimizing employers’ burden in the changing environment of work; and identify ways to improve federal support for people with disabilities. a Secure Retirement for Older Americans assess the implications of various Social Security reform proposals; identify opportunities to foster greater pension coverage, increase personal saving, and ensure adequate and secure retirement income; and identify opportunities to improve the ability of federal agencies to administer and protect workers’ retirement benefits. an Effective System of Justice identify ways to improve federal agencies’ ability to prevent and respond to major crimes, including terrorism; assess the effectiveness of federal programs to control illegal drug use; identify ways to administer the nation’s immigration laws to better secure the nation’s borders and promote appropriate treatment of legal residents; and assess the administrative efficiency and effectiveness of the federal court and prison systems. the Promotion of Viable Communities assess federal economic development assistance and its impact on communities; assess how the federal government can balance the promotion of home ownership with financial risk; assess the effectiveness of federal initiatives to assist small and minority- owned businesses; assess federal efforts to enhance national preparedness and capacity to respond to and recover from natural and man-made disasters; and assess how well federally supported housing programs meet their objectives and affect the well-being of recipient households and communities. Responsible Stewardship of Natural Resources and the Environment assess the nation’s ability to ensure reliable and environmentally sound energy for current and future generations; assess federal strategies for managing land and water resources in a sustainable fashion for multiple uses; assess federal programs’ ability to ensure a plentiful and safe food supply, provide economic security for farmers, and minimize agricultural environmental damage; assess federal pollution prevention and control strategies; and assess efforts to reduce the threats posed by hazardous and nuclear wastes. a Secure and Effective National Physical Infrastructure assess strategies for identifying, evaluating, prioritizing, financing, and implementing integrated solutions to the nation’s infrastructure needs; assess the impact of transportation and telecommunications policies and practices on competition and consumers; assess efforts to improve safety and security in all transportation modes; assess the U.S. Postal Service’s transformation efforts to ensure its viability and accomplish its mission; and assess federal efforts to plan for, acquire, manage, maintain, secure, and dispose of the government’s real property assets. Provide Timely, Quality Service to the Congress and the Federal Government to Respond to Changing Security Threats and the Challenges of Global Interdependence To achieve this goal, we will provide information and recommendations on the following: Respond to Diffuse Threats to National and Global Security analyze the effectiveness of the federal government’s approach to providing for homeland security; assess U.S. efforts to protect computer and telecommunications systems supporting critical infrastructures in business and government; and assess the effectiveness of U.S. and international efforts to prevent the proliferation of nuclear, biological, chemical, and conventional weapons and sensitive technologies. Ensure Military Capabilities and Readiness assess the ability of DOD to maintain adequate readiness levels while addressing the force structure changes needed in the 21st century; assess overall human capital management practices to ensure a high- quality total force; identify ways to improve the economy, efficiency, and effectiveness of DOD’s support infrastructure and business systems and processes; assess the National Nuclear Security Administration’s efforts to maintain a safe and reliable nuclear weapons stockpile; analyze and support DOD’s efforts to improve budget analyses and performance management; assess whether DOD and the services have developed integrated procedures and systems to operate effectively together on the battlefield; and assess the ability of weapon system acquisition programs and processes to achieve desired outcomes. Advance and Protect U.S. International Interests analyze the plans, strategies, costs, and results of the U.S. role in conflict interventions; analyze the effectiveness and management of foreign aid programs and the tools used to carry them out; analyze the costs and implications of changing U.S. strategic interests; evaluate the efficiency and accountability of multilateral organizations and the extent to which they are serving U.S. interests; and assess the strategies and management practices for U.S. foreign affairs functions and activities. Respond to the Impact of Global Market Forces on U.S. Economic and Security Interests analyze how trade agreements and programs serve U.S. interests; improve understanding of the effects of defense industry globalization; assess how the United States can influence improvements in the world financial system; assess the ability of the financial services industry and its regulators to maintain a stable and efficient global financial system; evaluate how prepared financial regulators are to respond to change and innovation; and assess the effectiveness of regulatory programs and policies in ensuring access to financial services and deterring fraud and abuse in financial markets. Help Transform the Government’s Role and How It Does Business to Meet 21st Century Challenges To achieve this goal, we will provide information and recommendations on the following: Analyze the Implications of the Increased Role of Public and Private Parties in Achieving Federal Objectives analyze the modern service-delivery system environment and the complexity and interaction of service-delivery mechanisms; assess how involvement of state and local governments and nongovernmental organizations affect federal program implementation and achievement of national goals; and assess the effectiveness of regulatory administration and reforms in achieving government objectives. Assess the Government’s Human Capital and Other Capacity for Serving the Public identify and facilitate the implementation of human capital practices that will improve federal economy, efficiency, and effectiveness; identify ways to improve the financial management infrastructure capacity to provide useful information to manage for results and costs day to day; assess the government’s capacity to manage information technology to improve performance; assess efforts to manage the collection, use, and dissemination of government information in an era of rapidly changing technology; assess the effectiveness of the Federal Statistical System in providing relevant, reliable, and timely information that meets federal program needs; and identify more businesslike approaches that can be used by federal agencies in acquiring goods and services. Support Congressional Oversight of the Federal Government’s Progress toward Being More Results-Oriented, Accountable, and Relevant to Society’s Needs analyze and support efforts to instill results-oriented management across the government; highlight the federal programs and operations at highest risk and the major performance and management challenges confronting agencies; identify ways to strengthen accountability for the federal government’s assets and operations; promote accountability in the federal acquisition process; assess the management and results of the federal investment in science and technology and the effectiveness of efforts to protect intellectual property; and identify ways to improve the quality of evaluative information. develop new resources and approaches that can be used in measuring performance and progress on the nations 21st century challenges Analyze the Government’s Fiscal Position and Approaches for Financing the Government analyze the long-term fiscal position of the federal government; analyze the structure and information for budgetary choices and explore alternatives for improvement; contribute to congressional deliberations on tax policy; support congressional oversight of the Internal Revenue Service’s modernization and reform efforts; and assess the reliability of financial information on the government’s fiscal position and financing sources. Maximize the Value of GAO by Being a Model Federal Agency and a World-Class Professional Services Organization To achieve this goal, we will do the following: Sharpen GAO’s Focus on Clients’ and Customers’ Requirements continuously update client requirements; develop and implement stakeholder protocols and refine client protocols; and identify and refine customer requirements and measures. | GAO is a key source of objective information and analyses and, as such, plays a crucial role in supporting congressional decision-making and helping improve government for the benefit of the American people. This testimony focuses on GAO's (1) fiscal year 2002 performance and results, (2) efforts to maximize our effectiveness, responsiveness and value, and (3) our budget request for fiscal year 2004 to support the Congress and serve the American public. In fiscal year 2002, GAO's work informed the national debate on a broad spectrum of issues including helping the Congress answer questions about the associated costs and program tradeoffs of the national preparedness strategy, including providing perspectives on how best to organize and manage the new Transportation Security Administration and Department of Homeland Security. GAO's efforts helped the Congress and government leaders achieve $37.7 billion in financial benefits--an $88 return on every dollar invested in GAO. The return on the public's investment in GAO extends beyond dollar savings to improvements in how the government serves its citizens. This includes a range of accomplishments that serve to improve safety, enhance security, protect privacy, and increase the effectiveness of a range of federal programs and activities. The results of our work in fiscal year 2002 were possible, in part, because of changes we have made to transform GAO in order to meet our goal of being a model federal agency and a world-class professional services organization. We had already realigned GAO's structure and resources to better serve the Congress in its legislative, oversight, appropriations, and investigative roles. Over the past year, we cultivated and fostered congressional and agency relations, better refined our strategic and annual planning and reporting processes, and enhanced our information technology infrastructure. We also continued to provide priority attention to our management challenges of human capital, information security, and physical security. We have made progress in addressing each of these challenges, but we still have work to do and plan to ask for legislation to help address some of these issues. GAO is requesting budget authority of $473 million for fiscal year 2004. Our request represents a modest 4.1 percent increase in direct appropriations, primarily for mandatory pay and uncontrollable costs. This budget will allow us to maintain current operations for serving the Congress as outlined in our strategic plan and continue initiatives to enhance our human capital, support business processes, and ensure the safety and security of GAO staff, facilities, and information systems. Approximately $4.8 million, or about 1 percent, of our request relates to several safety and security items that are included in our fiscal year 2003 supplemental request. If this supplemental request is granted, our fiscal year 2004 request could be reduced accordingly. |
DOD is one of the largest federal agencies with its budget representing over half of the entire federal government’s discretionary spending. For fiscal year 2010, Congress appropriated over $694 billion for DOD. This included $530 billion in regular appropriations for base needs and about $164 billion in regular and supplemental appropriations for contingency operations in Iraq, Afghanistan, and other locations. As of June 2010, DOD had received about $1 trillion since 2001 to support contingency operations. The department is currently facing near-term and long-term internal fiscal pressures as it attempts to balance competing demands to support ongoing operations, rebuild readiness following extended military operations, and manage increasing personnel and health care costs and significant cost growth in its weapons systems programs. For more than a decade, DOD has dominated GAO’s list of federal programs and operations at high-risk of being vulnerable to fraud, waste, abuse, and mismanagement. In fact, all the DOD programs on GAO’s High- Risk List relate to business operations, including systems and processes related to management of contracts, finances, the supply chain, and support infrastructure, as well as weapon systems acquisition. Long- standing and pervasive weaknesses in DOD’s financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DOD activities to Congress and DOD decision makers; (2) adversely affected its operational efficiency in business areas, such as major weapons system acquisition and support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse. Detailed examples of these effects are presented in appendix I. DOD is required by various statutes to improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and to produce audited financial statements. Collectively these statues required DOD to do the following Establish a leadership and governance framework and process, including a financial management improvement plan or strategy (over time the department’s strategy evolved into the FIAR Plan, which ultimately became a subordinate plan to the department’s Strategic Management Plan) for addressing its financial management weaknesses and report to Congress and others semi-annually on its progress. Concentrate the department’s efforts and resources on improving the department’s financial management information. Systematically tie actions to improve processes and controls with business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Limit the resources the department spend each year to develop, compile, report, and audit unreliable financial statements. Submit an annual report to defense committees, the Office of Management and Budget (OMB), the Department of the Treasury (Treasury), GAO, and the DOD Inspector General (DOD IG) concluding on whether DOD policies, procedures, and systems support financial statement reliability, and the expected reliability of each DOD financial statement. Certify to the DOD IG whether a component or DOD financial statement for a specific fiscal year is reliable. Following DOD’s assertion that a financial statement is reliable, DOD may expend resources to develop, compile, report, and audit the statement and the statements of subsequent fiscal years. Because of the complexity and magnitude of the challenges facing the department in improving its business operations, GAO has long advocated the need for a senior management official to provide strong and sustained leadership. Recognizing that executive-level attention and a clear strategy were needed to put DOD on a sustainable path toward successfully transforming its business operations, including financial management, the National Defense Authorization Act (NDAA) for fiscal year 2008 designated the Deputy Secretary of Defense as the department’s Chief Management Officer (CMO), created a Deputy CMO position, and designated the undersecretaries of each military department as CMOs for their respective departments. The act also required the Secretary of Defense, acting through the CMO, to develop a strategic management plan that among other things would provide a detailed description of performance goals and measures for improving and evaluating the overall efficiency and effectiveness of the department’s business operations and actions underway to improve operations. To further draw the department’s attention to the need to improve its strategy for addressing financial management weaknesses and achieve audit readiness the NDAA for Fiscal Year 2010 made the FIAR Plan a statutory mandate, requiring the FIAR Plan to include, among other things specific actions to be taken and costs associated with (a) correcting the financial management deficiencies that impair DOD’s ability to prepare timely, reliable, and complete financial management information; and (b) ensuring that DOD’s financial statements are validated as ready for audit by no later than September 30, 2017, and actions taken to correct and link financial management deficiencies with process and control improvements and business system modernization efforts described in the business enterprise architecture and enterprise transition plan required by 10 U.S.C. § 2222. Consistent with the priorities announced by the DOD Comptroller in August 2009, the act also focused the department’s improvement efforts on first ensuring the reliability of the department’s budgetary information and property accountability records for mission-critical assets. In addition, the act directed DOD to report to congressional defense committees no later than May 15 and November 15 each year on the status of its FIAR Plan implementation. Furthermore, the act required that the first FIAR Plan issued following enactment of this legislation (1) include a mechanism to conduct audits of the military intelligence programs and agencies and submit the audited financial statements to Congress in a classified manner and (2) identify actions taken or to be taken by the department to address the issues identified in our May 2009 report on DOD’s efforts to achieve financial statement auditability. Over the years, the department has initiated several broad-based reform efforts, including the 1998 Biennial Strategic Plan for the Improvement of Financial Management within the Department of Defense and the 2003 Financial Improvement Initiative, intended to fundamentally transform its financial management operations and achieve clean financial statement audit opinions. In 2005, DOD’s Comptroller established the DOD FIAR Directorate to develop, manage, and implement a strategic approach for addressing the department’s financial management weaknesses and achieving auditability and to integrate those efforts with other improvement activities, such as the department’s business system modernization efforts. The first FIAR Plan was issued in December 2005. DOD’s FIAR Plan defines DOD’s strategy and methodology for improving financial management and controls, and summarizes and reports the results of the department’s improvement activities and progress toward achieving financial statement auditability. Further, the FIAR Plan has focused on achieving three goals: (1) implement sustained improvements in business processes and controls to address internal control weaknesses, (2) develop and implement financial management systems that support effective financial management, and (3) achieve and sustain financial statement audit readiness. To date, the department’s improvement efforts have not resulted in the fundamental transformation of DOD’s financial management operations necessary to resolve the department’s long-standing financial management weaknesses; however, some progress has been made and the department’s strategy has continued to evolve. While none of the military services have obtained unqualified (clean) audit opinions on their financial statements, some DOD organizations, such as the Army Corps of Engineers, Defense Finance Accounting Service, the Defense Contract Audit Agency, and the DOD IG, have achieved this goal. Moreover, some DOD components that have not yet received clean audit opinions, such as the Defense Information Service Agency (DISA), are beginning to reap the benefits of strengthened controls and processes gained through ongoing efforts to improve their financial management operations and reporting capabilities. For example, according to DISA’s Comptroller, the agency was able to resolve over $270 million in Treasury mismatches through reconciliations of over $12 billion in disbursement and collection activities. In addition, DISA’s efforts to improve processes and controls over its accounts receivable and payable accounts have resulted in improvements in its ability to (1) substantiate the validity of DISA’s customer billings and collect funds due to DISA, and (2) identify areas where funds could be deobligated and put to better use. Moreover, DISA management has gained increased assurance over its reported cash availability balance, thereby improving mission-critical decision making. Since its inception, the FIAR Plan has followed an incremental approach to structure its process for examining operations, diagnosing problems, planning corrective actions, and preparing for audit. Moreover, the FIAR Plan has continued to evolve and mature as a strategic plan. Initially, DOD components independently established their own financial management improvement priorities and methodologies and were responsible for implementing the corrective actions they determined were needed to address weaknesses and achieve financial statement auditability. However, as we reported in May 2009, it was difficult to link corrective actions or accomplishments reported by the FIAR Plan to FIAR goals and measure progress. In addition, we reported that as the department’s strategic plan and management tool for guiding and reporting on incremental progress toward achieving these goals, the FIAR Plan could be improved in several areas. Specifically, we found the following: Clear guidance was needed in developing and implementing improvement efforts. A baseline of the department’s and/or key component’s current financial management weaknesses and capabilities was needed to effectively measure and report on incremental progress. Linkage between FIAR Plan goals and corrective actions and reported accomplishments was needed. Clear results-oriented metrics for measuring and reporting incremental progress were needed. Accountability should be clearly defined and resources budgeted and consumed should be identified. We made several recommendations in our May 2009 report 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, which were incorporated into the NDAA for fiscal year 2010. In its May 2010 FIAR Status Report and Guidance, the department identified steps taken to address our recommendations to strengthen its FIAR Plan strategy and chances of sustained financial management improvements and audit readiness. For example, DOD has established shared priorities and methodology, including guidance to develop component financial improvement plans, and an improved governance framework. In August 2009, DOD’s Comptroller directed that the department focus on improving processes and controls supporting information that is most often used to manage the department, while continuing to work toward achieving financial improvements aimed at achieving unqualified audit opinions on the department’s financial statements. As a result, in 2010 DOD revised its FIAR strategy, governance framework, and methodology to support these objectives and focus financial management improvement efforts primarily on achieving two interim departmentwide priorities— 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 the department’s mission-critical assets, including military equipment, real property, and general equipment, and validating improvement through existence and completeness testing. In addition, the DOD Comptroller directed DOD components to use a standard financial improvement plan template to support and emphasize achievement of the two FIAR priorities. The department intends to progress toward achieving financial statement auditability in five waves (or phases) of concerted improvement activities within groups of end-to-end business processes. According to DOD’s May 2010, FIAR Plan Status Report, the lack of resources dedicated to financial improvement activities at DOD components has been a serious impediment to progress, except in the Navy and the Defense Logistics Agency (DLA). As a result, the components are at different levels of completing the waves. For example, the Air Force has already received a positive validation by the DOD IG on the Air Force Appropriations Received account (wave 1) and the Navy is currently undergoing a similar review of its account. Army and DLA, are expected to complete wave 1 and be ready for validation by the end of fiscal year 2010. However, DOD is only beginning wave 1 work at other defense agencies to ensure that transactions affecting their appropriations received accounts are properly recorded and reported. The first three waves focus on achieving the DOD Comptroller’s interim budgetary and asset accountability priorities, while the remaining two waves are intended to complete actions needed to achieve full financial statement auditability. However, the department has not yet fully defined its strategy for completing waves 4 and 5. The focus and scope of each wave include the following: Wave 1—Appropriations Received Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in appropriations receipt and distribution process, including funding appropriated by Congress for the current fiscal year and related apportionment/reapportionment activity by OMB, as well as allotment and sub-allotment activity within the department. Wave 2—Statement of Budgetary Resources (SBR) Audit focuses efforts on assessing and strengthening, as necessary, the internal controls, processes, and business systems supporting the budgetary-related data (e.g., status of funds received, obligated, and expended) used for management decision making and reporting, including the SBR. In addition to fund balance with Treasury reporting and reconciliation, significant end-to-end business processes in this wave include procure-to- pay, hire-to-retire, order-to-cash, and budget-to-report. Wave 3—Mission-Critical Assets Existence and Completeness Audit focuses efforts on assessing and strengthening, as necessary, internal controls and business systems involved in ensuring that all assets (including military equipment, general equipment, real property, inventory, and operating materials and supplies) are recorded in the department’s accountable property systems of record exist, all of the reporting entities’ assets are recorded in those systems of record, reporting entities have the right (ownership) to report these assets, and the assets are consistently categorized, summarized, and reported. Wave 4—Full Audit Except for Legacy Asset Valuation focuses efforts on assessing and strengthening, as necessary, internal controls, processes, and business systems involved in the proprietary side of budgetary transactions covered by the Statement of Budgetary Resources effort of wave 2, including accounts receivable, revenue, accounts payable, expenses, environmental liabilities, and other liabilities. This wave also includes efforts to support valuation and reporting of new asset acquisitions. Wave 5—Full Financial Statement Audit focuses efforts on assessing and strengthening, as necessary, processes, internal controls, and business systems involved in supporting the valuations reported for legacy assets once efforts to ensure control over the valuation of new assets acquired and the existence and completeness of all mission assets are deemed effective on a go-forward basis. Given the lack of documentation to support the values of the department’s legacy assets, federal accounting standards allow for the use of alternative methods to provide reasonable estimates for the cost of these assets. According to DOD, critical to the success of each wave and the department’s efforts to ultimately achieve full financial statement auditability will be departmentwide implementation of the FIAR methodology as outlined in DOD’s FIAR Guidance document. Issued in May 2010, the FIAR Guidance document, which DOD intends to update annually, defines in a single document the department’s FIAR goals, strategy, and methodology (formerly referred to as business rules) for becoming audit ready. The FIAR methodology prescribes the process components should follow in executing efforts to assess processes, controls, and systems; identify and correct weaknesses; assess, validate, and sustain corrective actions; and achieve full auditability. Key changes introduced in 2010 to the FIAR methodology include an emphasis on internal controls and supporting documentation. Utilization of standard financial improvement plans and methodology should also aid both DOD and its components in assessing current financial management capabilities in order to establish baselines against which to measure, sustain, and report progress. More specifically, the standard financial improvement plan and FIAR Guidance outline key control objectives and capabilities that components must successfully achieve to complete each wave (or phase) of the FIAR strategy for achieving audit readiness. For example, to successfully complete wave 2 (SBR audit) one of the capabilities that each component must be able to demonstrate is that it is capable of performing Fund Balance with Treasury reconciliations at the transaction level. Based on what we’ve seen of the revised FIAR Plan strategy and methodology to date, we believe the current strategy reflects a reasonable approach. We are hopeful that a consistent focus provided through the shared priorities of the FIAR strategy will increase the department’s ability to show incremental progress toward achieving auditability in the near term, if the strategy is implemented properly. In the long term, while improved budgetary and asset accountability information is an important step in demonstrating incremental progress, it will not be sufficient to achieve full financial statement auditability. Additional work will be required to ensure that transactions are recorded and reported in accordance with generally accepted accounting principles. At this time, it is not possible to predict when DOD’s efforts to achieve audit readiness will be successful. The department continues to face significant challenges in providing and sustaining the leadership and oversight needed to ensure that improvement efforts, including ERP implementation efforts, result in the sustained improvements in process, control, and system capabilities necessary to transform financial management operations. We will continue to monitor DOD’s progress in addressing its financial management weaknesses and transforming its business operations. As part of this effort, we plan to assess implementation of DOD’s FIAR strategy and guidance, as part of our review of the military departments’ financial improvement plans. GAO supports DOD’s current approach of prioritizing efforts, focusing first on information management views as most important in supporting its operations, to demonstrate incremental progress to addressing weaknesses and achieving audit readiness. There are advantages to this approach, including building commitment and support throughout the department and the potential to obtain preliminary assessments on the effectiveness of current processes and controls and identify potential issues that may adversely affect subsequent waves. For example, testing expenditures in wave 2 will also touch on property accountability issues, as DOD makes significant expenditures for property. Identifying and resolving potential issues related to expenditures for property in wave 2 will assist the department as it enters subsequent waves dealing with its ability to reliably and completely identify, aggregate, and account for the cost of the assets it acquires through various acquisition and construction programs. We also support efforts to first address weaknesses in the department’s ability to timely, reliably, and completely record the cost of assets as they are acquired over efforts to value legacy assets. Prior efforts to achieve auditability of DOD’s mission assets failed, in large part, because these efforts were focused primarily on deriving values for financial statement reporting and not on assessing and addressing the underlying weaknesses that impaired the department’s ability to reliably identify, aggregate, and account for current transactions affecting these assets. GAO is willing to work with the department to revisit the question of how DOD reports assets in its financial statements to address unique aspects of military assets not currently reflected in traditional financial reporting models. Developing sound plans and a methodology and getting leaders and organizations in place is only a start. Consistent with our previous reports regarding the department’s CMO positions, including the CMO, Deputy CMO and military department CMOs, and our May 2009 recommendations to improve DOD’s FIAR Plan as a strategic and management tool for addressing financial management weaknesses and achieving and sustaining audit readiness, DOD needs to define specific roles and responsibilities—including when and how the CMO and military department CMOs and other leaders are expected to become involved in problem resolution or efforts to ensure cross-functional area commitment and support to financial management improvement efforts; effectively execute its plans; gauge actual progress against goals; strengthen accountability; and make adjustments as needed. In response to our report, DOD expanded its FIAR governance framework to include the CMOs. While expansion of the FIAR governance framework to include the CMOs is also encouraging, the specific roles and responsibilities of these important leaders have not yet been fully defined. As acknowledged by DOD officials, sustained and active involvement of the CMOs and other senior leaders is critical in enabling a process by which DOD can more timely identify and address cross-functional issues and ensure that other business functions, such as acquisition and logistics, fully acknowledge and are held accountable for their roles and responsibilities in achieving the department’s financial management improvement goals and audit readiness. Sustained and active leadership and effective oversight and monitoring at both the department and component levels are critical to ensuring accountability for progress and targeting resources in a manner that results in sustained improvements in the reliability of data for use in supporting and reporting on operations. As part of GAO’s prior work pertaining to DOD’s key ERP implementation efforts and the FIAR Plan, we have seen a lack of focus on developing and using interim performance metrics to measure progress and the impact of actions taken. For example, our review of DOD’s ERP implementation efforts, which we plan to report on in October 2010, found that DOD has not yet defined success for ERP implementation in the context of business operations and in a way that is measurable. In May 2009 we reported that the FIAR Plan does not use clear results-oriented metrics to measure and report corrective actions and accomplishments in a manner that clearly demonstrates how they contribute individually or collectively to addressing a defined weakness, providing a specific capability, or achieving a FIAR goal. To its credit, DOD has taken action to begin defining results-oriented FIAR metrics it intends to use to provide visibility of component-level progress in assessment and testing and remediation activities, including progress in identifying and addressing supporting documentation issues. We have not yet had an opportunity to assess implementation of these metrics or their usefulness in monitoring and redirecting actions. In the past, DOD has had many initiatives and plans that failed due to a lack of sustained leadership focus and effective oversight and monitoring. Without sustained leadership focus and effective oversight and monitoring, DOD’s current efforts to achieve audit readiness by a defined date are at risk of following the path of the department’s prior efforts and fall short of obtaining sustained substantial improvements in DOD’s financial management operations and capabilities or achieving validation through independent audits. DOD officials have said that successful implementation of ERPs is key to resolving the long-standing weaknesses in the department’s business operations in areas such as business transformation, financial management, and supply chain management, and improving the department’s capability to provide DOD management and Congress with accurate and reliable information on the results of DOD’s operations. For example in 2010, we reported that the Army Budget Office lacked an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel, Army (MPA) appropriation. These weaknesses resulted in a shortfall of $200 million in 2008. Army Budget Office personnel explained that they rely on estimated obligations, rather than actual data from program managers, to record the initial obligation or adjust the estimated obligation due to inadequate financial management systems. DOD has identified 10 ERPs, 1 of which has been fully implemented, as essential to its efforts to transform its business operations. Appendix II contains a description of each of the remaining 9 ERPs currently being implemented within the department. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before the remaining 9 ERPs are fully implemented. The department has noted that the successful implementation of these 10 ERPs will replace over 500 legacy systems that reportedly cost hundreds of millions of dollars to operate annually. However, our prior reviews of several ERPs have found that the department has not effectively employed acquisition management controls or delivered the promised capabilities on time and within budget. More specifically, significant leadership and oversight challenges, as illustrated by the Logistics Modernization Program (LMP) example discussed appendix I, have hindered the department’s efforts to implement these systems on schedule, within cost, and with the intended capabilities. Based upon the information provided by the program management offices (PMOs), six of the ERPs have experienced schedule slippages, as shown in table 1, based on comparing the estimated date that each program was originally scheduled to achieve full deployment to the full deployment date as of December 2009. For the remaining three ERPs, the full deployment date has either remained unchanged or has not been established. The GFEBS PMO noted that the acquisition program baseline approved in November 2008, established a full deployment date in fiscal year 2011 and that date remains unchanged. Additionally, according to the GCSS-Army PMO a full deployment date has not been established for this effort. The PMO noted that a full deployment date will not be established for the program until a full deployment decision has been approved by the department. A specific timeframe has not been established for when the decision will be made. Further, in the case of DAI, the original full deployment date was scheduled for fiscal year 2012, but the PMO is in the process of reevaluating the date and a new date has not yet been established. Prior work by GAO and the U.S. Army Test and Evaluation Command found that delays in implementing the ERPs have occurred, in part, due to inadequate requirements management and system testing, and data quality issues. These delays have contributed not only to increased implementation costs in at least five of the nine ERPS, as shown in table 2, they have also resulted in DOD having to fund the operation and maintenance of the legacy systems longer than anticipated, thereby reducing funds that could be used for other DOD priorities. Effective and sustained leadership and oversight of the department’s ERP implementations is needed to ensure that these important initiatives are implemented on schedule, within budget, and result in the integrated capabilities needed to transform the department’s financial management and related business operations. In closing, I am encouraged by continuing congressional oversight of DOD’s financial management improvement efforts and the commitment DOD’s leaders have expressed to improving the department’s financial management and achieving financial statement audit readiness. For instance, we have seen positive short-term progress on the part of DOD in moving forward. In its May 2010 FIAR status report, DOD reported actions it had taken in response to the 2010 NDAA and our prior recommendations to enhance effectiveness of the FIAR Plan as a strategic plan and management tool for guiding, monitoring, and reporting on the department’s efforts to resolve its financial management weaknesses and achieve audit readiness. The department has expanded the FIAR governance body to include the Chief Management Officer, issued guidance to aid DOD components in their efforts to address their financial management weaknesses and achieve audit readiness, and standardized component financial improvement plans to facilitate oversight and monitoring, as well as sharing lessons learned. In addition, DOD has revised its FIAR strategy to focus its financial management improvement efforts on departmentwide priorities, first on budgetary information and preparing the department’s Statements of Budgetary Resources for audit and second on accountability over the department’s mission-critical assets as a way of improving information used by DOD leaders to manage operations and to more effectively demonstrate incremental progress toward achieving audit readiness. Whether promising signs, such as shared priorities and approaches, develop into sustained progress will ultimately depend on DOD leadership and oversight to help achieve successful implementation. The expanded FIAR governance framework, including the CMOs, is a start; but their specific roles and responsibilities toward the department’s financial management improvement efforts still need to be defined. Importantly, sustained and effective leadership, oversight, and accountability at the department and component levels will be needed in order to help ensure that DOD’s current efforts to achieve auditability by a defined date don’t follow the path of the department’s prior efforts and fall short of obtaining sustained substantial improvement. The revised FIAR strategy is still in the early stages of implementation, and DOD has a long way and many long-standing challenges to overcome, particularly in regard to active and sustained leadership and oversight, before its military components and the department are fully auditable, and financial management is no longer considered high risk. However, the department is heading in the right direction. Some of the most difficult challenges ahead lie in effectively implementing the department’s strategy, including successful implementation of ERP systems and integration of financial management improvement efforts with other DOD initiatives. We will be issuing a report on DOD’s business system modernization efforts in October 2010 that discusses in greater detail the cost, schedule, and other issues that have hindered the success of important efforts. GAO will continue to monitor progress of the department’s financial management improvement efforts and provide feedback on the status of DOD’s financial management improvement efforts. We currently have work in progress to assess implementation of the department’s FIAR strategy through ongoing or recently initiated engagements related to (1) the U.S. Marine Corps’ (USMC) efforts to achieve an audit opinion on its Statement of Budgetary Resources, which regardless of its success should provide lessons learned that can be shared with other components, (2) the military departments’ implementation of the FIAR strategy and guidance, and (3) the department’s efforts to develop and implement ERPs. In addition, we will continue our oversight and monitoring of DOD’s financial statement audits, including the Army Corps of Engineers and DOD consolidated financial statements. Mr. Chairman and Ranking Member McCain, 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 Asif A. Khan, (202) 512-9095 or khana@gao.gov. Key contributors to this testimony include J. Christopher Martin, Senior-Level Technologist; Evelyn Logue, Assistant Director; Darby Smith, Assistant Director; Paul Foderaro, Assistant Director; Gayle Fischer, Assistant Director; F. Abe Dymond, Assistant General Counsel; Beatrice Alff; Maxine Hattery; Jason Kirwan; Crystal Lazcano; and Omar Torres. Despite years of improvement efforts since 2002, DOD has annually reported to Congress that the department is unable to provide reasonable assurance that the information reported in its financial statements is reliable due to long-standing weaknesses in its financial management and related business processes, controls, and systems. Importantly, these weaknesses not only affect the reliability of the department’s financial reports, as illustrated in the following examples, they also adversely affect the department’s ability to assess resource requirements; control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent fraud waste, abuse, and mismanagement; and address pressing management issues, as the following examples illustrate, The Army Budget Office lacks an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel, Army (MPA) appropriation. In June 2010, we reviewed Army obligation and expenditure reports pertaining to Army’s fiscal year 2008 MPA appropriation and confirmed that the Army had violated the Antideficiency Act, as evidenced by the Army’s need to transfer $200 million from the Army working capital fund to cover the shortfall. This shortfall stemmed, in part, from a lack of reliable financial information on enlistment and reenlistment contracts, which provide specified bonuses to service members. Army Budget personnel explained that they rely on estimated obligations, rather than actual data from program managers, to record the initial obligation or adjust the estimated obligation due to inadequate financial management systems. Without adequate processes, controls, and systems to establish and maintain effective funds control, the Army’s ability to prevent, identify, and report potential Antideficiency Act violations is impaired. While DOD has invested over a trillion of dollars to acquire weapon systems, also referred to as military equipment, the department continues to lack the processes and system capabilities to reliably identify, aggregate and report the full cost of its investment in these assets. We reported this as an issue to the Air Force over 20 years ago. In July 2010, we reported that although DOD and the military departments have efforts underway to begin addressing these financial management weaknesses, DOD officials acknowledged that additional actions were needed that will require the support of other business areas beyond the financial community, before they will be fully addressed. Without timely, reliable, and useful financial information on the full cost associated with acquiring assets, both DOD management and Congress lack key information needed for use in effective decision making, such as determining how to allocate resources to programs or evaluating program performance to help strengthen oversight and accountability. The department’s ability to identify, aggregate, and use financial management information to develop plans for managing and controlling operating and support costs for major weapons systems is limited. DOD spends billions of dollars each year to sustain its weapon systems. These operating and support (O&S) costs can account for a significant portion of a weapon’s system’s total life-cycle costs and include costs for, among other things, repair parts, maintenance, and contract services. However, in July 2010 we reported that the department lacked key information needed to effectively manage and reduce O&S costs for most of the weapon systems we reviewed—including life-cycle O&S cost estimates and consistent and complete historical data on actual O&S costs. Specifically, we found that the military departments lacked (1) life-cycle O&S cost estimates developed at the production milestone for five of the seven aviation systems we reviewed and (2) complete data on actual O&S costs. Without historical life-cycle O&S cost estimates and complete data on actual O&S costs, DOD officials lack important data for analyzing the rate of O&S cost growth for major weapon systems, identifying cost drivers, and developing plans for managing and controlling these costs. The department and military services continue to have difficultly effectively deploying business systems, on time, within budget, and with the functionality intended to significantly transform business operations. For example, in April 2010, we reported that the management processes the Army established prior to the second deployment of its Logistics Modernization Program (LMP) were not effective in managing and overseeing the second deployment of this system. Specifically, we found that due to data quality issues, the Army was unable to ensure that the data used by LMP were of sufficient quality to enable the Corpus Christi and Letterkenny Army depots to perform their day-to-day missions after LMP became operational at these locations. For example, LMP could not automatically identify the materials needed to support repairs and ensure that parts would be available in time to carry out the repairs. Labor rates were also missing for some stages of repair, thereby precluding LMP from computing labor costs for the repair projects. As a result of these data issues, manual work-around processes had to be developed and used in order for the depots to accomplish their repair missions. Furthermore, the performance measures the Army used to assess implementation failed to detect that manual work-arounds rather than LMP were used to support repair missions immediately following LMP’s implementation at the depots. Without adequate performance measures to evaluate how well these systems are accomplishing their desired goals, DOD decision makers including program managers do not have all the information they need to evaluate their systems investments to determine the extent to which individual programs are helping DOD achieve business transformation, including financial management, and whether additional remediation is needed. In addition to the DOD IG reports on internal controls and compliance with laws and regulations included in DOD and military department annual financial reports, the DOD IG has other reports highlighting a variety of internal controls weaknessesin the department’s financial management that affect DOD operations as the following illustrate. In January 2010, the DOD IG evaluated the internal controls over the USMC transactions processed through the Deployable Disbursing System (DDS) and determined that USMC did not maintain adequate internal controls to ensure the reliability of the data processed. Specifically, the DOD IG found that USMC disbursing personnel had not complied with the statute when authorizing vouchers for payment or segregated certifying duties from disbursing when making payments. Further, the DOD IG found that USMC personnel had circumvented internal controls restricting access to DDS information. As a result, the DOD IG concluded that USMC was at risk of incurring unauthorized, duplicate, and improper payments. In June 2009, the DOD IG reported that the Army did not have adequate internal controls over accountability for approximately $169.6 million of government-furnished property at two Army locations reviewed. Specifically, the DOD IG found that Army personnel had not ensured the proper recording of transfers of property accountability to contractors, physical inventories and reconciliation, or the identification of government property at these locations. As a result, the DOD IG concluded that the Army’s property accountability databases at these two locations were misstated and these two Army locations were at risk of unauthorized use, destruction or loss of government property. The department stated that implementation of the following nine ERPs are critical to transforming the department’s business operations and addressing some of its long-standing weaknesses. A brief description of each ERP is presented below. The General Fund Enterprise Business System (GFEBS) is intended to support the Army’s standardized financial management and accounting practices for the Army’s general fund, with the exception of that related to the Army Corps of Engineers which will continue to use its existing financial system, the Corps of Engineers Financial Management System. GFEBS will allow the Army to share financial, asset and accounting data across the active Army, the Army National Guard, and the Army Reserve. The Army estimates that when fully implemented, GFEBS will be used to control and account for about $140 billion in spending. The Global Combat Support System-Army (GCSS-Army) is expected to integrate multiple logistics functions by replacing numerous legacy systems and interfaces. The system will provide tactical units with a common authoritative source for financial and related non-financial data, such as information related to maintenance and transportation of equipment. The system is also intended to provide asset visibility for accountable items. GCSS-Army will manage over $49 billion in annual spending by the active Army, National Guard, and the Army Reserve. The Logistics Modernization Program (LMP) is intended to provide order fulfillment, demand and supply planning, procurement, asset management, material maintenance, and financial management capabilities for the Army’s working capital fund. The Army has estimated that LMP will be populated with 6 million Army-managed inventory items valued at about $40 billion when it is fully implemented. The Navy Enterprise Resource Planning System (Navy ERP) is intended to standardize the acquisition, financial, program management, maintenance, plant and wholesale supply, and workforce management capabilities at six Navy commands. Once it is fully deployed, the Navy estimates that the system will control and account for approximately $71 billion (50 percent), of the Navy’s estimated appropriated funds—after excluding the appropriated funds for the Marine Corps and military personnel and pay. The Global Combat Support System–Marine Corps (GCSS-MC) is intended to provide the deployed warfighter enhanced capabilities in the areas of warehousing, distribution, logistical planning, depot maintenance, and improved asset visibility. According to the PMO, once the system is fully implemented, it will control and account for approximately $1.2 billion of inventory. The Defense Enterprise Accounting and Management System (DEAMS) is intended to provide the Air Force the entire spectrum of financial management capabilities, including collections, commitments and obligations, cost accounting, general ledger, funds control, receipts and acceptance, accounts payable and disbursement, billing, and financial reporting for the general fund. According to Air Force officials, when DEAMS is fully operational, it is expected to maintain control and accountability for about $160 billion. The Expeditionary Combat Support System (ECSS) is intended to provide the Air Force a single, integrated logistics system—including transportation, supply, maintenance and repair, engineering and acquisition—for both the Air Force’s general and working capital funds. Additionally, ECSS is intended to provide the financial management and accounting functions for the Air Force’s working capital fund operations. When fully implemented, ECSS is expected to control and account for about $36 billion of inventory. The Service Specific Integrated Personnel and Pay Systems are intended to provide the military departments an integrated personnel and pay system. Defense Agencies Initiative (DAI) is intended to modernize the defense agencies’ financial management processes by streamlining financial management capabilities and transforming the budget, finance, and accounting operations. When DAI is fully implemented, it is expected to have the capability to control and account for all appropriated, working capital and revolving funds at the defense agencies implementing the system. 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. | As one of the largest and most complex organizations in the world, the Department of Defense (DOD) faces many challenges in resolving its pervasive and long-standing financial management and related business operations and systems problems. DOD is required by various statutes to (1) improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and (2) produce audited financial statements. DOD has initiated numerous efforts over the years to improve the department's financial management operations and ultimately achieve unqualified (clean) opinions on the reliability of reported financial information. The Subcommittee has asked GAO to provide its perspective on DOD's current efforts to address its financial management weaknesses and achieve auditability, including the status of its Enterprise Resource Planning (ERP) system implementations. GAO's testimony is based on its prior work related to DOD's financial improvement and audit readiness strategy and related activities, including its ERP implementation efforts. DOD has initiated numerous efforts over the years to address its financial management weaknesses and achieve audit readiness. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan to define the department's strategy and methodology for improving financial management operations and controls, and reporting its progress. In 2009, DOD Comptroller directed that the department's FIAR efforts be focused on improving processes and controls supporting information most often used to manage operations, while continuing to work toward achieving financial statement auditability. To support these objectives, DOD established two priority focus areas: budget information and information pertaining to mission-critical assets. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller's direction and priorities and to comply with fiscal year 2010 defense authorizing legislation, which incorporated GAO recommendations intended to improve the FIAR Plan as a strategic plan. Based on what GAO has seen to date, DOD's revised FIAR Plan strategy and methodology reflects a reasonable approach. Moreover, GAO supports prioritizing focus areas for improvement and is hopeful that a consistent focus provided through shared FIAR priorities will increase incremental progress toward improved financial management operations. However, developing sound plans and methodology, and getting leaders and organizations in place is only a start. DOD needs to define specific roles and responsibilities for the Chief Management Officers (CMO)--including when and how the CMOs are expected to become involved in problem resolution and in ensuring cross-functional area commitment to financial improvement activities. A key element of the FIAR strategy is successful implementation of the ERPs. According to DOD, as of December 2009, it had invested approximately $5.8 billion to develop and implement these ERPs and will invest additional billions before these efforts are complete. However, as GAO has previously reported inadequate requirements management, 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 cost. Whether DOD's FIAR strategy will ultimately lead to improved financial management capabilities and audit readiness depends on DOD leadership and oversight to help achieve successful implementation. Sustained effort and commitment at the department and component levels will be needed to address weaknesses and produce financial management information that is timely, reliable, and useful for managers throughout DOD. GAO will continue to monitor DOD's progress and provide feedback on the status of DOD's financial management improvement efforts. |
Each year, OMB and federal agencies work together to determine how much the government plans to spend for IT and how these funds are to be allocated. Federal IT spending has risen to an estimated $64 billion in fiscal year 2007. OMB plays a key role in overseeing federal IT investments and how they are managed. To drive improvement in the implementation and management of IT projects, Congress enacted the Clinger-Cohen Act in 1996 to further expand the responsibilities of OMB and the agencies under the Paperwork Reduction Act. In particular, the act requires agency heads, acting through agency chief information officers (CIOs), to, among other things, better link their IT planning and investment decisions to program missions and goals and to implement and enforce IT management policies, procedures, standards, and guidelines. The Clinger-Cohen Act requires that agencies engage in capital planning and performance and results- based management. The act also requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by executive agencies. OMB is also required to report to Congress on the net program performance benefits achieved as a result of major capital investments in information systems that are made by executive agencies. In response to the Clinger-Cohen Act and other statutes, OMB developed policy for planning, budgeting, acquisition, and management of federal capital assets. This policy is set forth in OMB Circular A-11 (section 300) and in OMB’s Capital Programming Guide (supplement to Part 7 of Circular A-11), which directs agencies to develop, implement, and use a capital programming process to build their capital asset portfolios. Among other things, OMB’s Capital Programming Guide directs agencies to ● evaluate and select capital asset investments that will support core mission functions that must be performed by the federal government and demonstrate projected returns on investment that are clearly equal to or better than alternative uses of available public resources; institute performance measures and management processes that monitor actual performance and compare to planned results; and ● establish oversight mechanisms that require periodic review of operational capital assets to determine how mission requirements might have changed and whether the asset continues to fulfill mission requirements and deliver intended benefits to the agency and customers. To further support the implementation of IT capital planning practices, we have developed an IT investment management framework that agencies can use in developing a stable and effective capital planning process, as required by statute and directed in OMB’s Capital Programming Guide. Consistent with the statutory focus on selecting, controlling, and evaluating investments, this framework focuses on these processes in relation to IT investments specifically. It is a tool that can be used to determine both the status of an agency’s current IT investment management capabilities and the additional steps that are needed to establish more effective processes. Mature and effective management of IT investments can vastly improve government performance and accountability. Without good management, such investments can result in wasteful spending and lost opportunities for improving delivery of services to the public. Only by effectively and efficiently managing their IT resources through a robust investment management process can agencies gain opportunities to make better allocation decisions among many investment alternatives and further leverage their investments. However, the federal government faces enduring IT challenges in this area. For example, in January 2004 we reported on mixed results of federal agencies’ use of IT investment management practices. Specifically, we reported that although most of the agencies had IT investment boards responsible for defining and implementing the agencies’ IT investment management processes, agencies did not always have important mechanisms in place for these boards to effectively control investments, including decision- making rules for project oversight, early warning mechanisms, and/or requirements that corrective actions for underperforming projects be agreed upon and tracked. Executive-level oversight of project-level management activities provides organizations with increased assurance that each investment will achieve the desired cost, benefit, and schedule results. Accordingly, we made several recommendations to agencies to improve their practices. In previous work using our investment management framework, we reported that the use of IT investment management practices by agencies was mixed. For example, a few agencies that have followed the framework in implementing capital planning processes have made significant improvements. In contrast, however, we and others have continued to identify weaknesses at agencies in many areas, including immature management processes to support both the selection and oversight of major IT investments and the measurement of actual versus expected performance in meeting established performance measures. In helping to ensure that investments of public resources are justified and that public resources are wisely invested, OMB began using the Management Watch List, in the President’s fiscal year 2004 budget request, as a means to oversee the justification for and planning of agencies’ IT investments. This list was derived based on a detailed review of the investments’ Capital Asset Plan and Business Case, also known as the exhibit 300. The exhibit 300 is a reporting mechanism intended to enable an agency to demonstrate to its own management, as well as OMB, that a major project is well planned in that it has employed the disciplines of good project management; developed a strong business case for the investment; and met other Administration priorities in defining the cost, schedule, and performance goals proposed for the investment. We reported in 2005 that OMB analysts evaluate agency exhibit 300s by assigning scores to each exhibit 300 based on guidance presented in OMB Circular A-11. As described in this circular, the scoring of a business case consists of individual scoring for 10 categories, as well as a total composite score of all the categories. The 10 categories are ● project (investment) management, ● security and privacy, ● performance-based management system (including the earned value management system), life-cycle costs formulation, and ● support of the President’s Management Agenda. Using these scores, projects were placed on the Management Watch List if their exhibit 300 business case received a total composite score of 3 or less, or if it received a score of 3 or less in the areas of performance goals, performance-based management systems, or security and privacy, even if its overall score was a 4 or 5. To derive the total number of projects on the list that were reported for fiscal year 2005, OMB polled the individual analysts and compiled the numbers. According to OMB, agencies with weaknesses in these three areas were to submit remediation plans addressing the weaknesses. OMB officials also stated that decisions on follow-up and monitoring the progress were typically made by staff with responsibility for reviewing individual agency budget submissions, depending on the staff’s insights into agency operations and objectives. According to OMB officials, those Management Watch List projects that did receive specific follow-up attention received feedback through the passback process, through targeted evaluation of remediation plans designed to address weaknesses, and through the apportioning of funds so that the use of budgeted dollars was conditional on appropriate remediation plans being in place, and through the quarterly e-Gov Scorecards. To improve IT project execution, OMB issued a memorandum in August 2005 to all federal CIOs, directing them to begin taking steps to identify IT projects that are high risk and to report quarterly on their performance. As originally defined in OMB Circular A-11 and subsequently reiterated in the August 2005 memorandum, high risk projects are those that require special attention from oversight authorities and the highest levels of agency management because of one or more of the following four reasons: ● The agency has not consistently demonstrated the ability to manage complex projects. ● The project has exceptionally high development, operating, or maintenance costs, either in absolute terms or as a percentage of the agency’s total IT portfolio. ● The project is being undertaken to correct recognized deficiencies in the adequate performance of an essential mission program or function of the agency, a component of the agency, or another organization. ● Delay or failure of the project would introduce for the first time unacceptable or inadequate performance or failure of an essential mission function of the agency, a component of the agency, or another organization. As directed in the memorandum, agencies are to work with OMB to identify their high risk IT projects using these criteria. Most agencies reported that, to identify high risk projects, CIO office staff compared the criteria against their current portfolio to determine which projects met OMB’s definition. They then submitted the list to OMB for review. According to OMB and agency officials, after the submission of the initial list, examiners at OMB worked with individual agencies to identify or remove projects as appropriate. According to most agencies, the final list was then approved by their CIO. For the identified high risk projects, beginning September 15, 2005, and quarterly thereafter, CIOs were to assess, confirm, and document projects’ performance. Specifically, agencies were required to determine, for each of their high risk projects, whether the project was meeting one or more of four performance evaluation criteria: (1) establishing baselines with clear cost, schedule, and performance goals; (2) maintaining the project’s cost and schedule variances within 10 percent; (3) assigning a qualified project manager; and (4) avoiding duplication by leveraging inter-agency and governmentwide investments. If a high risk project met any of these four performance evaluation criteria, agencies were instructed to document this using a standard template provided by OMB and provide this template to oversight authorities (e.g., OMB, agency inspectors general, agency management, and GAO) on request. Upon submission, according to OMB staff, individual analysts review the quarterly performance reports of projects with shortfalls to determine how well the projects are progressing and whether the actions described in the planned improvement efforts are adequate using other performance data already received on IT projects such as the e-Gov Scorecards, earned value management data, and the exhibit 300. About 300 projects totaling about $12 billion in estimated IT expenditures for fiscal year 2007 have been placed on OMB’s Management Watch List or as a high risk project with performance shortfalls. Specifically, the President’s budget for fiscal year 2007 included 857 major IT projects, totaling approximately $64 billion. Of this, OMB reported that there were 263 proposed major projects that were poorly planned, totaling $10 billion. In addition, agencies reported that 79 of the 226 high-risk projects identified as of March 2006, collectively totaling about $2.2 billion had a performance shortfall primarily associated with cost and schedule variances that exceeded 10 percent. OMB first reported on the Management Watch List in the President’s budget request for 2004. While the number of projects and their associated budget have decreased since then, they still represent a significant percentage of the total IT budget. Table 1 shows the budget information for projects on the Management Watch List for fiscal years 2004, 2005, 2006, and 2007. Table 2 provides the number of projects on the Management Watch List for fiscal years 2004, 2005, 2006, and 2007. In addition, in response to OMB’s August 2005 memorandum, the 24 major agencies identified 226 IT projects as high risk, totaling about $6.4 billion in funding requested for fiscal year 2007. Agencies identified most projects as high risk because their delay or failure would impact the essential business functions of the agency. In addition, agencies reported that about 35 percent of the high risk projects—or 79 investments, collectively totaling about $2.2 billion in fiscal year 2007—had a performance shortfall, primarily associated with cost and schedule variances that exceeded 10 percent. Figure 1 illustrates the number of agency high risk projects as of March 2006 with and without shortfalls. The majority of the agencies reported that their high risk projects did not have performance shortfalls in any of the four areas identified by OMB. In addition, six agencies—the departments of Commerce, Energy, Housing and Urban Development, and Labor, and the National Aeronautics and Space Administration and the National Science Foundation— reported that none of their high risk projects experienced any performance shortfalls. While the Management Watch List and high risk processes serve to highlight poorly planned and performing projects and focus attention on them, our reviews identified opportunities to strengthen the identification and oversight of projects for each. OMB’s Management Watch List may be undermined by inaccurate and unreliable data. While OMB uses the exhibit 300s as the basis for designating projects as poorly planned, we have recently reported that the underlying support was often inadequate for information provided in the exhibit 300s GAO reviewed. Three general types of weaknesses were evident: ● All exhibit 300s had documentation weaknesses. Documentation either did not exist or did not fully agree with specific areas of the exhibit 300. ● Agencies did not always demonstrate that they complied with federal or departmental requirements or policies with regard to management and reporting processes. Also, none had cost analyses that fully complied with OMB requirements for cost-benefit and cost-effectiveness analyses. In contrast, most investments did demonstrate compliance with information security planning and training requirements. ● In sections that required actual cost data, these data were unreliable because they were not derived from cost-accounting systems with adequate controls. In the absence of such systems, agencies generally derived cost information from ad hoc processes. Moreover, although agencies, with OMB’s assistance, generally identified their high risk projects using criteria specified by OMB, these criteria were not always consistently applied. ● In several cases, agencies did not use OMB’s criteria to identify high risk projects. Some agencies reported using other reasons to identify a total of 31 high risk projects. For example, the Department of Homeland Security reported investments that were high risk because they had weaknesses associated with their business cases based on the evaluation by OMB. The Department of Transportation reported projects as high risk because two did not have approved baselines, and four had incomplete or poor earned value management assessments. ● Regarding the criterion for high risk designation that the agency has not consistently demonstrated the ability to manage complex projects, only three agencies reported having projects meeting this criterion. This appears to be somewhat low, considering that we and others have previously reported on weaknesses in numerous agencies’ ability to manage complex projects. For example, we have reported in our high risk series on major programs and operations that need urgent attention and transformation in order to ensure that our national government functions in the most economical, efficient, and effective manner possible. Specifically, the Department of Defense’s efforts to modernize its business systems have been hampered because of weaknesses in practices for (1) developing and using an enterprise architecture, (2) instituting effective investment management processes, and (3) establishing and implementing effective systems acquisition processes. We concluded that the Department of Defense, as a whole, remains far from where it needs to be to effectively and efficiently manage an undertaking with the size, complexity, and significance of its departmentwide business systems modernization. We also reported that, after almost 25 years and $41 billion, efforts to modernize the air traffic control program of the Federal Aviation Administration, the Department of Transportation’s largest component, are far from complete and that projects continue to face challenges in meeting cost, schedule, and performance expectations. However, neither the Department of Defense nor the Department of Transportation cited the “inability to consistently manage complex projects” criteria for any projects as being high risk. ● Finally, while agencies have reported a significant number of IT projects as high risk, we identified other projects on which we have reported and testified that appear to meet one or more of OMB’s criteria for high risk designation including high development or operating costs and recognized deficiencies in the adequate performance but were not identified as high risk. Examples we have recently reported include the following projects: ● The Decennial Response Integration System of the Census Bureau, is intended to integrate paper, Internet, and telephone responses. Its high development and operating costs are expected to make up a large portion of the $1.8 billion program to develop, test, and implement decennial census systems. In March 2006, we testified that the component agency has established baseline requirements for the acquisition, but the bureau has not yet validated them or implemented a process for managing the requirements. We concluded that, until these and other basic contract management activities are fully implemented, this project faced increased risks that the system would experience cost overruns, schedule delays, and performance shortfalls. System—an initiative managed by the Department of Commerce, the Department of Defense, and the National Aeronautics and Space Administration—is to converge two satellite programs into a single satellite program capable of satisfying both civilian and military requirements. In November 2005, we reported that the system was a troubled program because of technical problems on critical sensors, escalating costs, poor management at multiple levels, and the lack of a decision on how to proceed with the program. Over the last several years, this system has experienced continual cost increases to about $10 billion and schedule delays, requiring difficult decisions about the program’s direction and capabilities. More recently, we testified that the program is still in trouble and that its future direction is not yet known. While the program office has corrective actions under way, we concluded that, as the project continues, it will be critical to ensure that the management issues of the past are not repeated. ● Rescue 21, is a planned coastal communications system of the Department of Homeland Security. We recently reported that inadequacies in several areas contributed to Rescue 21 cost overruns and schedule delays. These inadequacies occurred in requirements management, project monitoring, risk management, contractor cost and schedule estimation and delivery, and executive level oversight. Accordingly, the estimated total acquisition cost has increased from $250 million in 1999 to $710.5 million in 2005, and the timeline for achieving full operating capability has been extended from 2006 to 2011. For the projects we identified as appearing to meet OMB’s criteria for high risk, the responsible agencies reported that they did not consider these investments to be high risk projects for such reasons as (1) the project was not a major investment; (2) agency management is experienced in overseeing projects; or (3) the project did not have weaknesses in its business case. In particular, one agency stated that their list does not include all high risk projects, only those that are the highest priority of the high risk investments. However, none of the reasons provided are associated with OMB’s high risk definition. Without consistent application of the criteria, OMB and executives cannot have the assurance that all projects that require special attention have been identified. While OMB’s Management Watch List identified opportunities to strengthen investments and promote improvements in IT management, OMB did not develop a single, aggregate list identifying the projects and their weaknesses. According to OMB officials, they did not construct a single list of projects meeting their watch list criteria because they did not see such an activity as necessary in performing OMB’s predominant mission: to assist in overseeing the preparation of the federal budget and to supervise agency budget administration. Thus, OMB did not exploit the opportunity to use the list as a tool for analyzing IT investments on a govermentwide basis, limiting its ability to identify and report on the full set of IT investments requiring corrective actions. In addition, while OMB asked agencies to take corrective actions to address weaknesses associated with projects on the Management Watch List, it did not develop a structured, consistent process or criteria for deciding how to follow up on these actions. We also reported that because it did not consistently monitor the follow-up performed, OMB could not tell us which of the 621 projects identified on the fiscal year 2005 list received follow-up attention, and it did not know whether the specific project risks that it identified through its Management Watch List were being managed effectively. This approach could leave resources at risk of being committed to poorly planned and managed projects. Thus, OMB was not using its Management Watch List as a tool for improving IT investments on a governmentwide basis and focusing attention where it was most needed. Similar to the Management Watch List, we reported in June 2006 that while OMB analysts review the quarterly performance reports on high risk projects, they did not compile a single aggregate list of high risk projects. According to OMB staff they did not see such an activity as necessary in achieving the intent of the guidance—to improve project planning and execution. Consistent with our Management Watch list observations and recommendations, we believe that by not having a single list, OMB is limiting its ability to identity and report on the full set of IT investments across the federal government that require special oversight and greater agency management attention. To address our key findings, we made several recommendations to the Director of OMB. For example, to improve how the Management Watch List projects are identified, we have made several recommendations to improve the accuracy and validity of exhibit 300s for major IT investments, including that the Director require agencies to determine the extent to which the information contained in each exhibit 300 is accurate and reliable, and, where weaknesses in accuracy and reliability are identified, disclose them and explain the agency’s approach to mitigating them. We also recommended that the Director provide for training of agency personnel responsible for completing exhibit 300s, and specified that, in developing the training, OMB consult with agencies to identify deficiencies that the training should address. Likewise, to improve how high risk projects are identified, we recommended that the Director direct federal agency CIOs to ensure that they are consistently applying the high risk criteria defined by OMB. To improve how the Management Watch List is provided oversight, in our April 2005 report, we recommended that the Director of OMB develop a central list of projects and their deficiencies and report to Congress on progress made in addressing risks of major IT investments and management areas needing attention. In addition, to fully realize the potential benefits of using the Management Watch List, we recommended that OMB use the list as the basis for selecting projects for follow-up, tracking follow-up activities and analyze the prioritized list to develop governmentwide and agency assessments of the progress and risks of IT investments, identifying opportunities for continued improvement. We also made similar recommendations to the Director of OMB regarding high risk projects. Specifically, we recommended that OMB develop a single aggregate list of high risk projects and their deficiencies and use that list to report to Congress progress made in correcting high risk problems, actions under way, and further actions that may be needed. OMB generally disagreed with our recommendations for strengthening the Management Watch List and high risk projects processes. Specifically, OMB’s Administrator of the Office of E- Government and Information Technology stated that the ultimate responsibility to improve the accuracy and reliability of the exhibit 300s lies with the agencies. While this is true, OMB also has statutory responsibility for providing IT guidance governmentwide, especially when it involves an OMB-required budget document. Regarding the consistent application of the high risk criteria, the Administrator stated that some flexibility in the application of the criteria is essential. While some flexibility may be appropriate, we believe that these criteria should be more consistently applied so that projects that clearly meet them are identified and provided oversight. The Administrator also disagreed with our recommendations that an aggregated governmentwide Management Watch List and high risk project list is necessary to perform adequate oversight. However, we continue to believe that these lists are needed to facilitate OMB’s ability to track progress. Addressing these recommendations would provide increased assurance that poorly planned and performing projects are accurately identified and more effectively provided oversight. ------------------------------- In summary, the Management Watch List and High Risk processes play important roles in improving the management of federal IT investments by helping to identify poorly planned and performing projects totaling at least $12 billion that require management attention. However, the number of projects identified on both lists is likely understated because the Management Watch List is derived from budgetary documents that are not always accurate and reliable and the high risk projects are not always identified consistently using OMB criteria. In addition, we noted areas where oversight of both sets of projects could be strengthened primarily by reporting the results in the aggregate so that governmentwide analyses can be performed, progress can be tracked, and Congress can be informed. The recommendations we made to agencies and OMB to address these issues are aimed at providing greater assurance that poorly planned and performing projects are more accurately identified and receiving adequate oversight, and ultimately ensuring that potentially billions of taxpayers dollars are not wasted. If you should have any questions about this testimony, please contact me at (202) 512-9286 or by e-mail at pownerd@gao.gov. Other individuals who made key contributions to this testimony are Sabine Paul 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. | The Office of Management and Budget (OMB) plays a key role in overseeing federal IT investments. The Clinger-Cohen Act, among other things, requires OMB to establish processes to analyze, track, and evaluate the risks and results of major capital investments in information systems made by agencies and to report to Congress on the net program performance benefits achieved as a result of these investments. OMB has developed several processes to help carry out its role. For example, OMB began using a Management Watch List several years ago as a means of identifying poorly planned projects based on its evaluation of agencies' funding justifications for major projects, known as exhibit 300s. In addition, in August 2005, OMB established a process for agencies to identify high risk projects, i.e., projects requiring special attention because of one or more reasons specified by OMB, and to report on those that are poorly performing or not meeting performance criteria. GAO recently issued reports on the Management Watch List, high risk projects, and agencies' exhibit 300s. GAO was asked to summarize (1) the number of projects and the fiscal year 2007 dollar value of Management Watch List and high risk projects, (2) previously reported results on how these projects are identified and provided oversight, and (3) recommendations it made to improve these processes. As a result of the Management Watch List and high risk projects processes, about 300 projects totaling about $12 billion in estimated IT expenditures for fiscal year 2007 have been identified as being either poorly planned or poorly performing. Specifically, of the 857 major IT projects in the President's budget for fiscal year 2007, OMB placed 263 projects, representing about $10 billion on its Management Watch List. In addition, in response to OMB's memorandum, agencies reported that 79 of 226 high risk projects, collectively totaling about $2.2 billion, had a performance shortfall. While this information helps to focus both agency and OMB management attention on these poorly planned and poorly performing projects, GAO identified opportunities to strengthen how these projects are identified and provided oversight. The Management Watch List may be undermined by inaccurate and unreliable data. OMB uses scoring criteria to evaluate agencies' exhibit 300s to derive the projects on its Management Watch List. GAO's detailed evaluation of exhibit 300s showed that the information reported in them is not always accurate or supported by documentation. The criteria for identifying high risk projects were not always consistently applied and projects that appeared to meet the criteria were not identified as high risk. Without consistent application of the high risk criteria, OMB and agency executives cannot have the assurance that all projects that require special attention have been identified. For both sets of projects, OMB did not develop a central list of projects and deficiencies that could facilitate tracking progress and reporting to Congress. Without such lists, OMB is not fully exploiting the opportunity to analyze and track these projects on a governmentwide basis and not involving Congress in the oversight of these projects with risks. To improve the way the Management Watch List and high risk projects are identified and provided oversight, GAO has made a number of recommendations to the Director of OMB. These recommendations include directing agencies to improve the accuracy and reliability of exhibit 300 information and to consistently apply the high risk criteria defined by OMB. In addition, GAO recommended that the Director develop a single, aggregate list for both the Management Watch List and high risk projects to facilitate tracking progress, performing governmentwide analysis, and reporting the results to Congress. OMB generally disagreed with these recommendations. However, GAO believes that they are needed to provide greater assurance that poorly planned and poorly performing projects are more accurately identified and provided oversight, and ultimately ensure that potentially billions of taxpayer dollars are not wasted. |
BEA divided federal spending into two broad categories: discretionary and mandatory. Discretionary spending refers to outlays from budget authority that is provided in and controlled by appropriation acts; it can and has been controlled through annual, adjustable dollar limits (spending caps) that permanently lower the base for future appropriations. Mandatory spending refers to outlays resulting from budget authority that is provided in laws other than appropriation acts, for example, entitlement programs such as Medicare, Food Stamps, and veterans’ pensions. Mandatory spending—like tax expenditures—is governed by eligibility rules and benefit formulas, which means that funds are spent as required to provide benefits to those who are eligible and wish to participate. Therefore, unforeseen events such as changes in the economy or additional demands for services can translate into unanticipated additional program outlays. Congress controls spending for these programs indirectly by defining eligibility and setting the benefit or payment rules rather than directly through appropriation acts. On an annual basis, however, mandatory spending is relatively uncontrollable since Congress and the President must change substantive law in order to further increase or decrease outlays. This makes it more challenging to constrain costs and to design both triggers and triggered responses. Over the past 4 decades, we have seen mandatory spending grow as a share of the total federal budget. For example, figure 1 shows that spending on mandatory programs rose from approximately 42 percent of total federal spending in 1984 to about 49 percent in 1994, and to 54 percent in 2004. This growth is projected to continue with mandatory programs claiming about 58 percent of total federal spending in 2010. The nation’s long-term fiscal outlook is daunting under many different policy scenarios and assumptions. For instance, under a fiscally restrained scenario, if discretionary spending grew only with inflation over the next 10 years and all existing tax cuts expire when scheduled under current law, spending for Social Security and health care programs would grow to consume over three-quarters of federal revenues by 2040 (see fig. 2). On the other hand, if discretionary spending grew at the same rate as the economy—measured by Gross Domestic Product (GDP)—in the near term and if all tax cuts were extended, federal revenues may just be adequate to pay interest on the growing federal debt by 2040 (see fig. 3). Numerous alternative scenarios can be developed incorporating different combinations of possible policy choices and economic assumptions, but these two scenarios can be viewed as “bookends” showing a range of possible outcomes. As both these simulations illustrate, absent policy changes on the spending and/or revenue side of the budget, the growth in spending on federal retirement and health entitlements will encumber an escalating share of the government’s resources. Neither slowing the growth in discretionary spending nor allowing the tax provisions to expire—nor both together— would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, making no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling of taxes—and that seems implausible. Accordingly, substantive reform of Social Security and our major health programs remains critical to recapturing our future fiscal flexibility. These long-term spending projections can largely be attributed to the aging population and increased health care costs. This does not, however, mean that the rest of the budget should be exempt from review. It is important to periodically look at mandatory accounts in order to determine possible ways to constrain spending and ensure a more accurate and responsible federal budget process. Congressional interest in fiscal discipline and the adoption of budget tools to control mandatory spending are not new. The Balanced Budget and Emergency Deficit Control Act of 1985, commonly referred to as Gramm- Rudman-Hollings (GRH), established declining deficit targets and a sequestration procedure to reduce spending if those targets were exceeded. GRH was amended several times, most significantly by BEA in 1990. One important reason for BEA’s success in reducing the deficit during the 1990s was that the process enforced a previously reached agreement to reduce the deficit. However, recurring surpluses at the end of the decade caused a new debate to emerge and undermined the acceptance of BEA’s spending caps and PAYGO enforcement. BEA rules were not extended beyond their scheduled expiration date at the end of fiscal year 2002. In the past, mandatory spending caps were proposed as a way to control the growth of mandatory programs. This idea was discussed in a report we issued in 1994. Mandatory caps fail to address underlying eligibility and benefits formulas—which drive spending. In addition, if caps were imposed in the context of a control requiring across-the-board spending cuts, they would present agencies with difficulties in successfully reducing their program spending to stay within limits, and perhaps lead to a cycle of continual sequestrations. This difficulty is because in such a regime, any shortfalls in savings or growth in spending that occurred despite agency efforts would be added to the amount of cuts required in the next year. Moreover, the mandatory programs that would be most affected by a cap— because of their high and/or volatile growth rates—are also the programs for which a cap would be hardest to implement. In the mid-1990s, there was a period when the idea of constraining greater- than-expected growth through the use of triggers surfaced. However, it coincided with a period when actual growth generally was less than expected. Recently, with the reappearance of large deficits, there has been a resurgence of interest in restoring budget controls and containing the growth in both discretionary and mandatory spending. For example, in 2005, numerous bills to reinstate fiscal discipline were proposed. Moreover, in May 2005, OMB issued a memo to agencies that required them to propose offsets to any administrative action that would increase mandatory spending. Budget estimates and actual outlays are determined over a period that spans nearly 2 years: from the time the President’s budget is formulated, about a year before the start of the fiscal year in question, to the completion of that fiscal year. Within this 2-year lag period between original estimates and actual outlays, legislative, economic, and technical factors can affect program outlays. Budget estimates are revised part way through the fiscal year and included in the budget request for the following fiscal year. These revisions reflect updated technical and economic assumptions as well as any legislative changes. Also, midsession reviews conducted during the summer, usually in July, update budget estimates prior to the completion of the fiscal year. In addition, both CBO and OMB estimate the cost of bills that affect mandatory spending. The objectives of this study were to (1) determine the feasibility of designing and using trigger mechanisms to constrain growth in mandatory spending and (2) provide an analysis of the factors (legislative, economic, and technical) that led to differences between estimated and actual outlays in seven mandatory budget accounts during fiscal years 2000 through 2004. This second objective contributed to our understanding of programs, helped us better appreciate the reasons behind growth in mandatory accounts that experienced relatively large dollar changes, and more fully informed our thinking about triggers. To accomplish our first objective, we performed a literature search on mechanisms to constrain mandatory spending and had discussions with numerous budget experts from OMB, CBO, the Senate Budget Committee staff, and various policy research organizations. Based on our research, interviews at agencies, and discussions with experts, we then considered possible approaches for budgetary constraint within each account. To accomplish our second objective we extracted from OMB’s budget database mandatory outlays of accounts where 50 percent or more of the outlays were mandatory. We analyzed these data for fiscal years 2000 through 2004. To determine the estimated and actual outlays for each year, we used the original budget estimate and the actual outlays reported 2 years later, after the end of the fiscal year. For example, when determining the difference between estimated and actual outlays for fiscal year 2000, we compared the fiscal year 2000 budget estimates published in February 1999 to the actual outlays published in February 2001. From the 534 accounts with outlays at least half mandatory, we selected the top 10 accounts that experienced the greatest average dollar change between original estimate and actual outlays in absolute value terms for 5 fiscal years (2000–2004). The complete list of these accounts is included as appendix III. These 10 accounts, which represent approximately 50 percent of total average mandatory outlays, include (1) Interest on Treasury Debt Securities, (2) Unemployment Trust Fund, (3) Commodity Credit Corporation Fund, (4) Federal Supplementary Medical Insurance Trust Fund (Medicare Part B), (5) Federal Hospital Insurance Trust Fund (Medicare Part A), (6) Grants to States for Medicaid, (7) Rail Industry Pension Fund, (8) Federal Direct Student Loan Program (FDLP) Account, (9) Payments to Health Care Trust Funds, and (10) Mutual Mortgage Insurance Program Account (MMI). Because many of the programs we selected are relatively big, large dollar increases may represent small percentage increases relative to program size. After initial analysis, we excluded three of these accounts from further analysis: Interest on Treasury Debt Securities, MMI, and Payments to Health Care Trust Funds. We eliminated the U.S. Treasury account because interest payments are a function of all other funding decisions and thus provide little insight into trigger design. We excluded the MMI account because the program itself is discretionary—only the large mandatory reestimates of its credit subsidy required by the Federal Credit Reform Act of 1990 caused it to fall into our original sample. Because decisions about the size of this program are annually made in the appropriations process and can be informed by the reestimates of previous years’ loans, there is no need for separate triggers. Finally, we excluded the Payments to Health Care Trust Funds account because the payments are classified as intragovernmental transfers and therefore do not affect overall budget outlay data. Moreover, these transfers are captured within other accounts in our sample. Figure 4 below shows the 5-year average difference between estimated and actual mandatory outlays in absolute value terms for the seven accounts we reviewed. These differences ranged from $9.4 billion in the Unemployment Trust Fund to $2.6 billion in FDLP. To gain more perspective on what factors contributed to the differences between estimated and actual outlays in the remaining seven accounts, we met with officials from the cognizant agencies to determine if the reasons behind the differences were (1) legislative, (2) economic, (3) technical, or a combination of the three. We did not independently verify the explanations agencies provided for differences. Our work was done between May 2005 and January 2006 in Washington, D.C., in accordance with generally accepted government auditing standards. The purpose of a budget trigger is to either automatically cause some action to occur or to prompt decision makers to evaluate and consider responding to rising costs. For example, where differences between expected and actual growth in a program exceed a specified amount, Congress could decide explicitly—by voting—whether to accept the slippage or could take action to bring the spending path closer to the original goal by recouping some or all of the slippage through changes in the program. Our background research, work in case study agencies, and discussions with budget experts highlighted several issues to consider when designing triggers and their resulting actions, such as the extent of agreement among decision makers about underlying fiscal goals, measures selected to trip the trigger, and the triggered response. While a budget process can surface important issues, it is not a substitute for substantive debate—no process can force agreement where one does not exist. Accordingly, the success of any effort to constrain growth depends on whether there is widespread agreement on the underlying goals; absent such agreement, any trigger would likely be circumvented. For example, underlying the successful budget enforcement mechanisms embodied in BEA was the broadly accepted goal of deficit reduction and an agreement on a specific set of legislative changes to reach that goal. Its triggers were centered around measures that Congress could control— discretionary spending caps and changes to entitlement and tax laws. However, once the budget moved into surplus in the late 1990s and there was no longer agreement on fiscal goals, actions were taken to bypass BEA controls. For example, the consolidated appropriations acts for both fiscal years 2000 and 2001 mandated that OMB change the PAYGO scorecard balance to zero. Both OMB and CBO estimated that without instructions to change the scorecard, sequestrations would have been required in 2001. Other countries we have studied have sought to address national priorities by developing explicit goals to guide fiscal policy and justifying their goals with compelling rationales that often pointed out the potential fiscal and economic benefits of budgetary discipline. In a 2000 report, we noted that having fiscal goals anchored by a rationale that is compelling enough to make continued restraint acceptable is critical to sustain support for budgetary discipline. One of the reasons for the success of BEA was its link to congressional action. Discretionary spending caps and PAYGO constrained congressional action—BEA held Congress accountable only for things it could control and not for the effect of economic or technical factors on spending or revenues. This was both the strength and the limitation of PAYGO. Triggers seek to go beyond the PAYGO regime by subjecting program growth to scrutiny even where that growth is the result of economic, population, or other factors outside congressional control. Triggers recognize that even the best estimates can turn out to be wrong and that decision makers who expected one path might wish to consider changes in a program where the path is significantly different from what was anticipated. In general, there are two types of responses to budget triggers—soft and hard—depending on what type of action results when the trigger is tripped. A “soft” response prompts special consideration of a program or a proposal for action when a certain threshold or target is breached. Examples of soft responses that could be triggered include requiring the administering agency to prepare a special report explaining why the trigger’s threshold was breached, or requiring the President to submit a proposal for reform. An example of a soft response already exists in the Medicare program, which requires the President to submit a proposal to Congress for action if the Medicare Trustees determine in 2 consecutive years that the general revenue share of Medicare spending is projected to exceed 45 percent during a 7-year period. In addition, a few Social Security reform proposals have included language requiring presidential and congressional action if the Social Security Board of Trustees determines that the balance ratio of either of the Social Security trust funds will be zero for any calendar year during the succeeding 75 years. Soft responses can help in alerting decision makers of potential problems but they do not ensure that action to decrease spending or increase revenue is taken. With soft responses, the fiscal path continues unless Congress and the President take action. In contrast, a trigger could lead to “hard” responses requiring a predetermined, program-specific action to take place, such as changes in eligibility criteria and benefit formulas, automatic revenue increases, or automatic spending cuts. With hard responses, spending is automatically constrained, revenue is automatically increased, or both, unless Congress takes action to override. Figure 5 below illustrates the conceptual differences between hard and soft responses of a budget trigger. In establishing triggers, both near- and long-term perspectives need be considered. For some programs it might be appropriate to tie triggers to historical data. For example, unexpected spending growth in student loans might be measured against past historical spending data. However, for other programs that expose the government to long-term commitments— such as Medicare or Social Security—it might be more appropriate to tie the trigger to projections of future spending. Social Security, however, represents a large long-term commitment of future resources. Thus, growth for this program might be measured against changes in actuarial projections of Social Security’s 75-year outlook. Such an approach could be used for other programs with long-term commitments, such as pension insurance, if good long-term projections become available. Since all estimates are subject to some uncertainty, the triggering mechanism should not be so tight that it is overly sensitive to normal variation in budget estimation. One way to address this concern is to establish a normal or expected range of budget uncertainty and set a trigger level that falls outside this range. For example, if a program’s actual outlays historically fall within plus or minus 5 percent of estimated outlays, a trigger set at a level greater than 5 percent would best signal unexpected growth. This approach resembles one CBO uses for certain programs to analyze the budgetary effects of legislative proposals. Using a probabilistic model, CBO estimates the weighted average of the effects associated with all possible sets of circumstances, taking into account their respective probabilities. Such an approach could be adapted to establish a range of uncertainty around a budget estimate. Triggers also could be used to ensure that policy changes actually achieve intended reductions in spending growth. Such triggers could address concerns that some budget constraint mechanisms create the false impression that long-term problems have been addressed. Although any hard response can be overridden by congressional action, it could be important to incorporate a more automatic escape clause into budget enforcement mechanisms such as triggers. Effective budget enforcement mechanisms need to be able to accommodate changing budget policy and political environments in which future outcomes are difficult to predict. For example, periods of economic growth may be brief or sustained, but inevitably are followed by periods of economic downturn that may be shallow or deep. Escape mechanisms, such as expiration dates, allow budget policies and procedures to be renegotiated later. In addition to expiration dates, House or Senate rules can provide flexibility. For example, any Senator may raise a point of order against legislation violating PAYGO rules prohibiting consideration of revenue or direct spending legislation that is not deficit-neutral. However, the point of order may be waived if there is broad consensus on the need to do so—that is, if there is an affirmative vote of three-fifths of the membership. Although they provide important flexibility, escape clauses can be overused. For example, in fiscal year 2002, the Department of Defense and Emergency Supplemental Appropriations Act instructed that $130.3 billion in costs be eliminated from the PAYGO scorecard. Both OMB and CBO estimated that without instructions to change the scorecard, a sequester—across-the-board spending cuts—would have been required in 2002. In addition, many programs were exempt from PAYGO’s sequestration requirement. These exemptions meant that the full brunt of any sequester was concentrated in the remaining programs, resulting in cuts so draconian that Congress and the President changed the targets rather than impose the required cuts. Whether a triggered response is soft, hard, or a combination of the two, efforts to constrain growth in mandatory programs need to be focused at the program level. The experience with GRH highlights the importance of individually designed triggers and responses. The deficit-neutrality targets under GRH triggered a hard response—across-the-board spending cuts—if they were not met. The deficit targets under GRH were not achieved due to the inability of Congress and the President to control all of the factors— mainly economic factors—that affected whether the trigger would be breached and their unwillingness to accept the across-the-board cuts that would have been necessary to meet the deficit targets. In developing program-specific triggers and responses, proposed changes in underlying benefits structure and design of mandatory programs can be considered in the context of the factors that drove the growth and the goals and objectives of specific programs. For example, certain programs such as unemployment insurance and crop assistance are designed and intended to have a countercyclical effect on the economy. That is, they are aimed at reducing the size and duration of swings in economic activity in order to keep economic growth closer to a pace consistent with low inflation and high employment. Thus, a triggered response in these programs needs to be sensitive to whether growth is being driven by automatic budget stabilizers. For example, a rise in the unemployment rate would by design increase outlays in federal unemployment insurance not only to provide assistance to the unemployed but also to stabilize the economy. If a trigger were established that resulted in a contractionary response, it could undermine these important goals and exacerbate the effects of unemployment on the economy. In a January 2002 report, the Congressional Research Service (CRS) suggested one option to avoid procyclical triggers would be to delegate to some entity—for instance Congress or an executive department—the responsibility for evaluating each year whether deteriorating economic conditions would make a trigger detrimental. If conditions were found to be deteriorating, decisions would need to be made about whether and how to implement any reduction. CRS acknowledged, however, that this type of proposal could be criticized on the grounds that it is based on a subjective decision and thus could be prey to the sort of political pressures that critics fear would undermine a trigger. Indeed, one budget expert we met with expressed concern that in devising a budget trigger, it would be helpful to acknowledge political pressures by considering who would judge progress against the trigger and the neutrality of the judging entity. The programs and agencies we reviewed have objectives and missions that contribute to the achievement of public policy goals such as income security, feeding the nation, fostering higher education, and providing health care. To these ends, these programs are designed to provide entitlements—benefits and assistance—to eligible recipients. While striving to meet these commitments, our nation is faced with a daunting long-term fiscal outlook based on the challenges of an aging population, unsustainable deficits, and mounting debt while also ensuring truth and transparency. Figure 6 depicts the inherent tension in balancing public policy goals and long-term fiscal challenges. Addressing this tension invariably entails difficult political choices among competing programs that promise benefits to many Americans but are collectively unaffordable and unsustainable at current revenue levels. In February 2005 we highlighted the size of fiscal imbalances looming in the future and the challenge of our policy process to act with more foresight to take early action on problems that may not constitute an urgent crisis but pose important longer-term threats to the nation’s fiscal, economic, security, and societal future. Budget triggers are mechanisms that can encourage and facilitate such action. To help us better consider the implications of establishing triggers, we looked at seven mandatory accounts with relatively large differences between estimated and actual outlays: Commodity Credit Corporation (CCC), Federal Direct Student Loan Program Account, Grants to States for Medicaid, Federal Hospital Insurance (HI) Trust Fund (Medicare Part A), Federal Supplementary Medical Insurance (SMI) Trust Fund (Medicare Part B), Rail Industry Pension Fund, and the Unemployment Trust Fund. We explored ways in which existing triggers and their corresponding actions could be revised, as well as an array of new trigger mechanisms that take into consideration the issues just discussed and could be adopted to promote better budgeting in light of the nation’s long-term fiscal outlook. It is important to consider the data upon which the trigger will hinge— future projections based on historical data, growth as a percent of GDP, total growth, or another measure altogether. For example, Congress has established a trigger to constrain growth in Medicare spending for physicians’ services. The sustainable growth rate (SGR) is a statutorily set formula that estimates the allowed rate of increase in spending for physicians’ services; that rate is used to construct the spending target for the following calendar year. If actual spending exceeds the cumulative SGR 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. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established another trigger—the general revenue share of Medicare spending. If the Medicare Trustees determine in 2 consecutive years that the general revenue share is projected to exceed 45 percent during a 7-year projection period, the President must submit a proposal to Congress for action. To date, this threshold has not been breached and thus no response has been triggered. However, Medicare Trustees are expected to determine the first breach in their upcoming 2006 report as the trigger is projected to be tripped in 2012, which falls within the 7-year projection period captured in that report. For unemployment insurance, a trigger was established around balances in the Unemployment Trust Fund. When funds accumulating in federal unemployment accounts reach statutorily set limits, a distribution of the “excess” funds from the trust fund to individual states’ accounts—called “Reed Distributions”— are automatically triggered based on each state’s share of covered wages. One way to constrain federal spending would be to increase the statutory cap on federal unemployment accounts, thus making it more difficult to trigger Reed Distributions to states. By making it more difficult to trip the trigger, funds could continue to build during economic prosperity and be available to states when truly needed to counter rising unemployment. Our analysis allowed us to develop a list of illustrative examples, which analyze the related trade-offs involved in balancing restraint with optimization of program goals. These are shown in appendix I, along with a brief description of the program and account. Finally, where appropriate we present illustrative examples of hard responses that could be established to constrain spending. We do not specifically advocate any of these approaches—they are presented for illustrative purposes only to provide a sense of the types of trigger and resulting actions that could be established. Although the illustrative examples we developed apply specifically to the seven case study accounts that we reviewed, we believe the information can further the larger policy conversation about how to increase oversight of the path of mandatory spending and advance and encourage budgetary discipline. We interviewed budget experts from OMB, CBO, the Senate Budget Committee staff, and various policy research organizations to discuss views on using triggers to constrain mandatory spending. Overall, views were mixed. While some were more in favor of triggers than others, many expressed concern that they would be circumvented or ignored, thereby questioning their effectiveness. In addition, many were concerned that triggers could jeopardize the underlying intent of mandatory programs. Several experts also pointed to the need to ensure that any triggers developed be carefully designed to avoid procyclical effects. Some of the experts expressed strong support for budget triggers. These individuals believed that triggers with hard responses had the potential to constrain mandatory spending and that the accountability added by triggers would be preferable to the current unconstrained environment. For example, one expressed concern about the debt burden being permitted to mount for future generations in order to avoid the reduction in benefits or increase in taxes needed to finance current benefits. Linking revenues and spending with GDP, she argued, would help avoid such generational inequities. Another added that under current policy, spending grows automatically, by default, faster than tax revenues as the population ages and health costs soar. He argued that only by changing the budget’s autopilot programming can we gain the flexibility needed to continually improve government policies and services. Others, however, said that triggers reduced accountability because they enable decision makers to publicly extol budget constraint but quietly continue to increase spending. One pointed to “accounting tricks” that have resulted from triggers with hard responses, such as when Congress mandated certain costs not be counted against spending limits so as to avoid across-the-board cuts. However, as discussed previously, triggers also could be used to ensure that policy changes actually achieve intended reductions in spending growth. Such triggers could address concerns that some budget constraint mechanisms create the false impression that long- term problems have been addressed. Many expressed skepticism that budget constraint mechanisms such as triggers would be adhered to; one cited Medicare’s SGR as an example. The SGR system is designed to apply financial brakes whenever actual spending for physicians’ services exceeds predefined spending targets. It does this by reducing physician fees or limiting their annual increase. Because the actual versus target spending comparison is cumulative, future fee updates are reduced to lower future actual spending below future target spending until total cumulative actual spending is the same as total cumulative target spending. However, fee declines were averted for 2003, 2004, and 2005 by administrative and legislative actions that modified or overrode the SGR system. Some experts worried that applying budget triggers to various mandatory spending programs would divert attention from the real source of the nation’s fiscal woes—health care—whose costs continue to rise faster than GDP. They pointed to CBO data as evidence that, outside of health care and to a lesser extent Social Security, virtually all other mandatory programs are decreasing or holding steady as a percent of GDP. Accordingly, they expressed concern that establishing triggers on such programs could mislead the public into thinking that the long-term fiscal problem had been addressed, thus delaying efforts to appropriately address it. Many of the budget experts raised concerns about triggers jeopardizing the important underlying missions and program goals financed by mandatory accounts. In particular, concerns were raised about undermining countercyclical effects of programs such as unemployment insurance, Food Stamps, and the Earned Income Tax Credit. Some noted that the desire to preserve program goals is the reason why triggers with hard responses have not worked in the past. With respect to the SGR, for example, one expert explained that the reason Congress overrides the trigger is to ensure doctors do not stop accepting Medicare patients. Finally, a couple of experts pointed out that triggers need not only apply to spending; the revenue side of the budget should also be addressed. One noted, for example, that an increase in taxes to cover spending growth would increase visibility to the public and thus permit the American people to be more aware of how much they are paying for services. Applying triggers to tax cuts was an issue considered in 2001 when the budget was in surplus and tax cuts were proposed. For example, Federal Reserve Chairman Greenspan at that time expressed his preference for a trigger that would make tax cuts contingent on the realized net debt level. Comptroller General Walker also raised the possibility of using a trigger to return a “surplus dividend” if actual surpluses occurred in excess of specific levels. Ultimately, however, triggers were not adopted. Instead, tax cuts were enacted through 2010 even though substantial deficits have reappeared. In addition, as we reported in a February 2005 testimony, there has been an extensive use of tax incentives, rather than direct spending authority, to fund social objectives. As we reported in September 2005, the sum of revenue loss estimates associated with tax expenditures—such as tax exclusions, credits, and deductions—was nearly $730 billion in 2004. Many tax expenditures operate like mandatory spending programs and generally are not subject to reauthorization. Such tax expenditures are embedded in the tax system and are off the radar screen for the most part. This is a concern from a budgetary standpoint because federal dollars committed to fund these expenditures do not compete in the annual appropriations process and are effectively “fully funded” before any discretionary spending is considered. The analysis we applied to spending in this report would also be useful in examining tax expenditures. However, challenges in defining and measuring tax expenditures, to some extent, would affect any effort to curtail revenues foregone through tax expenditures. For example, after taxpayers have taken advantage of tax expenditures, the federal government still may not know, with much certainty, how much tax revenue was foregone, who benefited, and what results were achieved. To better appreciate the reasons behind growth in mandatory accounts and thus inform our thinking on triggers, we examined the reasons for differences between originally estimated and actual outlays for seven mandatory accounts that experienced relatively large dollar changes. Based on agencies’ explanations of differences between estimated and actual outlays of the case study accounts we examined, we found that legislation enacted after original estimates were submitted was the primary driver in 19 out of 40 differences during fiscal years 2000 through 2004. Economic factors, such as changes in interest and unemployment rates, were primarily responsible for 7 differences. Finally, technical factors, which cover a broad spectrum, most significantly drove 13 out of 40 differences. In one case, it was unclear which factors most significantly caused the difference between estimated and actual outlays. In many cases, a combination of factors resulted in differences. In categorizing agencies’ explanations for differences between estimated and actual outlays, we applied criteria similar to those that CBO uses in its annual budget and economic outlook reports to categorize changes as legislative, technical, and economic. However, in our report, legislative action was classified in a somewhat different manner from the method that CBO applies. Whereas we examined the actual budgetary effect that resulted from the legislation, CBO projects the anticipated future budgetary effect of legislation. Figure 7 describes the criteria that we applied to categorize agencies’ explanations into three factors. While this framework is helpful in evaluating changes in the federal budget, it is not precise and should be viewed as indicative as opposed to determinative. Table 1 summarizes the factors—legislative, economic, and technical—that most significantly resulted in differences between estimated and actual outlays by fiscal year and account. The factors that were major drivers for differences between estimated and actual outlays are denoted with “.” Other factors that affected the difference are denoted with “x.” In one case, it was unclear which factors most significantly caused the difference between estimated and actual outlays. In that case, both relevant factors are marked with an “x.” Detailed explanations supporting this summary are presented in appendix I. As seen above in table 1, most of the accounts we reviewed were directly affected by legislation that was enacted after original estimates were developed and significantly contributed to differences between expected and actual outlays in 19 out of 40 instances. For example, the Temporary Extended Unemployment Compensation Act (TEUC) of 2002 led to the disbursement of greater-than-expected unemployment benefits. Supplemental appropriations for crop disaster assistance and Agricultural Market Transition Act payments largely contributed to additional outlays that were not assumed in original CCC budget projections. Similarly, the MMA and the Railroad Retirement and Survivors’ Improvement Act of 2001, respectively, increased Medicare outlays and Rail Industry Pension outlays. TEUC was enacted to provide up to 13 weeks of federally funded unemployment insurance benefits to workers in all states who had exhausted their entitlement to regular state unemployment benefits. Furthermore, the Act provided up to 13 additional weeks of federally funded benefits to workers in states with especially high unemployment rates. Congress renewed this extension in April 2003, which allowed qualified individuals to file for federal extensions through December 2003 and collect on those extensions through December 2004. As a result, program outlays exceeded estimates by $7.9 billion in 2002, $11 billion in 2003, and $4.3 billion in 2004. Outlays in both CCC programs that we reviewed also were directly affected by subsequent legislative action that occurred after original budget estimates were formulated. For example, Crop Disaster Assistance programs are funded through supplemental appropriations every year throughout the 5-year period that we reviewed, which led to an additional total of $6 billion in program outlays. According to OMB officials, the Administration prefers not to include estimates in the budget for relatively unpredictable disaster-related programs such as crop disaster assistance. Instead, such funding is typically initiated by Congress through supplemental appropriations. Accordingly, for all 5 years we examined, no estimates were provided and all of the outlays were as a result of supplemental appropriations. Legislative action that increased market loss assistance payments to corn producers largely contributed to the greatest underestimates of outlays for that particular commodity—nearly $9 billion in 2000 and 2001 together. These payments were authorized on an ad hoc basis and, in fiscal year 2000, were paid out for both 1999 and 2000. The Consolidated Appropriations Resolution of 2003 provided substantially higher Medicare payments to physicians than estimated in original budget projections and contributed to the largest discrepancy—over $13 billion— between estimated and actual SMI outlays throughout the 5 years that we reviewed. Furthermore, both the HI and SMI trust funds incurred unanticipated additional outlays as a result of MMA. Several of the provisions under MMA were implemented in 2004 and directly affected that year’s outlays; however, officials from the Centers for Medicare & Medicaid Services (CMS) said that the largest factors that led to additional HI outlays of approximately $4.4 billion and additional SMI outlays of nearly $12.3 billion were the substantially increased payments to private health plans and rural health providers, as well as the increased physician payment update—all of which were provided for under MMA. Finally, the Railroad Retirement and Survivors’ Improvement Act of 2001 changed a number of benefit and eligibility criteria, which led to a sharp rise in retirements. For example, the enactment of this law (1) eliminated benefit reductions to early retirees, (2) eliminated the maximum threshold on the amount of combined monthly employee and spouse benefit payments, (3) lowered the minimum eligibility requirement for railroad retirement annuities, and (4) increased benefit payments for widow(er)s. Under this legislation, funds in excess of those needed for current benefit payments and administrative expenses were transferred to the National Railroad Retirement Investment Trust. As a result, rail industry retirements increased, and pension fund outlays increased by almost $20 billion in 2002 and 2003 collectively. Case study agencies cited economic factors as primary reasons for differences between estimated and actual outlays for 7 out of 40 differences. This was especially true for agricultural commodities, student loans, and unemployment insurance. For example, market prices for commodities affected federal subsidy payments to farmers, changes in interest rates affected revenues received from student loan borrowers, and unemployment affected outlays of federal unemployment insurance. Economic factors also affected the hospital market basket, which contributed to greater-than-expected Medicare outlays. For CCC’s corn program, market prices were both underestimated and overestimated over the 5-year period. According to a Department of Agriculture (USDA) official, corn prices are extremely volatile and highly dependent on weather conditions and global food production. In addition, the countercyclical design of federal commodity subsidies results in outlays that are highly sensitive to changes in price. This official explained that a 1 cent change in estimated corn prices results in about an $85 million change in federal outlays. The historically low interest rates that prevailed in recent years were below levels previously forecasted, which affected estimated student loan subsidy costs. Subsidy cost estimates for FDLP are highly sensitive to changes between projected and actual interest rates because borrower interest rates are variable. The decline in interest rates resulted in lower-than- expected interest payments to the government from FDLP borrowers, thus increasing reestimated subsidy costs for these loans. Concurrently, the volume of student consolidation loans, which allow borrowers to lock in fixed interest rates, increased as interest rates declined. In consolidating their loans, borrowers effectively paid off their underlying loans, thereby lowering anticipated interest payments to the government on the loans and, in turn, increasing the estimated subsidy costs of the underlying loans. Discrepancies between estimated and actual unemployment insurance outlays are partially attributed to economic factors such as unanticipated changes in both the unemployment rate and benefit recipiency rates. For example, Department of Labor officials said that most of the outlay overestimate in 2000 resulted from a lower-than-expected unemployment rate—the ratio of the total number of unemployed individuals to the total workforce—which translated into lower-than-expected outlays. In subsequent years, the unemployment rate was underestimated and thus contributed to greater-than-expected outlays. Inaccurate assumptions about the benefit recipiency rates, that is, the ratio of the total number of unemployed individuals filing for or receiving benefits to the total number of unemployed, further contributed to the agency’s errors in accurately estimating program outlays. According to agency officials, these economic factors tend to be key drivers affecting budget estimates, albeit to a somewhat lesser degree during the timeframe we reviewed given the significance of the temporary extended unemployment compensation legislation that substantially increased outlays in 2002 through 2004. To a lesser extent, economic factors affected Medicare outlays. In 2003, a higher-than-expected market basket, which is basically a price index representing the cost of providing health care services to patients, was part of the explanation behind higher-than-originally-estimated Medicare outlays, according to CMS officials. This increase in the market basket led to greater-than-expected inpatient and outpatient hospital expenditures in the HI and SMI funds respectively. Technical factors, which encompass a somewhat wide-ranging residual category, significantly explained outlay differences in 13 out of 40 instances. Generally, technical factors account for differences between budget estimates and actual outlays that cannot be attributed to legislative or economic factors. For example, delayed implementation and difficulty in predicting the behavior of providers under new payment systems, an increased case mix, and the deferral of adjusting payments for skilled nursing facilities utilization led to differences between estimated and actual Medicare outlays. Increases in administrative costs and revised assumptions of the amount of loan defaults and collections caused some of the direct student loan outlays to differ from original estimates. Similar to the diversity of the programs we reviewed, there was great variability among the technical factors that affected account outlays. Actual outlays for both Medicare Parts A and B differed from estimates primarily due to a number of technical factors, which accounted for both some of the largest and some of the smallest discrepancies. For example, the largest discrepancy in the HI fund (Medicare Part A) occurred in fiscal year 2000 for which outlays were lower-than-originally estimated by nearly $16 billion. According to CMS, the majority of this inaccuracy is attributed to lower-than-expected benefit payments as a result of the agency’s difficulty in predicting the behavior of providers under newly implemented payment systems for skilled nursing facility (SNF) services and home health services. CMS officials said that these payment systems were very new at the time fiscal year 2000 budget estimates were done and the effect of these new systems was unknown. Similarly, SMI outlays were $4.6 billion less-than-originally estimated due largely to the delayed implementation of and unfamiliarity with a new outpatient hospital prospective payment system. Other technical factors CMS cited to explain the differences between estimated and actual Medicare outlays included case mixes that were more complex than expected and deferred payment refinements for SNF utilization. Case mix refers to the average complexity of inpatient admissions for Medicare beneficiaries. A change in the mix of cases causes the amount of benefit payments to change. The deferral of payment adjustments for SNF utilization contributed to greater-than-expected outlays in both fiscal years 2003 and 2004. These adjustments would have reduced payment rates that had previously been increased on a temporary basis under the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA). CMS included the budgetary effects of these adjustments in their HI estimates for 2003 and 2004, but later decided not to implement them citing the need for additional time to review and analyze the implications of implementing hospital case mix refinements. Differences between estimated and actual outlays for federal direct student loans were most frequently explained by technical factors, including revised assumptions in the Department of Education’s loan subsidy model, increased administrative costs, and Congress’s decision not to adopt a budget proposal to shift administrative expenses to a discretionary account. Moreover, because of the way federal credit programs are budgeted, original estimates include a loan subsidy amount for one fiscal year but actual outlays include a loan subsidy reestimate for all prior fiscal years—in the case of FDLP, up to 8 years for fiscal year 2004. Given that unsustainable federal deficits and debt threaten our future economy and national security as well as the standard of living for the American people, renewed emphasis on increasing fiscal discipline is crucial. Mandatory spending represents an increasing percentage of the federal budget (e.g., about 54 percent in 2004, up from about 42 percent in 1984). Unexpected growth in individual programs—especially certain very large programs—can significantly change the nation’s fiscal position. By identifying significant increases in mandatory spending relatively early and acting to constrain it, Congress may avert even larger fiscal challenges in the future. The notion of establishing budget triggers to constrain growth is not new and has been used in the past with varying degrees of success. Given that spending for mandatory programs is driven by underlying benefit and eligibility formulas, serious efforts to constrain spending would require substantive changes to current law. Such changes should consider program goals and objectives and be enacted as programs are created, reexamined, or reauthorized. While budget triggers certainly are neither a panacea nor a substitute for deliberate consideration by stakeholders and decision makers, they can help to prompt action and enhance fiscal responsibility. Ignoring significant growth in mandatory accounts is inconsistent with evaluation of programs and their costs. While we appreciate the concerns raised by budget experts, in our opinion, establishing budget triggers warrants serious consideration in order to constrain growth in mandatory spending programs. However, it is clear that how the triggers are designed must be carefully considered. For example, once widespread agreement on underlying public policy goals has been achieved, it needs to be decided whether a soft or hard response to a trigger—or a combination thereof— would be most appropriate. Also, it is important to consider the data upon which the trigger will hinge—future projections of historical data, growth as a percent of GDP, total growth, or another measure altogether. Moreover, this trigger concept might also be useful in examining tax expenditure growth. Calculating a normal range of uncertainty for a program could help avoid triggering an action prematurely or unnecessarily. In addition, it is important to strike an appropriate balance between responses that constrain spending or increase revenues. We recognize that automatic responses pose much more difficult trade-offs. Ensuring countercyclical effects are not undermined is of particular importance. In any case, recognizing the natural tension in balancing both long-term fiscal challenges and other public policy goals, each program needs to be considered individually to ensure that any responses triggered strike the appropriate balance between the long-term fiscal challenge and the program goals. Considering ways to increase transparency, oversight, and control of mandatory spending programs must be part of addressing the nation’s long-term fiscal challenges. To promote explicit scrutiny of significant growth in mandatory accounts, as mandatory spending programs are created, reexamined, or reauthorized, Congress should consider incorporating budget triggers that would signal the need for action. Further, it should determine whether in some cases it might be appropriate to consider automatically causing some action to be taken when the trigger is exceeded. Once a trigger is tripped, Congress could either accept or reject all or a portion of the response to the spending growth. We requested comments on a draft of this report from OMB; the Departments of Agriculture, Education, Health and Human Services, Labor; and the Railroad Retirement Board. OMB and the Departments of Education and Labor had no comments. The Departments of Agriculture, Health and Human Services, and the Railroad Retirement Board provided clarifying and/or technical comments, which we incorporated as appropriate. This report was prepared under the direction of Susan J. Irving, Director, Federal Budget Analysis, Strategic Issues, who can be reached at (202) 512- 9142 or irvings@gao.gov. Other key contributors are listed in appendix IV. Addressing growth in mandatory spending is an important but complicated matter that requires looking below the aggregate and into specific programs. Mandatory spending is governed by eligibility rules and benefit formulas, which means that funds are spent as required to meet the needs of all those who are eligible and wish to participate. Accordingly, spending in mandatory programs cannot be constrained through the application of simple caps/limits. Rather, it requires changes in the underlying benefit structure and design of programs. As a result, constraints of individual programs that look at the specific economic and other factors that drive spending are likely to be most effective. One idea to constrain growth in mandatory programs is to develop triggers that, when tripped, would cause some automatic cost-cutting or revenue- increasing response—such as changes in eligibility criteria, benefit formulas, or fees—automatically to go into effect unless Congress and the President act to make other changes. An alternative approach would replace such a “hard” response with a “soft” one such as requiring special consideration of a program or a proposal for action when the trigger’s threshhold is breached. Examples of soft responses include raising a point of order, requiring the administering agency to prepare a special report explaining why the trigger was breached, or submitting a proposal for reform. Soft responses may be helpful in alerting decision makers of potential problems but do not ensure that such action is taken. Especially in designing hard responses, careful consideration must be given to avoid counteracting the program’s goals and objectives. For example, a rise in the unemployment rate would by design increase outlays in federal unemployment insurance not only to provide assistance to the unemployed but also to stabilize the economy. If a trigger were established that resulted in a contractionary response, it could undermine these important goals and exacerbate the effects of unemployment on the economy. We selected seven mandatory budget accounts to examine in order to inform our thinking about budget trigger responses and the design issues that need to be considered. These seven accounts were selected because of their relatively large 5-year average differences between estimated and actual outlays. These accounts are the (1) Commodity Credit Corporation(2) Federal Direct Student Loan Program Account, (3) Grants to States for Medicaid, (4) Medicare Part A: Federal Hospital Insurance Trust Fund, (5) Medicare Part B: Federal Supplementary Medical Insurance Trust Fund, (6) Rail Industry Pension Fund, and (7) Unemployment Trust Fund. In this appendix, for each case study account we present contextual information such as the administering agency, program description, and source of funding. Also we provide the agency’s explanation of key differences between estimated and actual outlays and, as appropriate, other relevant information. Finally, where appropriate we present illustrative examples of hard responses that could be established to constrain spending. In some cases these illustrative examples involve revising currently existing triggers and their corresponding actions. In other cases new triggers and responses are presented. We do not specifically advocate any of these approaches as Congress would need to balance the program and national objectives sought with the long-term fiscal challenges facing our nation. The approaches we present are for illustrative purposes only to provide a sense of the types of trigger and resulting actions that could be established. The Commodity Credit Corporation (CCC) is a government-owned and government-operated entity that was created in 1933 to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution. For fiscal years 2000–2002 (under 1996 Farm Bill provisions), CCC provided corn-related subsidies primarily through two types of payments available to supplement farmers’ incomes: (1) production flexibility payments to historical producers of corn and (2) nonrecourse loans, which allow farmers to store production and use loan proceeds to meet cash flow needs without selling the crop. Ad hoc legislation provided additional payments in the form of market loss assistance payments to compensate producers for low prices. For fiscal years 2003–2004 (under 2002 Farm Bill provisions), CCC provided corn-related subsidies through three types of payments available to supplement farmers’ incomes: (1) direct payments to historical producers of corn; (2) countercyclical payments, which provide a safety net in the event of low crop prices; and (3) nonrecourse loans. CCC has an authorized capital stock of $100 million held by the United States and the authority to have outstanding borrowings of up to $30 billion at any one time. Funds are borrowed from the U.S. Treasury. Based on a 5-year average, estimated outlays for corn differed from actual outlays by about $1.9 billion per year, or 63.4 percent, in absolute value terms. However, the actual annual differences varied between an overestimate of $388 million and an underestimate of $7 billion. Table 2 presents the estimated and actual outlays associated with CCC’s corn program, by fiscal year. According to the Farm Service Agency, legislative action and economic changes were the primary reasons behind differences between estimated and actual outlays for CCC’s corn program during fiscal years 2000 through 2004. In general, weather and natural disasters are the key drivers of differences between estimated and actual outlays, which are highly sensitive to changes in the price of corn. Outlays increase when the corn price decreases. A 1 cent drop in the price of a bushel of corn can lead to about $85 million increase in countercyclical payments. Participation also affects costs. Farm program costs depend on market prices and farm production, which in turn are influenced by world weather, the condition of the general economy, the foreign and trade policies of the United States and other food-exporting nations, the rate of inflation, and the value of the dollar, among other variables. Detailed explanations are shown in table 3. The 2002 Farm Bill guaranteed historical producers of corn and other commodities a minimum price per bushel, known as a target price, which they can expect to earn. To constrain spending, one possible trigger could be when the target price exceeds the market price by some historically average percentage, the legislated target price could be reduced. However, to avoid price shocks to the industry and possible procyclical effects, the price reduction could be deferred to the following year. The Farm Bill also established a formula for fixed, direct payments to historical producers of corn and other commodities. To limit spending on this income-support program, one idea for a trigger could be to link direct payments to farm sector production prices. For example, if production prices drop by more than 3 percent, Congress could redefine the formula to be less generous. Alternatively, Congress could limit the guarantee of direct payments to current producers of corn rather than historical producers. CCC is a government-owned and government-operated entity that was created in 1933 to stabilize, support, and protect farm income and prices. CCC also helps maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution. Crop Disaster Assistance programs reimburse producers for qualifying losses to agricultural commodities (other than sugar cane or cotton seed) due to damaging weather or related conditions. The damages must be in excess of 35 percent of the established price of crops for lost production or 20 percent for lost quality. Crop disaster programs cover insured, uninsured, and noninsurable crops. The program has no set funding limitation, however, payments are limited to $80,000 per person, and producers with incomes greater than $2.5 million are ineligible. This crop disaster assistance program is not permanently authorized. CCC has an authorized capital stock of $100 million held by the United States and the authority to have outstanding borrowings of up to $30 billion at any one time. Funds are borrowed from the U.S. Treasury. Although Crop Disaster Assistance programs are provided through appropriations acts, the Department of Agriculture considers and applies funding for the programs in a manner similar to mandatory programs. According to an FSA official, funding is provided to all eligible applications for assistance by prorating available funding if necessary. The Office of Management and Budget (OMB) also considers crop disaster assistance programs to be mandatory in that all eligible applicants may receive benefits. Based on a 5-year average, estimated outlays for crop disaster assistance differed from actual outlays by about $1.2 billion per year in absolute value terms. However, the actual annual differences varied between $230 million and $1.9 billion. Table 4 presents the estimated and actual outlays associated with CCC’s crop disaster assistance programs, by fiscal year. According to OMB staff, it is not OMB’s policy to include an estimate for disaster assistance in the President’s budget. Instead, these programs are typically funded through subsequent legislation. Although OMB typically does not include an estimate for crop disaster assistance in the President’s budget, we have reported in the past that shifting the budget timing to an up-front recognition of emergency costs through reserves may promote a more comprehensive and transparent debate over federal budgetary priorities during the regular budget process. For example, we suggested that federal governmentwide emergency reserves could set aside budget authority in advance for expected yet unpredictable events as part of the annual resource-allocation process. Another approach would be to establish agency-specific reserve funds for those agencies that regularly respond to federal emergencies. Funds would be appropriated to these agencies on a contingent basis, meaning that certain agency-specific criteria would have to be met before the funds could be used. While these approaches are not of the trigger/response variety that is the subject of this report, they would help accomplish a goal of constraining spending if the emergency budget authority provided in advance is assumed to be within a constrained total budget authority. The Department of Education (Education) provides financial aid in part to increase access to college. Education’s first direct loans were made in the fourth quarter of fiscal year 1994. Through its William D. Ford Federal Direct Loan Program (FDLP), students and/or their parents borrow money directly from the federal government through the vocational, undergraduate, or graduate schools the students attend. As is the case under the Federal Family Education Loan Program (FFELP), or “guaranteed” student loan program, there are four types of direct loans. Stafford Loans—variable rate loans available to students. The federal government pays the interest on behalf of borrowers while the student is in school, during a 6-month grace period when the student first leaves school, and during statutory deferment periods related to borrower unemployment and economic hardship. Unsubsidized Stafford Loans—variable rate loans to students with the same terms as Stafford Loans except that the government does not pay interest costs during in-school, grace, and deferment periods. PLUS Loans—variable rate loans made to parents. The borrower pays all interest costs. Consolidation Loans—borrowers may combine multiple federal student loans into a single, fixed rate loan. The interest rate is based on the weighted average of the interest rates in effect on the loans being consolidated or a fixed percentage. Education finances FDLP through a combination of appropriations and borrowing from Treasury. Education receives permanent, indefinite budget authority for estimated subsidy costs—the amount expected not to be repaid by borrowers—of its loans. These costs are generally updated, or reestimated, annually. The portion of direct loans that Education predicts will ultimately be repaid by borrowers is financed by borrowing from Treasury and is not considered a cost to the government because it is expected to be returned to the government in future years. Based on a 5-year average, estimated outlays for direct student loans differed from actual outlays by about $2.6 billion per year, or 702 percent, in absolute value terms. However, the actual annual differences varied between an overestimate of $2.8 billion and an underestimate of $5.3 billion. A large component of these differences reflects the fact that initial estimates do not include reestimates of prior year costs, which are reflected in actual outlays. In addition, initial estimates reflect proposed policies, many of which were not enacted and so were not reflected in subsequent actual outlays. Table 5 presents the estimated and actual outlays associated with the federal direct student loan program, by fiscal year. Because FDLP is a relatively new program, it has a short history of repayment activity and little historical data are available. Accordingly, Education initially relied heavily on data from the guaranteed student loan program to develop estimates for most key cash flow assumptions in its FDLP cash flow model, which is used to estimate the subsidy cost of the program. Over the past few years, Education has incorporated FDLP data into many cash flow assumptions; as more data become available, Education plans to completely phase out the use of guaranteed loan data for FDLP assumptions. Drops in interest rates have been a key driver behind differences in estimated versus actual outlays. Not only are loans being paid off at lower rates than anticipated but the drop in rates has also led to a dramatic increase in consolidations (which are prepayments). Detailed explanations are shown in table 6. other things, increasing the amount of fees borrowers must pay to obtain a loan or increasing borrowers’ interest rate. For example, continued differences between estimated and actual outlays could be used as a trigger, resulting in higher origination fees or interest rates for new FDLP loans. In implementing such a trigger and response, Congress would need to consider whether FFELP borrowers should similarly be affected. Under current law, loans made to borrowers, unless otherwise specified, are to have the same terms, conditions, and benefits and be made available in the same amounts under both FDLP and FFELP. Medicaid is a health-financing program for eligible low-income individuals and families. Federal statute defines over 50 population groups that are potentially eligible for states’ programs. In general, eligibility is limited to low-income children, pregnant women, parents of dependent children, people with disabilities, and the elderly. Although Medicaid is one federal program, it consists of 56 distinct state-level programs—one for each state, territory, Puerto Rico, and the District of Columbia. Each of the states has a designated Medicaid agency that administers the program. In accordance with the Medicaid statute and within broad federal guidelines, each state establishes its own eligibility standards; determines the type, amount, duration, and scope of covered services; sets payment rates; and develops its administrative structure. The federal government matches state Medicaid spending for medical assistance according to a formula that compares each state’s average per capita income—a proxy reflecting the health of the state’s economy and its response to economic changes—to the national per capita income. Therefore, states with a high per capita income receive less federal funds than states with a low per capita income. As economic conditions improve or decline in a particular state, so does the amount of federal matching funds granted to that state. The federal share, known as the Federal Medical Assistance Percentage (FMAP), can range from 50 to 83 percent. States are required to describe the nature and scope of their programs in comprehensive written plans submitted to CMS—with federal funding for state Medicaid services contingent upon CMS approval of the plans. This approval hinges on whether CMS determines that state plans meet all applicable federal laws and regulations. Although the source of Medicaid funding is through an annual appropriation act, Medicaid is not considered a discretionary spending program. Because Medicaid is an entitlement created by the operation of law, if Congress fails to appropriate money necessary to fund payments and benefits, eligible recipients may seek legal recourse. In such case, necessary payments may be made through the indefinite judgment fund pursuant to 31 U.S.C. § 1304. Based on a 5-year average, estimated Medicaid outlays differed from actual outlays by about $4.2 billion per year, or 2.9 percent, in absolute value terms. Actual annual differences ranged from an underestimate of $5.1 billion to an overestimate of $6.3 billion. Table 7 presents the estimated and actual Medicaid outlays for fiscal years 2000 through 2004. Both legislative and technical factors led to differences in estimated and actual Medicaid outlays. For example, the Jobs and Growth Tax Relief Reconciliation Act of 2003, which temporarily changed federal matching rates for benefits and provided fiscal relief to states, affected estimated Medicaid outlays in both fiscal years 2003 and 2004. Technical factors included misestimates of medical assistance payments, administrative costs, vaccines for children, and collections. Also, there were a number of legislative proposals that were not adopted. It is not clear if economic factors also contributed to the differences, although it is likely so given the economic downturn that occurred during this time period. Changing economic conditions could have led to differences in the number of individuals eligible for and receiving benefits, and therefore total program outlays. According to CMS officials, Medicaid estimates are based primarily on state estimates and may be adjusted by CMS’ Office of the Actuary to reflect recent trends in how state estimates have changed over time or how they have compared with actual expenditures in recent years. Agency officials were unable to accurately identify and quantify the effects of any of these factors and explained that the difficulty lies with the variability of program structure across states. Each state is allowed the discretion to structure and modify its program, including the establishment of eligibility criteria and payment rates. Similarly, state legislative actions and economic conditions vary across the country and could have varying effects on program outlays. Consequently, aggregating state data into a single Medicaid figure would mask estimating inaccuracies and challenges since the negative effect in one might be offset by positive effect in another. In the event that the difference between estimated and actual spending is very large, CMS said it would then investigate and seek explanations from the states. Although CMS did not consider the differences evident throughout the 5-year period we reviewed to be large enough to prompt such an evaluation, they did provide some explanation behind misestimates as shown in table 8 below. Federal Hospital Insurance (HI) Trust Fund (Medicare Part A) The account funds the Medicare Part A program which partially covers the costs of, among other things, home health care, inpatient care in hospitals and skilled nursing facilities, and hospice care. Based on their work history, most U.S. citizens and permanent residents and their spouses are eligible for Medicare Part A if they are 65 years of age or older. Also, certain persons under 65 years old who are disabled or have end-stage renal disease are eligible for coverage. Enrollees or their spouses who have contributed to Medicare through payroll taxes for at least 10 years of employment are automatically enrolled at age 65 and need not pay premiums to receive coverage. Individuals who have not met this eligibility requirement may pay a monthly premium to purchase Part A coverage. The primary funding source for Medicare Part A comes from payroll taxes. Other relevant revenue sources include interest on investments in government securities held by the fund, income from taxation of Old Age, Survivors, and Disability Insurance (Social Security) benefits, and premiums collected from voluntary participants. Based on a 5-year average, estimated Medicare Part A outlays differed from actual outlays by about $5.6 billion per year, or 3.8 percent, in absolute value terms. Actual annual differences ranged from an underestimate of $4.3 billion to an overestimate of $15.9 billion. Table 9 presents the estimated and actual HI outlays for fiscal years 2000 through 2004. Both legislative and technical factors led to differences between estimated and actual HI outlays. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) led to greater-than- expected outlays in fiscal year 2004. Technical factors included difficulty in predicting the behavior of providers under new payment systems, misestimates of home health transfers to and from the Supplementary Medical Insurance (SMI) Trust Fund, and misestimates of service usage. Economic factors, specifically the hospital market basket, also contributed to differences. The hospital market basket is an input price index that represents the cost of the mix of goods and services that comprise routine, ancillary, and special-care unit inpatient hospital services. Detailed explanations of the differences are shown in table 10. MMA established a trigger with a soft response to constrain growth in Medicare; it requires the President to submit a proposal to Congress for action if the Medicare Trustees determine in 2 consecutive years that the general revenue share of Medicare is projected to exceed 45 percent during a 7-year projection period. To date, this threshold has not been breached and thus no response has been triggered. According to the 2005 Medicare Trustees’ report, the trigger is expected to be breached in 2012, which falls within the 7-year projection period that will be covered in the 2006 Medicare Trustees’ report. If the 45 percent threshold is projected to be breached again in the next consecutive 7-year projection period, the President will be required to propose legislation, within 15 days of submitting the fiscal year 2009 budget, to respond to the funding warning. Illustrative Trigger and Response Using the trigger of general revenue exceeding 45 percent in 2 consecutive years during a 7-year period, hard responses could also be developed. Possible responses are to adjust taxes, benefit formulas, or eligibility criteria. For example, Medicare payroll taxes could automatically be increased unless Congress took action to prevent the increase. Alternatively, reaching the trigger could cause automatic changes to benefit formulas or eligibility criteria, or a combination of benefit changes and tax increases. Of course congressional action could change the automatic response if it was deemed inappropriate at that time. Federal Supplementary Medical Insurance (SMI) TrustFund (Medicare Part B) This account, also known as Medicare Part B, partially covers the cost of doctors’ services, clinical laboratory services, outpatient hospital services, some physical and occupational therapy services, and some home health care. Eligibility requirements for Medicare Part B are similar to those for Part A. However, unlike for Medicare Part A, enrollment is voluntary. Enrollees must pay a monthly premium to receive Part B coverage. In 2005, premiums were $78.20 per month and the deductible was $110. Premium and deductible rates may change every year. Most Part B services are paid based on a fee schedule. Physicians, the largest Part B service type, are paid under the sustainable growth rate (SGR) system, which determines the increase in payments per service for the physician fee schedule for each year based on a statutory formula. Under the SGR system, actual physician-related spending is compared with target physician-related spending levels. If actual spending exceeds target spending, then future physician fee schedule updates are reduced. SMI is financed from general revenues (approximately 75 percent) and beneficiary premiums (approximately 25 percent). Based on a 5-year average, estimated Medicare Part B outlays differed from actual outlays by about $6.4 billion per year, or 6.1 percent, in absolute value terms. Actual annual differences ranged from an underestimate of $13.4 billion to an overestimate of $4.6 billion. Table 11 presents the estimated and actual SMI outlays by fiscal year. Congress has overridden the statutory updates for the 2003, 2004, and 2005 physician fee schedules. Although the SGR system called for negative updates in these years, Congress instead granted increases in physician payments per service. For several years the law was changed to specify higher spending for physicians after the budget estimates were already done. Consequently, this contributed to actual outlays that were higher than estimated. Both legislative and technical factors led to differences between estimated and actual SMI outlays. For example, the Consolidated Appropriations Resolution of 2003 and MMA led to greater-than-expected outlays for spending for physicians’ services. Technical factors included delayed implementation and difficulty in predicting the behavior of providers under a new outpatient hospital prospective payment system, misestimates of home health transfers to and from the HI fund, and misestimates of service usage. Similar to the HI fund, changes in the hospital market basket also contributed to differences. Detailed explanations of the differences are shown in table 12. Congress has established two triggers with soft and hard responses to constrain growth in SMI. First, under the SGR system, if actual physician- related spending exceeds target physician-related spending then future physician fee schedule updates are reduced. Because the actual versus target spending comparison is cumulative, future fee updates are reduced to lower future actual spending below future target spending until total cumulative actual spending is the same as total cumulative target spending. Although the SGR system was designed to encourage fiscal discipline, Congress has chosen to modify or override this constraint a number of times. We have previously reported on concerns about the SGR system and considerations for reform. Second, MMA established a trigger with a soft response; it requires the President to submit a proposal to Congress for action if the Medicare Trustees determine in 2 consecutive years that the general revenue share of Medicare is projected to exceed 45 percent during a 7-year projection period. To date, this threshold has not been breached and thus no response has been triggered. As mentioned in the Medicare Part A section of this appendix, the trigger is expected to be breached in 2012, which falls within the specified 7-year projection period that will be covered in the 2006 Medicare Trustees’ report. If the 45 percent threshold is projected to be breached again in the next consecutive 7-year projection period, the President will be required to propose legislation, within 15 days of submitting the fiscal year 2009 budget, to respond to the funding warning. Illustrative Trigger and Response Using the trigger of general revenue exceeding 45 percent in 2 consecutive years during a 7-year period, hard responses could also be developed. Possible responses are to adjust premiums, benefit formulas, or eligibility criteria. For example, Part B premiums could automatically be increased unless Congress took action to prevent the increase. Alternatively, reaching the trigger could cause automatic changes to benefit formulas or eligibility criteria, or a combination of benefit changes and premium increases. Of course congressional action could change the automatic response if it was deemed inappropriate at that time. Railroad Retirement Board (RRB) The RRB administers a Federal retirement-survivor benefit program for the nation’s railroad workers and their families, under the Railroad Retirement Act. In connection with this retirement program, the RRB has administrative responsibilities under the Social Security Act for certain benefit payments and railroad workers’ Medicare coverage. Under the Railroad Retirement Act, retirement and disability annuities are paid to railroad workers with at least 10 years of service, or 5 years if performed after 1995. Annuities are also payable to spouses and divorced spouses of retired workers and to widow(er)s, surviving divorced spouses, remarried widow(er)s, children, and parents of deceased railroad workers. Qualified railroad retirement beneficiaries are covered by Medicare in the same way as Social Security beneficiaries. Railroad retirement benefits are calculated under a two-tier formula. Tier I is based on combined railroad retirement and Social Security credits, using Social Security benefit formulas. Tier II is based on railroad service only and is similar to the defined benefit pensions paid over-and-above Social Security benefits in other industries. In addition, some annuitants may also be qualified for supplemental benefits and vested dual benefits. Cost-of- living adjustments on the Tier I portion of annuities are paid similarly to those for Social Security. However, the adjustment for the Tier II portion is limited to 32.5 percent of the previous year’s increase in the Consumer Price Index. Supplemental annuities and vested dual benefits are not subject to cost-of-living adjustments. Payroll taxes paid by railroad employers and their employees are the primary source of funding for the railroad retirement benefit program. Corresponding to the two-tier benefit structure, railroad retirement taxes are levied on a two-tier basis. Railroad retirement Tier I payroll taxes are coordinated with Social Security taxes so that employees and employers pay Tier I taxes at the same rate as Social Security taxes. In addition, both employees and employers pay Tier II taxes, which are used to finance railroad retirement benefit payments over-and-above Social Security equivalent levels. These Tier II taxes are based on the ratio of certain asset balances to the sum of benefit payments and administrative expenses. While the railroad retirement system has remained separate from the Social Security system, the two systems are closely coordinated with regard to earnings credits, benefit payments, and taxes. The financing of the two systems is linked through a financial interchange under which, in effect, the portion of railroad retirement annuities that is equivalent to Social Security benefits is coordinated with the Social Security system. The purpose of this financial coordination is to place the Social Security trust funds in the same position they would be in if railroad service were covered by the Social Security program instead of the railroad retirement program. Starting in fiscal year 2002, revenues in excess of benefit payments are invested to provide additional trust fund income. The National Railroad Retirement Investment Trust (NRRIT), established by the Railroad Retirement and Survivors’ Improvement Act of 2001, manages and invests railroad retirement assets. The trust is a tax-exempt entity independent from the federal government. Railroad retirement funds are invested in nongovernmental assets, as well as in governmental securities. Prior to the Act, investment of Railroad Retirement Account assets was limited to U.S. government securities. Additional trust fund income is derived from revenues from federal income taxes on railroad retirement benefits, and appropriations from general Treasury revenues provided after 1974 as part of a phase-out of certain vested dual benefits. Based on a 5-year average, estimated outlays from the Rail Industry Pension Fund differed from actual outlays by about $4.1 billion per year, or 125.7 percent, in absolute value terms. The actual annual differences between estimated and actual outlays varied between an overestimate of $77 million and an underestimate of about $17.9 billion. The majority of the underestimate was a result of legislation that resulted in funds being transferred out of the account and into a nongovernmental investment trust fund. Table 13 presents the estimated and actual outlays associated with the Rail Industry Pension Fund, by fiscal year. The discrepancies between estimated and actual outlays in fiscal years 2002 through 2004 can be attributed to the enactment of the Railroad Retirement and Survivors’ Improvement Act of 2001, which was signed into law on December 21, 2001. This legislation lowered eligibility requirements for annuitants and eliminated reductions that previously applied to annuities of 30-year employees retiring between ages 60 and 62. The law also lowered the minimum eligibility requirement to receive regular annuities from 10 to 5 years of service after 1995 and increased the Tier II amount paid to a widow(er) from 50 percent to 100 percent. Additionally, the maximum limit on monthly railroad retirement benefits was eliminated. The law reduced the Tier II tax rate on rail employers in 2002 and 2003, and in 2004 provided automatic Tier II tax rate adjustments for both employers and employees. Lastly, funds in excess of those needed for current payment of benefits and administrative expenses were transferred to the National Railroad Retirement Investment Trust. Agency officials indicated that the level of employment in the rail industry is the most difficult factor to predict when estimating revenue because it directly affects payroll tax income. Employment only affects estimates in the long term, not short term. When reporting budget estimates to OMB, the agency uses middle-range estimates that assume employment will decrease gradually over time. Additionally, financial interchanges of the estimated allocation of benefits between the Railroad Retirement Account and Social Security Equivalent Benefit Account make it difficult to estimate exact outlays as they are continually changing. A detailed explanation of the differences is shown in table 14. If actual outlays exceeded estimates by more than the historical average, Congress could reduce retirement benefits across the board. For example, if estimated outlays historically differed from actual outlays by a specified percent, increases in outlays above that specified percent could automatically result in an across-the-board increase in retirement contributions or a cut in retirement benefits. To determine an appropriate threshold, rail officials would need to look at long-term historical differences to minimize the effects of events such as the legislative change in fiscal years 2002 and 2003. Unemployment insurance is designed to serve as a “counter-cyclical” remedy to the effects of recessions by putting more dollars in the pockets of the labor force, thereby increasing the demand for goods and services and stabilizing the U.S. economy. The Unemployment Trust Fund (UTF) finances unemployment insurance— a joint federal-state program that provides temporary cash benefits to eligible workers who become unemployed through no fault of their own and helps to stabilize the economy in times of economic recession. Guided by federal law, unemployed workers must meet certain criteria set by their state in order to receive these benefits. Unemployment insurance is administered by state employees under state law. Extended benefits are paid during periods of high state unemployment. Extended benefits are financed one-half by state payroll taxes and one-half by the federal unemployment payroll tax. The federal tax also pays for the cost of federal and state administration of unemployment insurance, labor- market information programs, veterans’ employment services, and 97 percent of the costs of the employment service. States may receive repayable advances from the UTF when their balances in the fund are insufficient to pay benefits. Federal unemployment payroll taxes accumulate in three accounts: (1) the Employment Security Administration Account (ESAA), which covers both federal and state administrative costs; (2) the Extended Unemployment Compensation Account (EUCA), which covers the federal share of extended unemployment benefits and has been used to fund temporary extended unemployment compensation benefits; and (3) the Federal Unemployment Account (FUA), which funds loans to insolvent state accounts. There is a statutory ceiling on the size of each of these accounts, the amounts of which are calculated each September. The ceiling for the ESAA account is 40 percent of the appropriated amounts during the fiscal year for which the ceiling is being calculated. For the EUCA and FUA accounts, this ceiling is 0.5 percent of the total covered wages in the prior calendar year. The UTF is funded by employer contributions (payroll taxes) and benefit reimbursements from nonprofit entities and governmental units that are paid in lieu of payroll taxes. The UTF may receive repayable advances from the general fund of the Treasury when it has insufficient balances to make advances to states or to pay the federal share of extended benefits. The UTF invests its receipts in U.S. government securities and then draws on them when the government needs to pay unemployment benefits and/or cover administrative costs. In addition, the Treasury maintains a trust fund account for each state that it can use to build up reserves in times of economic stability. Forty-nine states have triggers that automatically raise state employer taxes when UTF balances fall below a specific level. States finance the costs of regular unemployment insurance benefits and their half of the permanent Extended Benefits Program with employer payroll taxes imposed on at least the first $7,000 paid annually to each employee. Based on a 5-year average, estimated outlays from the UTF differed from actual outlays by about $9.4 billion per year, or 29.6 percent, in absolute value terms. However, the actual annual differences varied between an overestimate of about $5 billion and an underestimate of about $22 billion. Table 15 presents the estimated and actual outlays associated with the unemployment program by fiscal year. Because the overall unemployment rate increased over the 5 fiscal years, actual UTF outlays also increased as would be expected. UTF outlays are highly sensitive to changes in the unemployment rate. For example, between 2000 and 2001 the 17.5 percent increase in the unemployment rate was associated with a 34.6 percent increase in actual UTF outlays. This relationship is best illustrated by referring to figure 8. Between 2001 and 2002, UTF outlays increased 81.6 percent in response to a 23.4 percent increase in the unemployment rate. In 2002, part of the outlay increase was due to legislation extending federally-funded unemployment insurance benefits through the Temporary Employment Compensation Act of 2002 (TEUC) which resulted in unanticipated UTF outlays. The unemployment rate continued to rise during this time as 130,000 workers were displaced after the events on September 11, 2001, and the economic recession persisted. Between 2002 and 2003, TEUC benefits were extended and the unemployment rate continued to increase but did so at a decreasing rate. The 3.4 percent increase in the unemployment rate and the subsequent extension of TEUC led to the 7.4 percent increase in UTF outlays. Between 2003 and 2004, the unemployment rate decreased by 8.3 percent and outlays decreased by about 22 percent. Table 16 presents the Department of Labor’s (Labor) explanation for differences between estimated and actual outlays. Currently, when funds accumulating in federal unemployment accounts reach statutorily set limits, a distribution of the “excess” funds from the UTF to individual states’ accounts in the U.S. Treasury is automatically triggered based on each state’s share of covered wages. These distributions are known as “Reed Distributions.” Congress can also legislatively trigger a special distribution as it did in March 2002, which provided $8 billion in distributions to all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands and extended UTF benefits up to an additional 13 weeks longer than the maximum 26 weeks previously allowed by most states. One potential option to constrain federal spending would be to increase the statutory cap on federal unemployment accounts, thus making it more difficult to trigger Reed Distributions to states. By making it more difficult to trip the trigger, funds could continue to build during economic prosperity and be available to states when truly needed to counter rising unemployment. A different alternative for constraining growth would be to establish a trigger using a measure of economic prosperity—such as GDP growth in a specified number of consecutive quarters. If this trigger was reached, federal unemployment taxes would automatically increase, allowing trust fund balances to rise. To avoid procyclical effects, these taxes could be automatically reduced again using periods of rising unemployment or recession as the trigger for that action. While the focus of this report is on budget triggers as they relate to selected case study accounts, we have included our analysis of aggregate receipts, outlays, and surplus/deficit measures to provide broader context. Findings related to our seven case study accounts and the reasons for differences between estimated and actual outlays are discussed in the body of this report. More detailed summaries of each account are included in appendix I. In the aggregate, original estimates of total mandatory spending were fairly close to actual results, however large discrepancies were evident at the account level. During fiscal years 2000 through 2004, estimated total mandatory outlays differed from actuals by no more than about 2 percent, or $24 billion. However at the account level, average estimated and actual outlays varied greatly. While the largest difference was in the Interest on the Public Debt account—a result of other changes—other accounts also showed significant changes between estimated and actual outlays. Alternatively, there are many mandatory accounts with virtually no differences between estimated and actual outlays. The variation among individual accounts was not apparent at the aggregate level because the combination of positive and negative differences offset each other. Figure 9 shows that total spending on mandatory programs was expected to rise throughout the 5-year period and that resulting outlays were just slightly higher than expected. Although aggregate estimates were close to actual estimates, the continued actual and forecasted growth in mandatory programs has raised concerns about the government’s long-term fiscal outlook. Addressing growth in mandatory spending is an important but complicated matter that requires looking below the aggregate and into specific programs. The unified budget deficit/surplus measures federal fiscal position, that is, the difference between total annual receipts and outlays. Not surprisingly, the relatively small differences between total estimated and actual mandatory outlays had a limited effect on the unified budget surplus/deficit. In most cases throughout fiscal years 2000 through 2004, the difference between estimated and actual mandatory outlays accounted for approximately 7 percent or less of the difference between the estimated and actual fiscal position. Despite the fact that mandatory outlays were close to expectations, surplus/deficit measures proved difficult to estimate throughout the 5-year period, primarily because of misestimates of federal receipts. During fiscal years 2000 through 2004, deficit/surplus projections were generally more optimistic than reality. Figure 10 illustrates the estimated and actual fiscal position (surplus/deficit) throughout the 5-year period. Although increasing surpluses were projected for the first three years followed by growing deficits, actual results show that the nation’s fiscal position in fact declined throughout the 5-year timeframe. In addition, projections for fiscal years 2003 and 2004 show that the deficit was expected to grow but not to the magnitude that ultimately resulted. The fiscal position represents the difference between total federal revenues and outlays in a given year. Although mandatory spending constitutes more than half of total federal spending, misestimates of the amount of mandatory spending did not contribute significantly to the differences between the predicted and actual fiscal position. According to the detailed receipt and outlay data shown in table 17, the mandatory outlay difference in most cases accounted for less than 7 percent of the difference between the estimated and actual fiscal position with one exception. In fiscal year 2001, the mandatory outlay estimating error had a larger than usual effect—approximately 29 percent—on the fiscal position estimating error. While this particular year stands out in the analysis, it is a reasonable result given that the total amount of error in surplus/deficit projections was much smaller—approximately 30 percent or $60 billion—compared with any other year during the 5-year period. For example, a $242 billion surplus was projected for 2002 when in fact the nation’s fiscal position changed from surplus to deficit, resulting in a $165 billion deficit for that year. This discrepancy represented a misestimate of approximately 168 percent. In both fiscal years 2001 and 2002, mandatory outlay estimates differed from actual outlays by approximately 2 percent. This relatively small difference accounted for over one quarter of the resulting error in the surplus projection for 2001 because the difference between estimated and actual receipts also was relatively small. It accounted for less than one-tenth of the total error in the fiscal position projection for 2002 because the difference between estimated and actual receipts was much larger. Effects similar to the latter occurred more frequently throughout the 5-year period, indicating that estimation errors in mandatory outlays had a limited effect on fiscal position. In contrast, revenue estimate inaccuracies proved to have a greater effect on projections of the nation’s fiscal position. Throughout the 5-year period, total estimated outlays differed from actual outlays by no more than 3 percent while total estimated receipts differed from actual receipts by up to 15 percent in absolute value terms. This suggests that revenue, rather than outlay estimates, led most significantly to the discrepancies in surplus/deficit projections. Figure 11 shows the total estimated and actual federal receipts in dollar terms for each year we reviewed. As mentioned earlier in this report, the greatest revenue estimating errors occurred in 2000, 2002, and 2003, which correlate with the years in which the fiscal position projections were the most inaccurate. For example, in fiscal year 2002, an approximate 2.6 percent underestimate in total outlays coupled with an approximate 15.4 percent overestimate of receipts translated into a large shift in fiscal position from surplus to deficit. Similar effects occurred in 2000 and 2003. As shown in table 18, the driving source of revenue misestimates in any given year varied, but individual and corporate income taxes often proved difficult to estimate. In addition to the individual named above, Christine Bonham, Assistant Director, as well as Carol Henn, Richard Krashevski, Leah Nash, Sheila Rajabiun, Paul Posner, and Stephanie Wade made key contributions to this report. | Prepared as part of GAO's basic statutory responsibility for monitoring the condition of the nation's finances, the objectives of this report were to (1) determine the feasibility of designing and using trigger mechanisms to constrain growth in mandatory spending programs and (2) provide an analysis of the factors that led to differences between estimated and actual outlays in seven mandatory budget accounts during fiscal years 2000 through 2004. One idea to constrain growth in mandatory programs is to develop program-specific triggers that, when tripped, prompt a response. A trigger could result in a "hard" or automatic response, unless Congress and the President acted to override or alter it. Alternatively, reaching a trigger could require a "soft" response, such as a report on the causes of the overage, development of a plan to address it, or an explicit and formal decision to accept or reject a proposed action or increase. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress may avert larger financial challenges in the future. However, both in establishing triggers and in designing the subsequent responses, the integrity of program goals needs to be preserved. In addition, tax expenditures operate like mandatory programs but do not compete in the annual appropriations process. The analysis GAO applied to spending in this report would also be useful in examining tax expenditures. The budget experts GAO consulted had mixed views of triggers. Proponents of triggers noted that mandatory spending is currently unconstrained and a mechanism that causes decision makers to at least periodically reevaluate spending is better than allowing spending to rise unchecked. Others, however, expressed considerable skepticism about the effectiveness of triggers; many felt they would either be circumvented or ignored. While GAO appreciates the views expressed by budget experts, in our opinion establishing budget triggers warrants consideration in efforts to constrain significant and largely unchecked growth in mandatory programs. However, recognizing the natural tension in balancing both long-term fiscal challenges and other public policy goals, each program needs to be considered individually to ensure that any responses triggered strike the appropriate balance between the long-term fiscal challenge and the program goals. To better understand growth in mandatory spending and thus inform GAO's thinking on triggers, for seven case study accounts GAO categorized the reasons provided by agencies for differences between estimated and actual outlays during a 5-year period as the result of legislative, economic, or technical changes. Out of 40 differences, subsequent legislation was the primary reason for 19, economic changes for 7, and technical changes for 13. In many cases, a combination of these factors caused the differences. |
The U.S. Army Corps of Engineers, made up of approximately 34,600 civilian and 650 military personnel, has both military and civil works missions. The Corps’ military mission includes managing and executing engineering, construction, and real estate programs for DOD components, other federal agencies, state and local governments, and foreign governments. The Corps also provides military support by managing and executing Army installation support programs and by developing and maintaining the capability to mobilize in response to national security emergencies. The Corps’ civil works program involves investigating, developing, and maintaining the nation’s water and related environmental resources; constructing and operating projects for navigation; developing hydroelectric power; and conserving fish and wildlife. The Corps is organized geographically into eight divisions in the United States and 41 subordinate districts throughout the United States, Asia, and Europe. The districts oversee project offices throughout the world. The Corps also has eight research laboratories and two data processing centers. Further, the Corps conducts business with numerous external customers, including the military departments and various federal government agencies. External customers require access to the Corps’ systems for such things as posting and retrieval of information for water management functions. The Corps’ Finance Center has centralized responsibility for issuing checks and electronic funds transfers for the various Corps sites and external customers. During fiscal year 2000, CEFMS made about $11 billion in disbursements for Corps (civil works and military fund) activities. The Corps acquired and owns the Corps of Engineers Enterprise Information System (CEEIS) wide area network, which supports multiple unclassified Corps systems, including its key financial management system, CEFMS. The CEEIS interconnects Corps sites worldwide, providing for the exchange of traffic between sites in support of engineering, financial management, E-mail, and real-time data collection. External customers access Corps systems via the Internet and DOD’s Unclassified (but Sensitive) Internet Protocol Router Network (NIPRNet) gateways at selected sites. CEFMS processes financial and other data at two data processing centers. Each Corps site maintains its own database and provides its financial data input to one of the two processing centers. Corps users enter data and update financial transactions in CEFMS via workstations at the various organizational elements. Our objective was to evaluate the design and test the effectiveness of selected general and application controls over CEFMS. Our work included assessing (1) the corrective actions taken by the Corps to address the weaknesses that we identified during our fiscal year 1999 general and application control review of CEFMS; and (2) the effectiveness of the Corps’ computer controls to help ensure the reliability, availability, and confidentiality of financial and sensitive data contained in CEFMS. We contracted with an independent public accounting firm, PricewaterhouseCoopers (PwC), LLP, to assist in the evaluation and testing of CEFMS computer controls. We determined the scope of our contractor’s audit work, monitored its progress, attended key meetings between PwC and Corps personnel, and reviewed the related working papers. PwC used our Federal Information System Controls Audit Manual (FISCAM) to guide the general controls testing. This testing included four of the six FISCAM general control areas: (1) access controls, (2) application software development and change control, (3) systems software, and (4) segregation of duties. PwC used a proprietary methodology tailored to CEFMS to evaluate and test application controls over selected CEFMS modules. The Army Audit Agency evaluated the two remaining FISCAM areas: entitywide security management and service continuity. Working with the Army Audit Agency for these two FISCAM areas, we analyzed DOD, Department of the Army, and Corps information assurance documents; interviewed key personnel to document responsibilities, actions, and plans for Corps-wide information security management, information technology, and operations management; and evaluated Corps security program elements against GAO, DOD, Army, and other federal criteria. The Army Audit Agency plans to issue a report on these two FISCAM areas in fiscal year 2002. Our fiscal year 2001 review also included a network vulnerability assessment of a critical path between two Corps network segments. During the course of our work, we communicated our findings to Corps officials, who informed us of the corrective actions they planned or had taken to address many of the weaknesses we identified. Our review was performed from January to October 2001 at the two Corps data processing centers; the Corps Finance Center; the CEFMS Development Center; and 3 of the 41 Corps districts. These districts were chosen because of the significance of their processing volumes. We also held interviews with Corps officials at the Corps Headquarters in Washington, D.C. Our work was performed in accordance with generally accepted government auditing standards. General controls—the structures, policies, and procedures that apply to an entity’s overall computer operations—establish the environment in which application systems and controls operate. An effective general controls environment would (1) ensure that an adequate computer security management program is in place; (2) protect data, files, and programs from unauthorized access, modification, and destruction; (3) limit and monitor access to programs and files that protect applications and control computer hardware; (4) prevent unauthorized changes to systems and applications software; (5) prevent any one individual from controlling key aspects of computer-related operations; (6) ensure the recovery of computer processing operations in case of a disaster or other unexpected interruption; and (7) ensure that only authorized individuals can gain network access to sensitive and critical agency data. Of the 75 recommendations that we made on general controls in our fiscal year 1999 audit, the Corps had completed action on 41 and had partially completed or was implementing action plans to correct the remaining 34. Among the actions taken, the Corps had (for example) reconfigured its network, including implementing firewalls and deploying intrusion detection systems; deleted certain unneeded/vulnerable services operating on CEFMS performed auditing on changes made to the CEFMS access control enforced monitoring of system log files on the CEFMS servers; formalized Corps policies and procedures for making and documenting CEFMS changes and for obtaining approvals on user acceptance tests resulting from software changes; and updated job descriptions at data centers to better address the concept of segregation of duties. Although the Corps made substantial progress in correcting vulnerabilities, continuing and newly identified vulnerabilities in general computer controls continue to impair the Corps’ ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. In addition to the results of our review, Corps records indicate that from October 2000 through June 2001 vulnerabilities in Corps systems resulted in several serious compromises. The numbers in table 1 reflect open recommendations on general controls, including both recommendations remaining from our fiscal year 1999 review and additional recommendations arising from our fiscal year 2001 review. The foundation of an entity’s security control structure is an entitywide program for security management, which should establish a framework for continually (1) assessing risk, (2) developing and implementing effective security procedures, and (3) monitoring and evaluating the effectiveness of security procedures. A well-designed entitywide security management program helps to ensure that security controls are adequate, properly implemented, and applied consistently across the entity and that responsibilities are clearly understood. In our May 1998 best practices guide on information security management at leading nonfederal organizations, we reported that leading organizations successfully managed their information security risks through an ongoing cycle of risk management activities. As we discussed in our fiscal year 1999 report, an underlying cause for the Corps’ computer control weaknesses was that it did not yet have an effective security management program. The lack of an effective security management program increases the risk that computer control weaknesses could exist and not be detected promptly so that losses or disruptions could be prevented. For fiscal year 1999, the Army Audit Agency identified four weaknesses in the Corps’ security management program and issued five recommendations to address the weaknesses. The Army Audit Agency reported that key elements of an entitywide security program were needed, including a more comprehensive program definition in an entitywide security plan, updated network accreditation and risk assessments, and complete and documented background investigations. Also, the Army Audit Agency reported that other key elements were immature, including assignment of security responsibilities, a formal incident response team, computer security training, and security policy assessment and compliance verification. Since our fiscal year 1999 audit, the Corps has taken several steps to define and develop an agencywide security program. It has established a central focal point for information assurance at Corps Headquarters, consisting of an information assurance program manager and staff reporting to the Architecture Branch of Information Technology Services under the chief information officer. The staff includes a coordinator for Corps security accreditation activities. A 5-year budget has been developed for Corps-wide investments in information security technologies and services, and several agencywide information assurance initiatives are planned, including public key infrastructure, risk assessment, and automated system vulnerability updates. The Corps has appointed information assurance managers and officers throughout its functional units and assigned them responsibility for implementing the Army’s security regulations. It has also identified training requirements for these and other positions. In addition, the Corps has established processes for notification and reporting on DOD’s information assurance vulnerability alerts and has begun updating system security accreditations under DOD’s Defense Information Technology Security Certification and Accreditation Program. These elements are necessary to meet federal guidance and DOD and Army requirements for protection of automated information systems. Although the Corps has identified and addressed some near-term security priorities, it has not yet developed a comprehensive management program to ensure that its information security policies and practices are fully defined, consistent, and continuously effective across all systems, facilities, and organizational levels. Specifically, the Corps has not yet developed a comprehensive information assurance program plan that ensures appropriate security posture and adequate security resources for all systems, facilities, and programs, and supports agency-level monitoring of progress toward security objectives; information security policy, plans, and procedures are incomplete in areas such as risk assessment, cyber incident management, and personnel security, and limited guidance has been provided to functional units for implementing policy and plans; current mechanisms for identifying system vulnerabilities and ensuring appropriate corrective actions are limited, and as a result, systems remain vulnerable to inappropriate access, inadequate physical security, and users with incomplete and missing background investigations; processes for monitoring and evaluating security measures throughout the Corps (such as command staff inspections, vulnerability assessments, and reviews of the effectiveness of corrective actions taken) have not been sufficiently frequent or rigorous to be fully effective in identifying security policy violations, system vulnerabilities, and weaknesses in operational controls; and an agencywide incident response capability has not been fully implemented in areas such as centralized incident tracking, follow-up, and evidence controls. The Army Audit Agency plans to issue a report in fiscal year 2002 providing additional discussion on these weaknesses. Access controls should be designed to limit or detect unauthorized access to computer programs, data, equipment, and facilities, so that these resources are protected from unauthorized modification, disclosure, loss, or impairment. Such controls include both logical access controls and physical security controls. Logical access controls involve the protection of data supporting critical operations from unauthorized access. Organizations can protect these data by requiring users to input unique user identifications, passwords, or other identifiers that are linked to predetermined access privileges and by providing a log of security events. Logical access controls prevent unauthorized user access to computing resources and restrict the access of legitimate users to the specific systems, programs, and files they need to conduct their work. Physical security controls include surveillance personnel and equipment, locks, guards, ID badges, alarms, and similar measures that limit access to the buildings and rooms where computer facilities and resources are housed, thus helping to safeguard them from intentional or unintentional loss or impairment. A key weakness in Corps’ controls was that it had not appropriately limited user access. Although the Corps developed a security audit script to assist database administrators (DBAs) in identifying security practices that are inconsistent with user management principles, we found instances of inappropriate user access and weaknesses in user management, including those described below. Weak password management. Sensitive CEFMS administrative-level accounts had passwords that could be easily guessed, which could allow unauthorized access to CEFMS data. Inadequate management of user IDs. CEFMS users were assigned sensitive administrative-level privileges that either could not be justified by the DBAs or were not needed to perform the users’ job functions. As a result, the risk is increased that CEFMS data could be compromised without detection. Inappropriate access privileges. All CEFMS users, regardless of their job functions, had access privileges to certain tables on their local databases that allowed them to make changes to CEFMS data outside the CEFMS application. As a result, the risk is increased that CEFMS users could make inappropriate changes to CEFMS data. Command line access. CEFMS users continued to have the ability to log in directly to the operating system, giving users the ability to execute many commands that are not necessary to access CEFMS, as well as the opportunity to take advantage of vulnerable programs, files, and directories. Further, since user commands were not audited, there was no method to identify whether users were attempting to issue unauthorized commands. Inadequate monitoring of audit logs. Audit logs were not used to detect and monitor security violations, thereby increasing the risk that violations could occur undetected. Informal procedures for access requests. Access request procedures for privileged or dial-in access to the CEFMS servers were not adequately enforced, thereby increasing the risk that employees without a legitimate or authorized need could gain such access. Weak passwords on Corps dial-in servers. Corps dial-in modems at one site (non-CEFMS) contained easily guessed usernames and passwords. Such access places Corps network assets at risk. Lack of monitoring of Web server activity. The Corps was not monitoring CEFMS Web server activity or reviewing and analyzing log files, thereby increasing the risk that attempted intrusion or potential degradation of service could go unnoticed. To protect the overall integrity and reliability of information systems, it is essential to control access to and modifications of system software. System software controls, which limit and monitor access to the powerful programs and sensitive files associated with computer operations, are important in providing reasonable assurance that access controls are not compromised and that the operating system will not be impaired. To protect system software, a standard computer control practice is to (1) configure system software to protect against security vulnerabilities, (2) periodically review sensitive software to identify potential security weaknesses, and (3) ensure that only authorized and fully tested system software is placed in operation. While the Corps had corrected many of the system software weaknesses that we identified in our fiscal year 1999 audit, we identified other weaknesses where the Corps was not adequately controlling system software. These weaknesses included the following. Unencrypted usernames and passwords over the network. Corps usernames and passwords continued to be sent unencrypted over the network. Consequently, an individual with physical access to a site’s local network could capture usernames and passwords and then use that information to gain unauthorized access to the database. The attacker might also be able to use this information to gain additional privileges on the local network. Ineffective authentication controls over Corps servers. Corps servers continued to allow unauthenticated connections, thereby increasing the risk that an attacker could gather information to gain further access to the system or that other DOD networks could be attacked via the Corps’ network. Lack of formal test plans and procedures for validating operating system upgrades. The Corps had no formal test plans and procedures to ensure system integrity after operating system software upgrades were performed, thereby increasing the risk that some processing functions might not operate properly after a system upgrade. Controls over the design, development, and modification of application software help to ensure that all programs and program modifications are properly authorized, tested, and approved before they are placed in operation and that access to and distribution of programs are carefully controlled. These controls also help prevent security features from being inadvertently or deliberately turned off, audit logs from being modified, and processing irregularities or malicious code from being introduced. Changes to application software programs were not adequately documented or controlled. Described below are some examples of the application change control weaknesses that we identified. Lack of documented test plans and results. The Corps did not formally document test plans and test results for CEFMS software changes, increasing the risk that developers might unknowingly introduce processing anomalies or make unauthorized changes. Informal Web server change management. At one data processing center, a Web server change management program was not documented or formalized, nor did the center have a lead Web administrator to coordinate changes. Also, the other data processing center did not have a current change control program for its Web server. Without a strong change management process, unauthorized changes could be made to the Web server application. Demonstration files on production Web servers. CEFMS production Web servers contained vendor demonstration files with known vulnerabilities that are easily exploitable, increasing the risk that an attacker could gain unauthorized access to CEFMS. A key control for safeguarding programs and data is to ensure that staff duties and responsibilities for authorizing, processing, recording, and reviewing data, as well as for initiating, modifying, migrating, and testing programs, are separated to reduce the risk that errors or fraud will occur and go undetected. Incompatible duties that should be segregated include application and system programming, production control, database administration, computer operations, and data security. Once policies and job descriptions supporting the principles of segregation of duties have been developed, it is important to ensure that adequate supervision is provided and adequate access controls are in place to ensure that employees perform only compatible functions. Although computer duties were generally properly segregated, we identified instances where controls did not enforce segregation of duties principles, as in the following examples. Lack of reviews and training regarding segregation of duties concepts. We found that training at the data processing centers did not address segregation of duties principles. If employees are not properly trained in segregation of duties principles, managers may find it difficult to hold employees accountable if they perform incompatible duties. Also, the data processing centers had not performed reviews to determine whether incompatible duties were appropriately segregated. Without periodically reviewing individuals’ roles and responsibilities, management cannot be assured that appropriate segregation of duties is being maintained. They may also find it difficult to hold employees accountable for using their access privileges to carry out inappropriate activity. Development staff given access to production systems. CEFMS developers had inappropriate access to the CEFMS production databases. We identified several instances in which developers had excessive privileges. Allowing application development staff access to the production environment increases the likelihood that unauthorized changes could be made to the production environment. An organization’s ability to accomplish its mission can be significantly affected if it loses the ability to process, retrieve, and protect information that is maintained electronically. For this reason, organizations should have established (1) procedures for protecting information resources and minimizing the risk of unplanned interruptions and (2) plans for recovering critical operations should interruptions occur. A contingency and disaster recovery plan specifies backup operations, emergency response, and postdisaster recovery procedures to ensure the availability of critical resources and facilitate the continuity of operations in an emergency. Such a plan addresses how an organization will deal with a full range of contingencies, from electrical power failures to catastrophic events such as earthquakes, floods, and fires. The plan also identifies essential business functions and ranks resources in order of criticality. To be most effective, a contingency plan should be periodically tested in disaster simulation exercises, and employees should be trained in and familiar with its use. For fiscal year 1999, the Army Audit Agency identified three control weaknesses related to service continuity and issued corresponding recommendations to address them. The agency reported that the continuity of operations plan for the CEEIS was out of date, and that periodic testing would be needed to identify planning and training deficiencies. It also found that backup tape storage facilities were too close to primary operations centers. Since the fiscal year 1999 audit, the Directorate of Corporate Information has assumed responsibility for development of service continuity plans for agencywide information systems. A program plan has been drafted for analyzing, defining, and coordinating continuity of operations for the CEEIS. In addition, the Corps is gathering information from functional units to develop a continuity of operations plan that would address the roles of CEFMS and CEEIS in headquarters emergency operations and disaster recovery. Nevertheless, the weaknesses noted from 1999 in the continuity plans and activities of Corps functional units remained unresolved. The Corps still lacks an overall continuity of operations plan for the CEEIS, and plans for its major processing centers were not yet developed or were incomplete and did not meet federal guidance. Furthermore, the draft program plan to establish a CEEIS continuity of operations plan did not identify the full set of activities required for effective management of this program or establish milestones and performance measures based on recognized federal directives and best practices. The Corps thus lacks effective mechanisms to track the CEEIS service continuity improvement efforts and ensure establishment of integrated plans. In addition, new weaknesses indicated that the Corps had not effectively managed this area of federal requirements across its functional units. CEFMS obtained interim approval to operate under the Corps’ system certification and accreditation process, without detailing the central role of CEEIS in CEFMS service continuity. The Corps’ Office of Internal Review found that at least 10 facilities that depend on CEEIS and CEFMS lacked continuity plans for their operations, and 10 more had outdated plans. For example, the Corps did not meet its schedule for obtaining Headquarters service continuity planning information from functional units such as the Directorate of Corporate Information, and it had not yet taken follow-up actions to address this delay to its program. Persistent weaknesses in service continuity testing are related to inadequacies in continuity of operations plans. No service continuity testing has been conducted for the CEEIS network or for CEFMS, which both lack viable continuity of operations plans. In addition, some existing continuity of operations plans for facilities that rely on CEEIS and CEFMS had not been tested, and no training programs were in place, to ensure that plans could be reliably executed. Finally, the Army Audit Agency’s fiscal year 1999 recommendation to relocate the CEEIS backup storage centers farther away from primary facilities had not been addressed. Corps officials told us, and these weaknesses confirm, that the Corps lacks a strong focal point for continuity of Corps business operations. Such a focal point is needed to provide agencywide guidance, coordination, integration, and oversight for CEFMS and CEEIS service continuity and disaster recovery planning and preparation. Agencywide management is required to ensure that individual site plans will operate effectively together and to verify that the Corps’ response to disruptions will be adequate to support its mission. The Army Audit Agency plans to issue a report in fiscal year 2002 providing further discussion on these weaknesses. Network security controls are key to ensuring that only authorized individuals can gain access to sensitive and critical agency data. These controls include a variety of tools, such as user IDs and passwords, that are intended to authenticate and allow authorized users access to the network. In addition, network controls should provide for safeguards to ensure that system software is configured to prevent users from bypassing network access controls or causing network failures. During our review, we performed preannounced network vulnerability testing, during which we were able to gain access to the Corps’ internal network and perform some probing of Corps systems. The access obtained allowed us to map the network, but it did not allow us to gain access to any of the CEFMS production systems. The Corps’ intrusion detection team detected our activity and blocked this access once we employed more intrusive techniques. Our review identified network security weaknesses that could allow unauthorized access to Corps systems; these weaknesses included the following: Weak logical access controls at the Finance Center. Logical access controls were not adequately implemented to prevent or detect unauthorized individuals with physical access to the facility from gathering sensitive information, such as user IDs and passwords. Extensive “trust” relationships. The Corps has established trust relationships between network segments to conduct Corps business (CEFMS and non-CEFMS related); however, additional restrictions could be implemented to more effectively control access. Inadequate restrictions on internal network traffic. The Corps’ security model does not employ the control capabilities of certain critical network components to restrict internal network traffic. Consequently, the risk is increased that users could potentially gain unauthorized access to Corps systems. Application controls relate directly to the individual computer programs that are used to perform transactions (such as recording journal entries in the general ledger). In an effective general controls environment, application controls help to ensure that transactions are valid, properly authorized, and completely and accurately processed and reported. Of the 18 recommendations that we made on application controls in our fiscal year 1999 audit, the Corps had completed action on 13 and had partially completed or was implementing action plans to correct 5. Among the actions taken, the Corps had (for example) required electronic signature on updates to the CEFMS access control changed the CEFMS database design to prevent the same user from paying, certifying, and authorizing certain disbursements and to prevent users from creating and certifying the same invoice for payment; and required weekly authorization of disbursing terminals by the Finance Center. Although the Corps made substantial progress in correcting vulnerabilities, continuing and newly identified vulnerabilities in application computer controls continue to impair the Corps’ ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. The numbers in table 2 reflect open recommendations on application controls, including both recommendations remaining from our fiscal year 1999 review and additional recommendations arising from our fiscal year 2001 review. Like general access controls, access controls for specific applications should be established to ensure that (1) only authorized transactions are entered into the application, (2) duties are properly segregated and individuals can be held accountable, and (3) modifications to user access permissions are authorized and audited. In some instances, proper authorization controls were not enforced, as in the following examples. User access permissions in CEFMS did not match authorized access request forms, thereby increasing the risk that a user could process CEFMS transactions that were not authorized or consistent with management’s intent. Electronic signature header records were still not being routinely reviewed and analyzed to detect whether individuals were performing incompatible duties associated with critical transactions; this increased the risk that unauthorized transactions would go undetected. CEFMS development personnel had user IDs allowing them to generate invoices at other locations, thereby increasing the risk of inappropriate activity. User transactions processed on the disbursing terminals were not subject to postpayment audits. This situation increases the risk that a malicious user could input fraudulent transactions without detection. For an application system to produce reliable results, the data input to the system must be valid and accurate. Input controls include data validation and editing to identify and correct erroneous data, automatic reporting of erroneous data, and review and reconciliation of output. CEFMS user manuals pertaining to the work management module do not reflect current information, including up-to-date input controls. The Corps has determined the manual to be obsolete and is performing a functional review. Outdated manuals increase the risk that employees may follow input procedures that are inadequate or improper. To identify users associated with certain types of transactions, CEFMS uses an electronic signature system. The Corps requires the use of the electronic signature system for CEFMS transactions that lead to an obligation, collection, or disbursement of government funds. The electronic signature system consists of a smartcard, smartcard reader, cryptographic module, and central database containing all system user IDs. The electronic signature system was designed to provide assurance that a document signed by an authorized person has not been altered. This assurance relies on Corps policy, which assumes that the electronic signature smartcard has only been used by the individual to whom it was issued. We previously reported that the Corps had not adequately used CEFMS electronic signature capabilities to help ensure data integrity for certain transactions. For the 35 percent of CEFMS functions for which electronic signature verification is required, alterations of data would be detected during transaction processing. However, for some sensitive functions, use of the electronic signature system was not required, including some functions that were financial transactions (such as general ledger journal authority). Such “unsigned” records could be added, modified, or deleted without detection. The Corps had not reevaluated the CEFMS functions to determine whether other sensitive transactions should require electronic signature. During the fiscal year 2001 audit, several instances were identified of CEFMS users sharing their CEFMS electronic signature smartcards with other Corps employees. One critical requirement in implementing the electronic signature system was that each smartcard be under the sole control of an individual smartcard holder. However, according to tests performed by the Army Audit Agency at one Corps site, card sharing had occurred. As a result, authentication controls were not effective to provide reasonable assurance that users’ electronic signatures are valid. Consequently, the Corps cannot ensure that its electronic signature system authenticates transactions and mitigates other computer control weaknesses identified in CEFMS. To help maintain the integrity and security of CEFMS, the Corps issued a memorandum on January 17, 2002, reinforcing the need to comply with Army and Corps policies that prohibit sharing of electronic signature cards and passwords. The Army Audit Agency is continuing to review the effectiveness of authentication controls over CEFMS electronic signature card users. The agency plans to issue a separate report to Corps management during fiscal year 2002. Information system general and application controls are critical to the Corps’ ability to manage its computer security and to ensure the reliability, confidentiality, and availability of its financial and sensitive data. While the Corps has made substantial progress in resolving many of the fiscal year 1999 weaknesses that we identified and has taken other steps to improve security, continuing and newly identified weaknesses were identified in the Corps’ information system control environment. Specifically, at the general controls level, the Corps had not adequately (1) limited user access; (2) developed adequate system software controls to protect programs and sensitive files; (3) documented software changes; (4) segregated incompatible duties; (5) addressed service continuity needs; and (6) secured network access. At the application control level, the Corps had not maintained current and accurate CEFMS access authorizations and maintained CEFMS current user manuals. The weaknesses that we identified at the two data processing centers and other sites placed the Corps’ computer resources, programs, and files at risk from inappropriate disclosure of financial and sensitive data and programs, modification of data, misuse of or damage to computer resources, or disruption of critical operations. A primary reason for the Corps’ information system control weaknesses was that it had not yet fully developed and implemented a comprehensive security management program. A comprehensive program for computer security management is essential for achieving an effective general and application controls environment. Effective implementation of such a program provides for (1) periodically assessing risks, (2) implementing effective controls for restricting access based on job requirements and actively reviewing access activities, (3) communicating the established policies and controls to those who are responsible for their implementation, and (4) evaluating the effectiveness of policies and controls to ensure that they remain appropriate and accomplish their intended purpose. In our March 15, 2002, “Limited Official Use Only” report, we recommended that you instruct the chief information officer and the deputy chief of staff for resource management to implement corrective actions to resolve the general and application computer control weaknesses that we identified in that report. In its report on the Corps’ entitywide security management and service continuity, planned for fiscal year 2002, the Army Audit Agency plans to address recommendations in these areas. In providing written comments on a draft of this report, the commanding general of the U.S. Army Corps of Engineers agreed with our findings and recommendations and stated that the numerous working meetings concerning the information security weaknesses that we identified will help expedite their corrective actions. His comments are reprinted in appendix I of this report. The commanding general also stated that the Corps has already completed corrective action on 11 of the open fiscal year 1999 and the new fiscal year 2001 recommendations. The Corps has developed an action plan to correct all but 12 of the remaining recommendations by September 30, 2002, and stated that these 12 recommendations would be completed by fiscal year 2003 or beyond. We are sending copies of this report to the Senate Committee on Armed Services; the Senate Committee on Governmental Affairs; the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform; the House Armed Services Committee; the under secretary of defense (comptroller/chief financial officer); the assistant secretary of defense (command, control, communications & intelligence); the deputy inspector general, Department of Defense; the assistant secretary of the army (financial management and comptroller); the director of information systems for command, control, communication, and computers; army auditor general; the deputy chief of staff operations and plans; the deputy chief of staff for intelligence; and the commander, U.S. Army Intelligence and Security Command. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-3317. Key contributors to this assignment were Lon Chin, Barbara Collier, Edward M. Glagola, Jr., David Hayes, Harold Lewis, Paula Moore, Duc Ngo, Eugene Stevens, Crawford L. Thompson, and Jenniffer F. Wilson. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | GAO tested selected general and application controls of the Corps of Engineers Financial Management System (CEFMS). The Corps relies on CEFMS to perform key financial management functions supporting the Corps' military and civil works missions. The Corps has made substantial progress in improving computer controls at each of its data processing centers and other Corps sites. The Corps had completed action on 54 of GAO's 93 previous recommendations and partially completed or had action plans to correct the remainder. During the current review, nine new weaknesses were identified and corrected. Nevertheless, continuing and newly identified vulnerabilities involving general and application computer controls continue to impair the Corps' ability to ensure the reliability, confidentiality, and availability of financial and sensitive data. Such vulnerabilities increase risks to other Department of Defense networks and systems to which the Corps' network is linked. Weaknesses in general controls impaired the Corps' ability to ensure that (1) computer risks are adequately assessed, and security policies and procedures within the organization are effective and consistent with overall organizational policies and procedures; (2) users have only the access needed to perform their duties; (3) system software changes are properly documented before being placed in operation; (4) test plans and results for application changes are formally documented; (5) duties and responsibilities are adequately segregated; (6) critical applications are properly restored in the case of a disaster or interruption; and (7) the Corps has adequately protected its network from unauthorized traffic. Application control weaknesses impaired the Corps' ability to ensure that (1) current and accurate CEFMS access authorizations were maintained, (2) user manuals reflect the current CEFMS environment, and (3) the Corps is effectively using electronic signature capabilities. |
Various environmental statutes, including CERCLA and RCRA, govern the reporting and cleanup of hazardous substances and hazardous waste at DOD sites. Specific provisions in these laws establish requirements for addressing hazardous waste cleanup or management. Key aspects of these requirements for federal facilities are described below: Comprehensive Environmental Response, Compensation, and Liability Act. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980 was passed to give the federal government the authority to respond to actual and threatened releases of hazardous substances, pollutants, and contaminants that may endanger public health and the environment. The EPA program under CERCLA is better known as “Superfund” because Congress established a large trust fund that is used to pay for, among other things, remedial actions at nonfederal sites on the NPL. Federal agencies are prohibited from using the Superfund trust fund to finance their cleanups and must, instead, use their own or other appropriations. Figure 2 depicts the number of NPL sites listed by EPA as of November 2008, which totals 1,587 sites. Of these, 140 were DOD NPL sites, representing the majority of federal facility sites on the NPL. According to EPA’s 2007 annual report on Superfund, more than 75 percent of all sites on the NPL—both federal and private—were listed before 1991. Since fiscal year 2000, EPA has added five DOD sites to the NPL. CERCLA does not establish regulatory standards for the cleanup of specific substances, but requires that long-term cleanups comply with applicable or relevant, and appropriate requirements. These may include a host of federal and state standards that generally regulate exposure to contaminants. The National Oil and Hazardous Substances Pollution Contingency Plan (NCP) outlines procedures and standards for implementing the Superfund program. The NCP designates DOD as the lead agency at defense sites, though as described below, it must carry out its responsibilities consistent with EPA’s oversight role under Section 120 of CERCLA, including EPA’s final authority to select a remedial action if it disagrees with DOD regarding the remedy to be selected. In 1986, the Superfund Amendments and Reauthorization Act (SARA) added provisions to CERCLA specifically governing the cleanup of federal facilities. Under Section 120 of CERCLA, as amended, EPA must take steps that assure completion of a preliminary site assessment by the responsible agency for each site in the Federal Agency Hazardous Waste Compliance Docket. This preliminary assessment is reviewed by EPA, together with additional information, to determine whether the site poses little or no threat to human health and the environment or requires further investigation or assessment for potential proposal to the NPL. SARA also added Section 211 of CERCLA, which established DOD’s Defense Environmental Restoration Program providing legal authority governing cleanup activities at DOD installations and properties. CERCLA Section 120 also establishes specific requirements governing IAGs between EPA and federal agencies. The contents of the IAGs must include at least the following three items: (1) a review of the alternative remedies considered and the selection of the remedy, known as a remedial action; (2) the schedule for completing the remedial action; and (3) arrangements for long-term operations and maintenance at the site. DOD and EPA are required to enter into an IAG within 180 days of the completion of EPA’s review of the remedial investigation and feasibility study at a site. SARA’s legislative history explains that, while the law already established that federal agencies are subject to and must comply with CERCLA, the addition of Section 120 provides the public, states, and EPA increased authority and a greater role in assuring the problems of hazardous substance releases at federal facilities are dealt with by expeditious and appropriate response actions. The relevant congressional conference committee report establishes that IAGs provide a mechanism for (1) EPA to independently evaluate the other federal agency’s selected cleanup remedy, and (2) states and citizens to enforce federal agency cleanup obligations, memorialized in IAGs, in court. Specifically, the report states that while EPA and the other federal agency share remedy selection responsibilities, EPA has the additional responsibility to make an independent determination that the selected remedial action is consistent with the NCP and is the most appropriate remedial action for the affected facility. The report also observes that IAGs are enforceable documents just as administrative orders under RCRA and, as such, are subject to SARA’s citizen suit and penalties provisions. Thus, penalties can be assessed against federal agencies for violating terms of agreements with EPA. However, at sites without IAGs, EPA has only a limited number of enforcement tools to use in compelling compliance by a recalcitrant agency; similarly, states and citizens also lack a mechanism to enforce CERCLA. Resource Conservation and Recovery Act. In 1976, Congress passed the Resource Conservation and Recovery Act (RCRA) giving EPA the authority to regulate the generation, transportation, treatment, storage, and disposal of hazardous waste. Under RCRA, EPA may authorize states to carry out many of the functions of the statute in lieu of EPA under a state’s hazardous waste programs and laws. Almost all states are authorized to implement some portion of the RCRA program. Forty-eight states are currently authorized to implement the RCRA base program to manage hazardous waste treatment, storage, and disposal. (Only Alaska and Iowa are not authorized to implement the RCRA base program.) Forty- three states are authorized to implement the RCRA corrective action program which expands a state’s RCRA authority to include managing the cleanup of releases of hazardous waste and hazardous constituents. EPA has a policy to defer sites, which are being managed under RCRA, from placement on the NPL, known as the RCRA deferral policy. Where this policy is applied, cleanup proceeds under RCRA, generally through an authorized state corrective action program, rather than CERCLA. EPA regions may defer a federal facility site to RCRA even if the site is eligible for the NPL. In 1996, Congress amended CERCLA to authorize EPA to consider non-CERCLA cleanup authorities when making a listing determination for federal facility sites if the site is already subject to an approved federal or state cleanup plan. According to EPA policy, the criteria to defer a federal facility site from the NPL to RCRA are: (1) the CERCLA site is currently being addressed by RCRA Subtitle C corrective action authorities under an existing enforceable order or permit containing corrective action provisions; (2) the response under RCRA is progressing adequately; and (3) the state and community support deferral of NPL listing. According to EPA, deferral from one program to another is often the most efficient and desirable way to address overlapping requirements, and deferrals to RCRA may free CERCLA oversight resources for use in situations where another authority is unavailable. In these instances, state agencies or another regulatory authority, rather than EPA, oversee the cleanup of hazardous substance releases. Other non-CERCLA cleanup authorities EPA considers in deciding whether to list a site include state cleanup programs (often referred to as voluntary cleanup programs) and DOD’s environmental response program. See appendix II for a summary of these cleanup programs. The NCP provides the methods and criteria for carrying out site discovery, assessment, and cleanup activities under CERCLA. Figure 3 depicts the process by which EPA and federal agencies assess a site for inclusion on the NPL and address contamination at federal NPL sites. The CERCLA cleanup process is made up of a series of steps, during which specific activities take place or decisions are made. The key steps in this process are included in figure 3. Site discovery. When a federal agency identifies an actual or suspected release or threatened release to the environment on a federal site, it notifies EPA, which then lists the site on its Federal Agency Hazardous Waste Compliance Docket. The docket is a listing of all federal facilities that have reported hazardous waste activities under three provisions of RCRA or one provision of CERCLA. RCRA and CERCLA require federal agencies to submit to EPA information on their facilities that generate, transport, store, or dispose of hazardous waste or that have had some type of hazardous substance release or spill. EPA updates the docket periodically. Preliminary assessment. The lead agency (DOD, in this case) conducts a preliminary assessment of the site by reviewing existing information, such as facility records, to determine whether hazardous substance contamination is present and poses a potential threat to public health or the environment. EPA regions review preliminary assessments to determine whether the information is sufficient to assess the likelihood of a hazardous substance release, a contamination pathway, and potential receptors. EPA regions are encouraged to complete their review of preliminary assessments of federal facility sites listed in EPA’s CERCLA database within 18 months of the date the site was listed on the federal docket. EPA may determine the site does not pose a significant threat to human health or the environment and no further action is required. If the preliminary assessment indicates that a long-term response may be needed, EPA may request that DOD perform a site inspection to gather more detailed information. Site inspection. The lead agency (DOD, in this case) samples soil, groundwater, surface water, and sediment, as appropriate, and analyzes the results to prepare a report that describes the contaminants at the site, past waste handling practices, migration pathways for contaminants, and receptors at or near the site. EPA reviews the site inspection report and, if it determines the release poses no significant threat, EPA may eliminate it from further consideration. If EPA determines that hazardous substances, pollutants, or contaminants have been released at the site, EPA will use the information collected during the preliminary assessment and site inspection to calculate a preliminary HRS score. HRS scoring. If EPA determines that a significant hazardous substance release has occurred, the EPA region prepares an HRS scoring package. EPA’s HRS assesses the potential of a release to threaten human health or the environment by assigning a value to factors related to the release such as (1) the likelihood that a hazardous release has occurred; (2) the characteristics of the waste, such as toxicity and the amount; and (3) people or sensitive environments affected by the release. National Priorities List. If the release scores an HRS score of 28.50 or higher, EPA determines whether to propose the site for placement on the NPL. CERCLA requires EPA to update the NPL at least once a year. Governor’s concurrence. Before placing a site on the NPL, the EPA Regional Administrator sends a written inquiry to the governor seeking a written response from the state addressing whether it will support a listing decision. According to EPA regional officials, EPA usually contacts the governor before calculating the HRS score due to the high cost and length of time required to prepare a scoring package. If EPA calculates an HRS score of 28.50 or higher and the governor agrees with EPA to list the site, the site is eligible for inclusion on the NPL. However, where the governor does not support listing, but the EPA region firmly believes listing is necessary, a process, involving OMB for federal facilities, is followed before a listing decision is made. Following the decision to place a site on the NPL, several steps lead to the selection of a cleanup remedy and its long-term operation and maintenance. These steps are described below: Remedial investigation and feasibility study. Within 6 months after EPA places a site on the NPL, the lead agency (DOD, in this case) is required to begin a remedial investigation and feasibility study to assess the nature and extent of the contamination. The remedial investigation and feasibility study process includes the collection of data on site conditions, waste characteristics, and risks to human health and the environment; the development of remedial alternatives; and testing and analysis of alternative cleanup methods to evaluate their potential effectiveness and relative cost. EPA, and frequently the state, provide oversight during the remedial investigation and feasibility study and the development of a proposed plan, which outlines a preferred cleanup alternative. After a public comment period on the proposed plan, EPA and the federal facility sign a record of decision that documents the selected remedial action cleanup objectives, the technologies to be used during cleanup, and the analysis supporting the remedy selection. Interagency agreement. Within 6 months of EPA’s review of DOD’s remedial investigation and feasibility study, CERCLA, as amended, requires that DOD enter into an IAG with EPA for the expeditious completion of all remedial action at the facility. (EPA’s policy however, is for federal facilities to enter into an IAG after EPA places the site on the NPL.) The IAG is an enforceable document that must contain, at a minimum, three provisions: (1) a review of remedial alternatives and the selection of the remedy by DOD and EPA, or remedy selection by EPA if agreement is not reached; (2) schedules for completion of each remedy; and (3) arrangements for the long-term operation and maintenance of the facility. Remedial design and remedial action. During the remedial design and remedial action process, the lead agency (DOD, in this case) develops and implements a permanent remedy on the site as outlined in the record of decision and IAG. Monitoring. Long-term monitoring occurs at every site following construction of the remedial action. This includes the collection and analysis of data related to chemical, physical, and biological characteristics at the site to determine whether the selected remedy meets CERCLA objectives to protect human health and the environment. For NPL or non-NPL sites where hazardous substances, pollutants, or contaminants were left in place above levels that do not allow for unlimited use and unrestricted exposure, every 5 years following the initiation of the remedy, the lead agency (DOD, in this case) must review its sites. The purpose of a 5-year review, similar to long-term monitoring, is to assure that the remedy continues to meet the requirements contained in the record of decision and is protective of human health and the environment. Federal Facility Compliance Act. The Federal Facility Compliance Act of 1992, which amended RCRA, authorizes EPA to order the cleanup of contaminated sites by initiating administrative enforcement actions against a federal agency under RCRA, including the imposition of fines and penalties. The act authorizes EPA to initiate administrative enforcement actions against federal agencies in the same manner and under the same circumstances as actions would be initiated against a person. Enforcement. Several factors hinder the enforcement of cleanup requirements at federal facilities. DOJ has taken the position that EPA may not sue another federal agency to enforce cleanup requirements. EPA may not issue cleanup orders under CERCLA to other federal agencies without DOJ’s concurrence. EPA may issue cleanup orders to other federal agencies under RCRA and the Safe Drinking Water Act, but not all RCRA orders can provide for administrative penalties. IAGs also generally contain administrative penalty provisions. Third parties, such as states and citizens groups, may sue to enforce IAGs and administrative orders under the “citizen suit” and other public participation provisions of CERCLA, RCRA, and Safe Drinking Water Act, but such litigation can be time consuming. While EPA oversees and evaluates DOD’s preliminary assessments of all DOD sites suspected of having a hazardous release, the agency has little to no oversight of the cleanup of most of these sites because most are not on the NPL. EPA reviews DOD sites to determine whether to propose placement on the NPL. However, only 140 of the 985 current DOD sites with hazardous waste appear on the NPL. EPA and DOD have not finalized IAGs for the remaining 11 sites, which impedes EPA’s ability to enforce cleanup, such as approving detailed cleanup schedules and applying administrative penalties. EPA only recently began using enforcement action at DOD NPL sites where an IAG is not in place. State agencies, rather than EPA, oversee the cleanup of hazardous waste at most DOD sites. DOD performs preliminary assessments of all federal DOD sites on the Federal Agency Hazardous Waste Compliance Docket. EPA regions review the assessments to determine whether releases pose a threat to human health and the environment and if so, whether hazardous substances are being released into the environment. DOD’s preliminary assessments are based on readily available and historical data of suspected releases on DOD sites. DOD reports the results of preliminary assessments to EPA, which often requests additional information such as data on site geography, prior activities at the site, and the source and destination of the hazardous release. According to EPA guidance, EPA regions should complete their review of preliminary assessments within 18 months of when the site was listed on the federal docket; however, EPA officials from two regions told us that DOD may take 2 to 3 years to complete a preliminary assessment because EPA does not have an independent authority under CERCLA to enforce a time line for completion of the preliminary assessment. Based on their review of the preliminary assessment, EPA regional officials may determine that no further action is needed at the site or request that DOD perform a more comprehensive site inspection by sampling groundwater and other media on site. Following DOD’s investigation, EPA regional officials may: determine that no further action is needed at the site; defer the site to another regulatory authority, such as a state agency, for cleanup; or begin the process to propose the site for placement on the NPL. Of the 985 DOD sites contaminated with hazardous substances, EPA placed 140 sites—about 15 percent—on the NPL; the remaining 845 sites are generally overseen by a cleanup authority other than EPA. Sites on the NPL are considered among the most dangerous of all hazardous substance sites, based on the evaluation criteria used by EPA. EPA may propose to list sites that (1) have an HRS score of 28.50 or higher; (2) a state designates as its top priority, regardless of the HRS score; or (3) are subject to a health advisory issued by the Agency for Toxic Substances and Disease Registry and meet certain other criteria. In practice, however, few sites meet these criteria. Further, even if a site is eligible for placement on the NPL based on the HRS score, EPA may choose to defer the site to RCRA. As we discuss later in this report, our review of non-NPL DOD sites in four EPA regions demonstrated that available data supporting these decisions is limited. EPA regional officials were unable to provide a rationale for EPA’s decision to not list almost one-half of the 389 sites that we reviewed because site file documentation was inconclusive or missing. For the remaining sites, EPA did not propose listing because officials determined the sites did not satisfy the criteria to score a high HRS score or deferred them to another regulatory authority. Although EPA has IAGs in place with DOD for 129 of the 140 DOD sites on the NPL, IAGs have not been finalized at the remaining 11 sites remaining. According to an EPA headquarters official, EPA is generally satisfied with the cleanup of DOD NPL sites where DOD has signed IAGs. EPA has encountered few problems at these sites, the EPA official said, because DOD is held accountable for compliance with the provisions of the IAGs and if differences arise, the agreements provide EPA with an enforceable process to address the issue. EPA and DOD have not finalized IAGs for the remaining 11 DOD NPL sites, however. As a result, DOD has been cleaning up 11 sites without IAGs, inhibiting EPA’s ability to seek enforcement actions that compel attention to schedules and milestones. Under CERCLA, as amended, EPA and DOD must enter into negotiated IAGs for the expeditious completion of all necessary remedial action at each DOD site on the NPL. IAGs must include, at a minimum, the alternative remedies and the selected remedy, a schedule for completing the remedial action, and arrangements for long-term operation and maintenance of the facility. According to EPA, the schedule is enforceable and often found in a site management plan that documents and provides for re-evaluation of schedules and priorities for cleanup. In addition, EPA officials indicated that IAGs generally also include consultative provisions that document time frames for review and comment on documents by each agency as well as administrative penalties for DOD’s failure to comply with the agreed-upon cleanup tasks and milestones. The IAG therefore documents EPA’s expectations of DOD, and provides for administrative penalties against the department when it does not comply with the activities agreed to in the document. Without the IAG, EPA does not have the needed criteria, or a foundation upon which an enforcement action may be taken, and has limited ability to sanction DOD without going to court, which DOJ does not allow it to do. The 11 DOD NPL sites—2 Army, 2 Navy, and 7 Air Force facilities—were placed on the NPL at least a decade ago, between 1994 and 1999, except for 1 of the Air Force sites, which was listed in 1983. As of early March 2009, however, DOD has not finalized IAGs for any of these sites. In its most recent report to Congress for fiscal year 2007, EPA indicated the number of NPL sites with IAGs and facilities where EPA had issued enforcement orders. However, EPA’s report did not clearly indicate that there were 11 DOD NPL sites without IAGs and the reasons why. There is a long history of EPA and DOD efforts to negotiate IAGs, beginning in 1988. Key actions taken by these agencies are listed in table 1. Although CERCLA requires that federal agencies enter into IAGs with EPA to govern the cleanup of NPL sites within 180 days of EPA’s review of the remedial investigation and feasibility study, DOD officials told us they have not finalized IAGs for 11 NPL sites because DOD disagreed with some of the terms of the provisions contained in the agreements. DOD also indicated they feel that EPA has adequate authority through its remedy selection process and that the IAG serves primarily as an administrative roadmap. Although the Defense Environmental Restoration Program statute requires DOD to take actions that provide EPA with adequate opportunity to review and comment at key phases of cleanup, there are no formal ramifications when DOD does not comply. Without an IAG, EPA lacks a documentation roadmap that demonstrates review and comment on key decisions. An IAG would identify areas of concern at a site and the process being used to address them. At DOD NPL sites without IAGs, such as at Langley Air Force Base in Maryland, DOD did not obtain EPA concurrence before signing a unilateral record of decision that identifies the remedial action. As a result, according to EPA, the agency cannot confirm whether all areas of contamination have been identified or whether they are being addressed properly. In 1988 and supplemented in 1999 and 2003, DOD and EPA developed model language for specific provisions representing the most contentious issues encountered in earlier negotiations. Although DOD agreed to the model language, it has disagreed with some of the specific terms contained in the provisions of agreements based on these models, such as those that, in DOD’s opinion, conflict with or go beyond CERCLA or its regulatory requirements. DOD officials also stated that EPA has been unwilling to negotiate the terms of these provisions with DOD. Although EPA has some oversight of the cleanup of NPL sites where DOD has not entered into an IAG, EPA officials told us the agency has only limited ability to carry out cleanup enforcement actions at federal facilities. For example, at sites where DOD has entered into an IAG, EPA has the authority to approve and modify a sites’ sampling plan. In contrast, at NPL sites without an IAG, although DOD may send copies of draft plans and reports to EPA, it is often without regard to schedule or a process for vetting issues back and forth as defined in IAG provisions. Therefore, EPA’s role is limited to reviewing many plans after they are finalized without the opportunity to provide input to the cleanup process. According to EPA headquarters officials, EPA is not seeking excessive enforcement authority at DOD NPL sites but intends to hold DOD to the same enforceable oversight it has at private sites. In fact, federal agencies are more often subject to much less stringent enforcement provisions. DOJ has taken the position that EPA may not sue another federal agency to enforce cleanup requirements, which effectively restricts EPA’s ability to compel compliance through civil judicial litigation. According to EPA, enforcement provisions contained in the agreements, such as stipulated penalties, are generally less onerous for federal facilities than they are for private parties. The terms of the provisions, regardless of whether they are based on model language agreed upon between DOD and EPA, are necessary for EPA to carry out its role to enforce the cleanup process, EPA officials said. The IAG is not simply an administrative document but an essential tool, without which EPA and the states cannot assure the public that DOD is properly identifying and addressing hazardous waste at contaminated DOD sites. Although EPA may initiate enforcement actions to compel the cleanup of contaminated sites, EPA only recently began to use this authority at DOD NPL sites without IAGs. In 2007, EPA issued four administrative cleanup orders—three under RCRA and one under the Safe Drinking Water Act— to four DOD NPL sites––Tyndall Air Force Base in Florida, McGuire Air Force Base in New Jersey, Air Force Plant 44 in Arizona, and Fort Meade in Maryland—that do not have IAGs. The orders stated that an imminent and substantial endangerment from contamination may be present on the sites and required DOD to notify EPA of its intent to comply with the orders and clean up. The Air Force did not agree with EPA’s assertion that an imminent and substantial endangerment existed at Air Force Plant 44, but agreed to perform the work required by the order. At the remaining two Air Force sites and one Army site, the services disagreed with EPA’s assertion that an imminent and substantial endangerment existed and indicated that the failure to enter into an IAG at the site was an inappropriate basis for issuing an order. The Air Force also argued that compliance with the orders would not accelerate study and cleanup but, rather, that the additional paperwork required for compliance would delay implementation of ongoing investigation and cleanup. The Air Force and Army did not notify EPA of their intent to comply with the orders within the time frame required and stated they would continue to clean up these sites under their CERCLA removal and lead agency authority. According to DOD, some of these sites are nearly cleaned up. For example, as of July 2008, DOD estimated that three of the four sites had cleaned up about two- thirds or more of the contamination on site. According to EPA headquarters officials, DOD’s estimation of the cleanup at these sites is inconsistent with EPA’s assessment and there is still much work to be performed at each of these sites. For example, according to EPA headquarters officials, Tyndall Air Force Base has not completed a single record of decision for work to be performed and McGuire Air Force Base has not completed a single investigation. In May 2008, DOD requested that DOJ and OMB resolve the disagreement between DOD and EPA as to the basis upon which EPA may issue imminent and substantial endangerment orders under RCRA and the Safe Drinking Water Act, and the terms of federal facility agreements regarding cleanup at DOD NPL sites. As of November 2008, OMB was noncommittal regarding its involvement. On December 1, 2008, DOJ issued a letter upholding EPA’s authority to issue administrative cleanup orders at DOD NPL sites in appropriate circumstances. Specifically, the letter stated, among other things, that EPA may issue imminent and substantial endangerment orders to DOD in accordance with RCRA and the Safe Drinking Water Act; EPA may issue such orders at a site even if it would not have done so had there been an IAG under CERCLA for the site; and while IAGs are consensual undertakings, and DOD is not necessarily required to agree to all IAG terms EPA seeks beyond those enumerated in CERCLA, EPA may require DOD to agree in an IAG to follow EPA guidelines, rules, and criteria in the same manner, and to the same extent as these apply to private parties. As of early March 2009, the Air Force and Army did not have IAGs for these four sites, including the site being cleaned up under the Safe Drinking Water Act order. Because the majority of contaminated DOD sites are not on the NPL, most DOD site cleanups are overseen by state agencies rather than EPA, as allowed by CERCLA. CERCLA provides that state cleanup and enforcement laws apply to federal facilities not included on the NPL. Under CERCLA, EPA may choose to defer a federal facility site to another cleanup authority, such as RCRA, even though the site is eligible for placement on the NPL. Of the 845 DOD sites not on the NPL, EPA generally determined that no further action was needed at the sites either because (1) the sites did not have hazards that would score high enough for NPL listing or (2) EPA deferred oversight of DOD’s response at the sites to the states or other regulatory authorities. Most states have their own cleanup programs to address hazardous waste sites and RCRA corrective action authority to clean up RCRA sites. While EPA regions have some oversight of states’ RCRA programs by reviewing site files and providing technical advice to the state, EPA defers oversight authority to states for the cleanup of non-NPL RCRA sites. EPA does not exercise day- to-day oversight of state cleanup programs but has entered into memorandums of understanding or agreement with some states. For example, EPA and the state of Ohio entered into a memorandum of agreement that defined the roles and responsibilities of EPA and the state for non-RCRA cleanups. Since the 1990s, EPA has proposed fewer DOD sites for the NPL than in previous years for three key reasons. First, EPA defers the majority of DOD sites to other statutory authorities for cleanup under state oversight, and to avoid duplicating efforts, it does not list these sites. Second, over the years, DOD has discovered fewer hazardous substance releases, resulting in fewer sites for assessment and potential proposal for the NPL. Third, state officials or other federal agencies may, on occasion, object to EPA’s proposal to list contaminated DOD sites, and while EPA can still propose listing the site, it usually does not. Based on our review of 389 unlisted DOD sites from four EPA regions, we found EPA did not list about half of these sites because EPA determined that little to no hazardous release had occurred or it deferred the site to a state for oversight, often because a contamination response was already underway. In 1996, Congress amended CERCLA to specify that a response under another cleanup authority is an appropriate factor to consider when making a determination whether to list a federal site. Since then, EPA has generally not proposed listing contaminated DOD sites that are being cleaned up under other federal or state programs. Under EPA’s deferral policy, it may choose to defer sites to RCRA, even if sites are eligible for the NPL, where (1) the CERCLA site is currently being addressed by RCRA Subtitle C corrective action authorities under an existing enforceable order or permit containing corrective action provisions, (2) the response is progressing adequately, and (3) the state supports deferral of placement on the NPL. According to EPA headquarters officials, during the early years of CERCLA, the Superfund program was the primary means by which EPA assured that contamination at federal facilities was assessed and cleaned up. In recent years, however, other cleanup programs such as RCRA have evolved and matured so that placement on the NPL is just one of several tools available to address contamination. EPA policy allows regions to defer a federal facility site to RCRA even though the site is eligible for the NPL. Officials from two EPA regions said that almost all of the region’s DOD sites were being cleaned up under RCRA at the time they were assessed and to avoid adding unnecessary and redundant regulatory oversight, the regions chose to leave them under RCRA for cleanup. EPA regions also defer sites from the NPL that are being cleaned up under a state cleanup program. EPA headquarters officials said that many sites proposed for placement on the NPL were referred to EPA by the states but that, over the years, states developed their own cleanup programs and did not refer as many sites to EPA. As a result, EPA headquarters officials said that EPA is not proposing to list as many sites based on states’ referrals. DOD is discovering and reporting fewer new or additional hazardous substance releases because, over the years, many potentially contaminated waste sites have been identified and cleaned up and waste management practices have changed. Discovery of new DOD sites has been infrequent, making fewer sites available to EPA for assessment and proposal for inclusion on the NPL. According to Army officials, beginning in the early 1980s, the Army conducted initial assessments to identify potentially contaminated sites. As a result, Army officials said, the Army’s installation restoration program inventory is mature and, for the most part, complete. According to a Navy official, during the 1980s and 1990s, the Navy also conducted assessments to identify and catalog the majority of contaminated Navy sites. DOD officials also stated that because of controls placed on the management of hazardous materials and wastes as a result of well-established laws, there are relatively fewer releases or threats of release, and operational releases are immediately addressed. EPA officials generally agreed that DOD has identified fewer contaminated DOD sites in recent years because, EPA officials said, the services have a fairly well-inventoried universe of sites, and old or abandoned DOD sites are no longer being discovered. Further, EPA headquarters officials said, DOD has cleaned up hazardous waste sites over the years, has tremendous cleanup efforts underway, and has the budgets to fund them. EPA policy recommends states’ governors to be included in the decision whether to list sites on the NPL and, in cases where a state does not agree that EPA should list a site, EPA’s policy recommends that a region work closely with the state to resolve the state’s concerns. If the region is unable to resolve the state’s concerns and EPA believes it has sufficient reasons to proceed with listing, EPA may list the site on the NPL without the state’s concurrence; however, according to EPA headquarters officials, EPA will not list a site without agreement from the state. On rare occasions, EPA proposed but ultimately did not list some contaminated DOD sites. Four sites were not listed because the states’ governors did not support listing. EPA did not list a fifth site because OMB recommended against listing. Although these five sites were not listed, EPA regional officials said that all five sites are being cleaned up, have a remedy in place that is protective of human health and the environment, or the site has been cleaned up to the point that it no longer meets the requirements for placement on the NPL. Specifically: Rickenbacker Air National Guard Base. In 1994, DOD closed the remaining portions of the Rickenbacker Air National Guard Base in Lockbourne, Ohio, which had been in use since 1942 providing aircraft refueling operations. Fuel contamination and chemical releases were found around underground fuel lines and tanks and near former storage areas and buildings. Trichloroethylene (TCE) has been found in soil and near groundwater. In January 1994, EPA proposed placing the site on the NPL but did not do so because the governor did not agree, citing the stigma that NPL listing would have on current, planned, and future economic development as well as the potential to adversely affect the economic development of adjacent sites. The governor also proposed that the Ohio EPA oversee investigation and cleanup activities at the site under the state’s cleanup program. Today, portions of the site are being cleaned up under RCRA while other portions are being cleaned up under CERCLA and DOD’s Base Realignment and Closure program, with state oversight. According to EPA headquarters officials, EPA and the Air Force agreed the site should be cleaned up for commercial-industrial use. The Air Force transferred portions of the facility to another state agency for cleanup and signed an agreement with the state to clean up the remaining lands, in accordance with CERCLA. However, the Air Force has refused to include land use restrictions in its selected remedy, as EPA would normally do for sites on the NPL. Nonetheless, cleanup at the site is proceeding, EPA regional officials said, and the site no longer meets the requirements for the NPL. Air Force Plant 85. Air Force Plant 85 in Columbus, Ohio, manufactured and tested aircraft and missile systems between 1941 and 1994. Wastes produced from these operations included acids from metal cleaning and electroplating, cyanide wastes, and paint strippers. From 1984 to 1990, the Air Force identified multiple sources of potential hazardous waste contamination, including two nearby streams and a creek. TCE and other chlorinated solvents were found in groundwater; polychlorinated biphenyls (PCB), solvents, and metals were found in soil; and various metals and solvents were found in sediment. In January 1994, EPA proposed placing the site on the NPL but did not do so because the governor objected, again citing the stigma of listing and its potential effects on economic development. The governor also proposed that the Ohio EPA oversee investigation and cleanup activities at the site under the state’s cleanup program. Air Force Plant 85 is being cleaned up under Ohio’s Voluntary Cleanup Program which, according to EPA officials, follows the CERCLA process. According to EPA regional and Air Force officials, the Air Force has cleaned up or has a remedy in place at 11 of the 13 sources of hazardous substances releases at the site and is expected to have all remedies in place by 2011. Arnold Engineering Development Center. The Arnold Engineering Development Center near Tullahoma and Manchester, Tennessee, is an Air Force test and research organization that simulates flight conditions in ground-test facilities. The site contains contaminated landfills, leaching pits, and testing areas. Jet and rocket fuels, solvents, and other shop wastes have been detected in the main testing area. PCBs also have been detected in soil samples collected in the main testing area and in wastewater and surface water runoff in a retention reservoir. In August 1994, EPA proposed placing the site on the NPL but did not do so because the governor did not concur. EPA regional officials said that state officials told them Tennessee preferred to clean up the site under a state cleanup program and speculated that many states may prefer this arrangement because of the perception of a stigma associated the NPL. Further, the Arnold Engineering Development Center was competing with a DOD facility in another state to install a wind tunnel and the Tennessee governor’s office was concerned that NPL listing would hurt the site’s chances. The Air Force is cleaning up the Arnold Engineering Development Center under RCRA with EPA and state oversight. EPA regional officials said that Air Force actions to date on the site are protective of human health and control the migration of contaminated groundwater. While Air Force officials said they expect all remedies to be in place by the end of fiscal year 2011, EPA regional officials indicated the goal for final construction of the remedy is 2020. Wurtsmith Air Force Base. Wurtsmith Air Force Base, a 5,000-acre site near Oscoda, Michigan, has performed various air support missions since it was established in the early 1920s, such as aircraft and vehicle maintenance and air refueling. In 1977, the Air Force sampled drinking water and monitoring wells on the site and found solvents, including TCE. The U.S. Geological Survey also sampled and found TCE in the groundwater. The base closed in June 1993 and in January 1994, EPA proposed placing the site on the NPL. However, EPA did not list the site because the state did not support listing after DOD placed the site in the Base Realignment and Closure program and progressed with cleanup under state oversight. Although TCE is still present in groundwater plumes, EPA regional officials said the site has been cleaned up to the point that it would no longer meet the requirements for the NPL. Chanute Air Force Base. Chanute Air Force Base in Rantoul, Illinois, provided military and technical training for Air Force and civilian personnel on the operation and maintenance of military aircraft and ground support equipment until DOD closed the base in 1990. The primary sources of hazardous waste on the site include various landfills, fire training areas and buildings that contained oil-water separators, underground storage tanks, and sludge pits. The primary concern was the potential for this contamination to migrate into a nearby creek. In April 2000, the governor wrote to the EPA region to express his support for placing Chanute Air Force Base on the NPL, citing the state’s concern about past operation and disposal practices at the site and because the state was unable to reach an agreement with the Air Force on how the site should be cleaned up. In December 2000, EPA proposed placing the site on the NPL but the Air Force objected, citing a perception that listing was a stigma and argued it could clean up the site by 2005 and on schedule if it did not have to suspend cleanup to negotiate the provisions of an IAG. The Air Force asked OMB to mediate the dispute. EPA presented its case for listing the site to OMB, pointing out that the site’s HRS score supported a proposal for listing, the governor of the state concurred, and listing would help to assure that DOD would enter into an IAG with EPA to clean up. In 2003, OMB determined that EPA should not proceed with listing. OMB encouraged EPA to defer listing the site for 6 months to provide DOD with time to address personnel and contractor changes and demonstrate remediation progress. If, after that time, progress was not forthcoming, then listing was to be pursued, but in fact, never was. Although EPA officials told us that cleanup at Chanute has progressed slowly, milestones were met and EPA did not list the site. The Air Force estimates that it will have all remedies in place by the end of fiscal year 2012 and all property transferred from Air Force control by the end of fiscal year 2014. Although cleanup is behind schedule, according to EPA regional officials, the site has been cleaned up to the point that it is unclear whether the site would score for the NPL if the listing process was started today. For example, three of the four landfills have been capped and are no longer active. Remedial investigation reports of the creek do not show the levels of contamination detected when EPA proposed listing the site. Despite the slow progress to clean up, EPA regional officials said they believe that proposing the site for listing ultimately helped to start the cleanup process. As part of our review, we asked officials from four EPA regions to provide the primary basis for their decision to not propose placing 389 DOD sites under their jurisdiction on the NPL. (See fig. 4.) Based on a review of site records and interviews with EPA regional officials, we found EPA did not propose listing almost one-third of these sites (121 of 389, or 31 percent) because site assessments found little to no contamination or hazardous release on the site or no contamination exposure pathway or receptor. In instances where EPA scored these sites, the HRS score was below the minimum hazard ranking threshold for the NPL. One-quarter of these sites (96 of 389, or 25 percent) were not proposed for the NPL because EPA deferred them to another authority, such as a state agency under its RCRA authority. We were unable to determine the rationale for EPA’s decision to not list less than half of these sites (172 of 389, or 44 percent) because site file records were missing, inconclusive, or not up to date. For example, some site files showed that EPA had not yet determined whether to propose listing, even though the site assessment was conducted decades ago. According to EPA region officials, record-keeping practices have varied over the years so that, in some cases, site files and the basis for EPA’s decisions were not well documented or maintained. While the number of DOD sites considered for placement on the NPL has declined over the past decade, DOD sites still account for 9 percent of all NPL sites. Despite years of negotiations, DOD and EPA have not finalized IAGs to clean up 11 of the 140 DOD NPL sites. Most are more than a decade overdue, yet EPA has made few efforts to use its enforcement authority under CERCLA to compel parties to enter into IAGs, and to select remedies at sites without agreements. While the Federal Facility Compliance Act authorizes EPA to apply the same RCRA enforcement policies to federal facilities as it does to nonfederal facilities, EPA has not taken enforcement action at most federal sites. In light of prolonged disagreements between DOD and EPA over the terms of the IAGs, and the absence of any statutory consequences for failing to enter into an IAG, now may be the time to reconsider the provisions required by CERCLA for effective EPA oversight. While the law offers accountability through citizen suits, transparency through public participation provisions, legal recourse through enforceable schedules, and mechanisms for addressing conflicts through dispute resolution provisions, at sites without IAGs EPA lacks the leverage needed to provide strong environmental stewardship. Bringing the parties together for further discussions with relevant oversight committees may facilitate resolution at the sites without IAGs. While the pattern of delays in DOD’s preliminary assessment process appeared to go unchallenged by EPA, we believe EPA’s failure to enforce a time line for completion further exacerbated this process. These conditions suggest a need for stronger enforcement and reporting as well as a serious commitment to address ongoing challenges. We believe Congress should be kept apprised of the situations where agreements are lacking. However, EPA has not used its annual report to Congress to provide this information. Moreover, because EPA was unable to make available documentation of the basis for its decisions whether to list or not list DOD sites, it is impossible for EPA to provide a justification for its decisions for many of the sites placed on or left off of the NPL. Given the critical nature of Superfund cleanup for protecting public health, and the long-term commitment necessary to maintain strong environmental stewardship at federal facilities, we encourage Congress to ensure accountability by DOD and EPA by raising concerns about the impasse between these federal agencies, if IAGS are not finalized within 60 days following issuance of this report. Specifically, Congress should consider amending CERCLA Section 120 to authorize EPA to impose administrative penalties at federal facilities placed on the NPL that lack IAGs within the CERCLA-imposed deadline of 6 months after completion of the remedial investigation and feasibility study. This leverage could help EPA better satisfy its statutory responsibilities with agencies that are unwilling to enter into agreements where required under CERCLA Section 120. In addition, Congress may wish to consider amending Section 120 to authorize EPA to require agencies to complete preliminary assessments within specified time frames. To facilitate congressional oversight of the Superfund program and provide greater transparency to the public on the cleanup of DOD sites, we recommend that the Administrator of EPA improve its record keeping in the following manner. Consistent with good management practices defined in EPA’s Superfund program implementation manual and to ensure that meaningful data are available for the agency’s reports to Congress, EPA should establish a record-keeping system, consistent across all regions, to accurately document EPA decisions regarding the proposal of DOD sites for inclusion or exclusion on the NPL and the basis for each decision. We provided a draft of this report to EPA and DOD for review and comment. In its letter, EPA agreed with our recommendation that Congress should provide greater enforcement authority under CERCLA to impose administrative penalties at federal facilities placed on the NPL, stating that greater authority would help to assure timely and protective cleanup of NPL sites. EPA did not comment specifically on our recommendation that EPA improve its record keeping but acknowledged that some file data supporting EPA’s decisions regarding the proposal of DOD sites for NPL listing are missing or otherwise insufficient. In general, EPA agreed with the findings and conclusions of our report. EPA also provided general comments related to the declining number of DOD sites proposed for listing; specifically, whether state objections and the declining number of newly discovered hazardous substance releases in recent years has caused a reduction in the number of DOD sites proposed. In addition, while EPA agrees with GAO that typical sources of contamination on DOD sites have been fairly well characterized, it adds that other areas have not been evaluated, and there may still be sites with undiscovered sources of contamination, such as military munitions sites. GAO has made changes to the report to respond to these comments. We also addressed EPA’s technical changes, throughout the report, as appropriate. See appendix III for EPA’s letter. In its letter commenting on the findings and conclusions of our report, DOD disagreed with our assertion that additional EPA oversight or enforcement authority was needed and, if provided, would help assure that NPL sites are cleaned up. According to DOD, EPA is actively involved in reviewing response actions at DOD NPL sites, regardless of whether an IAG is in place. Further, DOD stated that GAO’s report provides no evidence that the lack of an IAG at any DOD NPL site has delayed, diminished, or reduced the timeliness or quality of DOD’s response and that EPA does not need additional oversight enforcement authority but, rather, should strive to more effectively implement its authority under existing law. We continue to assert that an expansion in EPA’s enforcement authority is warranted. According to recent discussions with EPA officials, the agency cannot confirm whether all areas of contamination have been identified or whether they are being addressed properly at NPL sites without IAGs, particularly where DOD signed unilateral records of decision without EPA concurrence, such as at Langley Air Force Base in Maryland. Further, we believe our report demonstrates that EPA has experienced considerable difficulty employing its existing enforcement authorities, and that DOD has resisted EPA’s decision to use its existing authority to require that DOD enter into IAGs at NPL sites. DOD’s comments notwithstanding, the issue is DOD’s refusal for more than a decade to enter into IAGs required by CERCLA Section 120 to clean up DOD NPL sites. As EPA officials have noted, without an IAG, the agency does not have the enforcement authority to assure that DOD cleans up according to an agreed-upon remedy. Further, the question is not whether DOD believes that EPA is sufficiently involved at DOD NPL sites, but whether the statutory requirements for EPA’s involvement have been satisfied. CERCLA Section 120 provides for independent EPA oversight, not mere opportunity for EPA review and comment. The procedures in Section 120 may not be disregarded simply because some cleanup progress is occurring. As mentioned in our report, Maryland’s December 2008 suit against the Army seeking to compel compliance with EPA’s administrative order at Fort Meade is evidence that at least one state disagrees with DOD’s assertion that the progress of cleanup is unaffected by the lack of an IAG. Therefore, we continue to believe that additional EPA enforcement authority is needed to ensure that cleanup is being pursued properly at federal facility NPL sites. DOD’s letter also provided some technical comments which we incorporated throughout the report along with DOD’s technical changes, as appropriate. See appendix IV for DOD’s letter. 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 Administrator of EPA, the Secretary of DOD, and interested congressional committees. The report will also 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 stephensonj@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. We were asked to determine (1) the extent of the Environmental Protection Agency’s (EPA) oversight during assessment and cleanup at Department of Defense (DOD) National Priority List (NPL) and non-NPL sites and (2) why EPA has proposed fewer DOD sites for inclusion on the NPL since the early 1990s. To examine the extent of EPA’s oversight during assessment and cleanup of DOD NPL and non-NPL sites, we reviewed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and other legislation governing the cleanup of federal hazardous waste sites, as well as EPA Superfund program policy and guidance, to determine the roles and responsibilities of EPA and federal agencies, such as DOD, to implement the CERCLA process and assess and clean up hazardous waste. We reviewed EPA and DOD reports to the Congress on the Superfund and Defense Environmental programs, respectively. We reviewed EPA and DOD policy and guidance on interagency agreements (IAG), including the model agreements, and correspondence relating to the negotiation of IAGs for selected DOD sites. We conducted several interviews with EPA and DOD headquarters officials on issues related to IAGs and enforcement. At GAO’s request, EPA provided data from its computerized CERCLA information database of actual and potential hazardous releases at federal and private sites. Based on these data, we worked with EPA to identify the universe of DOD sites and obtain certain information on these sites, such as NPL status. To determine the reliability of the CERCLA information database, an EPA headquarters official contacted each EPA region and asked them to verify selected information, such as the number of DOD sites and their NPL status. During site visits to selected EPA regions, we also confirmed certain information in the CERCLA information database by reviewing site file documentation, where available, and interviewing EPA region officials. Based on this work, we determined that these data were sufficiently reliable for the purposes of this report. We interviewed EPA headquarters officials on the agency’s policies and processes under the Superfund program to ensure that contaminated federal DOD sites, both NPL and non-NPL, are assessed and cleaned up. We interviewed DOD headquarters officials on DOD’s role and responsibilities to identify, report, assess, and clean up, as necessary, hazardous releases at NPL and non-NPL DOD sites. We also interviewed officials at four EPA regions on their oversight of contaminated federal DOD sites, both NPL and non-NPL, to assure that sites are assessed and cleaned up. We conducted our work at four EPA regions—Atlanta, Chicago, Dallas, and San Francisco—which, taken together, were responsible for about half of the 845 non-NPL DOD sites. We selected the Atlanta and Chicago regions because they were responsible for five DOD sites that EPA proposed for NPL inclusion but which were not listed. We selected the San Francisco region because it had the largest number of non-NPL DOD sites. We selected the Dallas region to pretest our review methodology because it was geographically convenient. To determine why EPA has proposed fewer DOD sites for NPL inclusion since the early 1990s, we reviewed EPA policy and guidance on proposing sites for the NPL and interviewed EPA headquarters and regional officials on the reasons why EPA has proposed fewer sites. We interviewed DOD headquarters officials on its progress to identify and assess potentially contaminated DOD sites and the reasons why fewer hazardous releases have been identified. We interviewed EPA and DOD officials on contaminated DOD sites that EPA proposed for the NPL, why some were not listed, and the status of cleanup at these sites. Finally, for selected DOD sites, we evaluated the basis for EPA’s decision to not propose listing certain contaminated DOD sites by reviewing site file documentation and interviewing EPA regional officials regarding all non-NPL DOD sites at four EPA regions. We excluded from our review sites under DOD’s military munitions response program because of the ongoing uncertainty concerning the degree to which spent military munitions are subject to RCRA and CERCLA, and the fact that GAO has ongoing work in this area. Based on our review of contaminated DOD sites at four EPA regions, we attempted to determine the primary basis for EPA’s decision to not propose to list the site. However, we were unable to confirm the basis for EPA’s decision to not propose listing less than one-half of the sites surveyed (172 of 389, or 44 percent) because site file documentation, such as records of EPA’s decisions and recommendations concerning sites, was missing or inconclusive. For example, officials at one EPA region told us they could not determine how many sites required no further action after either a preliminary assessment or site inspection because, prior to 1990, the region did not document the basis for determining that no further action was required. In addition to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), there are a number of other cleanup authorities EPA considers in deciding whether to list a site include state cleanup programs (often referred to as voluntary cleanup programs) and the Defense Environmental Restoration program. Specifically: State Cleanup Programs. Over the years, most states have developed their own cleanup programs, often referred to as voluntary state cleanup programs. Some state cleanup programs address hazardous waste sites independent of a state’s Resource Conservation and Recovery Act (RCRA) program. Often, state cleanup projects begin with a preliminary site assessment and if contamination is suspected, an on-site investigation is conducted. EPA does not have oversight of state cleanup programs but has entered into memoranda of agreement or understanding with some states, recognizing the use of the state’s cleanup program to address hazardous waste sites under a state’s non-RCRA authority. Defense Environmental Restoration Program. In 1986, Congress amended CERCLA and required that DOD establish an environmental restoration program under which all response actions at hazardous waste contaminated sites—such as site identification, investigation, and cleanup—must be conducted consistent with Section 120 of CERCLA. More than 15 years later, the National Defense Authorization Act for Fiscal Year 2002 required that DOD also develop an inventory of all DOD sites known or suspected to contain unexploded ordnance, military munitions, or munitions constituents throughout the United States and develop a methodology for prioritizing response actions at these sites. Today, DOD’s environmental response program includes an installation restoration program, which in 1985 began addressing hazardous releases resulting from past practices, and a military munitions response program, established as a separate program in 2001, to address safety and environmental hazards from unexploded ordnance and munitions on other-than-operational ranges (ranges that are closed, transferred or transferring). As of fiscal year 2007, DOD reported there were 27,950 installation restoration program sites on DOD facilities and former defense sites, of which 23,980, or 86 percent, had achieved “remedy in place” or “response complete” status. At 3,537 munitions response sites at current DOD facilities and former defense sites, a total of 940, or 27 percent, had achieved “remedy in place” or “response complete” status. DOD completed an initial inventory of munitions response sites in fiscal year 2002. Since then, DOD has been working to reconcile its inventory which includes conducting site assessments (preliminary assessments and, if needed, site inspections) of all sites. DOD estimates it will complete site assessments for all munitions response sites by the end of fiscal year 2010 except for sites on former defense sites. Former defense sites represent the majority of sites with suspected munitions response sites and, according to DOD, site assessments for munitions sites on former defense sites will not be completed until about 2013. Under the Defense Environmental Restoration Program, DOD cleans up environmental hazards and contamination on active installations, installations being closed under DOD’s Base Realignment and Closure program, and at formerly used defense sites. DOD is required to carry out response cleanup actions under the program, subject to, and in a manner consistent with, Section 120 of CERCLA. DOD is required to report annually to Congress on its environmental restoration programs. As of fiscal year 2007, DOD reported that its goal was to clean up all known releases (or achieve a “remedy in place” status) on active installations by the end of fiscal year 2014 and all sites on formerly used defense sites by the end of fiscal year 2020. In addition to the contact named above, Diane B. Raynes, Assistant Director; Elizabeth Beardsley; Christine D. Frye; Richard Johnson; and Alison O’Neill made major contributions to this report. Amy Ward-Meier also made key contributions. | Prior to the 1980s and the passage of environmental legislation--particularly the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) governing environmental cleanup--Department of Defense (DOD) activities contaminated millions of acres of soil and water on and near DOD sites. The Environmental Protection Agency (EPA), which enforces CERCLA, places the most contaminated sites on its National Priorities List (NPL) and requires that they be cleaned up in accordance with CERCLA. EPA has placed 140 DOD sites on the NPL. Disputes have recently arisen between EPA and DOD on agreements to clean up some of these sites. In addition, most sites were placed on the NPL before 1991; since fiscal year 2000, EPA has added five DOD sites. In this context, we agreed to determine (1) the extent of EPA's oversight during assessment and cleanup at DOD sites and (2) why EPA has proposed fewer DOD sites for the NPL since the early 1990s. GAO interviewed officials at EPA and DOD and reviewed site file documentation at four EPA regions. EPA evaluates DOD's preliminary assessments of contaminated DOD sites but has little to no oversight of the cleanup of the majority of these sites because most are not on the NPL. Of the 985 DOD sites requiring cleanup of hazardous substances, EPA has oversight authority of the 140 on the NPL; the remaining 845 non-NPL sites are overseen by other cleanup authorities--usually the states. Our review of 389 non-NPL DOD sites showed that EPA decided not to list 56 percent because it determined the condition of the sites did not satisfy the criteria for listing or because it deferred the sites to other programs, most often the Resource Conservation and Recovery Act--another federal statute that governs activities involving hazardous waste. However, EPA regional officials were unable to provide a rationale for not listing the remaining 44 percent because site files documenting EPA's decisions were missing or inconclusive. In addition, EPA has agreements with DOD for cleaning up 129 of the 140 NPL sites and is generally satisfied with the cleanup of these sites. However, DOD does not have agreements for the remaining 11 sites, even though they are required under CERCLA. It was not until more than 10 years after these sites were placed on the NPL that EPA, in 2007, pursued enforcement action against DOD by issuing administrative orders at 4 of the 11 sites. Since the mid-1990s, EPA has placed fewer DOD sites on the NPL than in previous years for three key reasons. First, EPA does not generally list DOD sites that are being addressed under other federal or state programs to avoid duplication. Second, DOD and EPA officials told us that, because DOD has been identifying and cleaning up hazardous releases for more than two decades, and improved its management of waste generated during its ongoing operations, DOD has discovered fewer hazardous substance releases in recent years, making fewer sites available for listing. Third, in a few instances, state officials or others have objected to EPA's proposal to list contaminated DOD sites, and EPA has usually declined to proceed further. For example, in five instances EPA proposed contaminated DOD sites for the NPL that were not ultimately placed on the list. At four of these sites, the states' governors did not support listing, citing the perceived stigma of inclusion on the NPL and potential adverse economic effect. EPA did not list the fifth site because, according to EPA regional officials, DOD objected and appealed to the Office of Management and Budget, which recommended deferring this listing for 6 months to give DOD time to address personnel and contractor changes and demonstrate remediation progress. EPA officials recently told us that cleanup has taken place at these sites and that it was unlikely or unclear whether they would qualify for placement on the NPL based on their current condition. |
The extent of foodborne illness in the United States and its associated costs are significant. CDC estimates that unsafe foods cause as many as 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths annually. In terms of medical costs and productivity losses, foodborne illnesses associated with seven major pathogens cost the nation between $7 billion and $37 billion annually, according to USDA’s estimates. The National School Lunch Program and the School Breakfast Program share the goals of improving children’s nutrition, increasing lower-income children’s access to nutritious meals, and supporting the agricultural economy. The school lunch program is available in almost all public schools and in many private schools. About 70 percent of those schools also participate in the breakfast program. Schools participating in the school lunch or breakfast programs receive a per-meal federal cash reimbursement for all meals they serve to children, as long as the meals meet federal nutrition standards. In fiscal year 2001, school meal programs provided lunch, breakfast, and snacks to over 27 million school children daily. At the federal level, FNS administers the school meal programs. At the state level, the program is usually administered by state education agencies, which operate them through agreements with local school food authorities. Overall, USDA donates about 17 percent of the dollar value of food that goes on the table in school lunch programs through its Food Distribution Program. USDA purchases and distributes commodities to remove surpluses from the marketplace and to provide nutritious foods to the nation’s children. Schools purchase the remaining 83 percent of the dollar value of food served using USDA’s cash reimbursement and their own funds. In fiscal year 2001, the total cost of the school meal programs—including cash reimbursements to schools, USDA purchases of donated foods, and program administration—was nearly $8 billion. By far the largest component of the school meal programs is the school lunch program. In fiscal year 2001, the school lunch program cost about $5.7 billion. The procurement process for foods served in school lunch program differs depending on whether federal or state/local food authorities procure the foods (see figure 1). USDA’s Agricultural Marketing Service (AMS) and Farm Service Agency (FSA) are responsible for procuring USDA-donated foods. The Agricultural Marketing Service purchases meat, poultry, fish, and fruits and vegetables for donation; the Farm Service Agency purchases grains, oils, peanut products, dairy products, and other foods. USDA contracts for the purchase of these products with manufacturers that are selected through a formally advertised competitive bidding process. FNS, through its Food Distribution Division, provides the donated foods to state agencies for distribution to schools. Schools then purchase the remainder of food for school meals independently using their own procurement practices, either purchasing foods directly from manufacturers or distributors, or contracting with food service management companies that procure the foods for them. USDA provides little guidance to promote safety in school food procurements. FNS’ guidance to schools emphasizes safe food handling because, according to USDA officials, most cases of foodborne illness at schools are due to poor food storage, handling, and serving practices. Therefore, the priority is on guidance to ensure food safety through proper handling and preparation of foods at schools. For example, manuals are provided that address appropriate temperatures for reheating ready-to-eat foods and for hot-holding potentially hazardous foods. Similarly, FNS provides information on employee personal hygiene and how it relates to cross-contamination of foods. CDC’s outbreak data shows an increase in the number of school-related outbreaks since 1990. Between 1990 and 1999 (the most recent year for which complete outbreak data is available from CDC), 292 school-related outbreaks were reported to CDC, averaging 17 outbreaks in the first 4 years of the decade, 28 in the next 4 years, and 57 in the final 2 years (see table 1). In total, approximately 16,000 individuals, mostly children, were affected. For those outbreaks with a known cause, the most commonly identified cause of the illnesses were foods contaminated with salmonella or Norwalk-like viruses. According to CDC officials, some unknown portion of the increase in reported outbreaks extends from CDC’s transition from a completely passive surveillance data collection method to a more active surveillance methodology in early 1998. In effect, CDC went from accepting data from the states to actively soliciting states for more comprehensive information and having the states verify the information that they submit. As a result, states began to report more of all types of foodborne outbreaks, including school outbreaks, to CDC beginning in 1998. Moreover, CDC suggests that increased resources for outbreak investigations and greater awareness among the general public about foodborne disease might also account for the increased number of reported outbreaks. To evaluate the trend in the number of school outbreaks, and in their number relative to non-school outbreaks, we compared the observed numbers to the estimated numbers of school and non-school outbreaks.This analysis shows that there is an upward trend in foodborne illness outbreaks reported in schools between 1990 and 1999 and that not all of this increasing trend is attributable to changes that took place when CDC began a more active data collection effort. Outbreaks in the general population have increased by a comparable amount over the same period; therefore, there is no statistically significant difference between increased outbreaks in schools and increased outbreaks in general. As figure 2 shows, our analysis of CDC’s data indicates that, even after adjusting for CDC’s improved data collection, the number of school-related foodborne outbreaks increased, on average, about 10 percent per year between 1990 and 1999. We also analyzed trends in participation in the school meal programs over this same time period and found that the changes in school outbreaks reported did not simply mirror changes in the number of students participating in the school meal programs. While the number of reported school outbreaks doubled over the decade, and generally increased by an average of about 10 percent from one year to the next, the number of school lunch participants increased by only 12 percent over the entire decade, or by just over 1 percent per year. Thus, the increase in school outbreaks reported is not explained by the increase in children’s participation in the school meal programs. One should exercise caution, however, when analyzing school outbreak data. CDC’s data must be supplemented with more detailed state or local information to determine the extent of foodborne illness outbreaks actually associated with the school meal programs in any given year. We gathered additional state and local health department information for the 20 largest school outbreaks in CDC’s database for 1998 and 1999, each of which resulted in 100 or more illnesses. We determined that 13 of the 20 outbreaks (65 percent) were associated with foods served in the school meal programs. Three of the 13 outbreaks were linked to tainted burritos that were distributed to schools nationwide and are thought to have caused approximately 1,700 illnesses. The other 7 outbreaks were not linked to foods served in the school meal programs, but with foods brought to schools from home or other sources. Therefore, data limitations make it difficult to assert with complete certainty to what extent the foods served in the school meal programs are the cause of the reported outbreaks from 1990 to 1999. USDA has, for the most part, been responsive to the two recommendations we made in our February 2000 report. First, we recommended that USDA develop a database to track the actions it takes to hold or recall donated foods when safety concerns arise regarding foods donated to the school meal programs. Second, we recommended that the agency revise its school food service manual to include guidance regarding food safety procurement contract provisions, which could be used by state and local school authorities. We made our first recommendation because, without comprehensive records of such safety actions, USDA had no reliable basis for identifying problematic foods or suppliers, or for documenting the agency’s responsiveness to concerns over the safety of USDA-donated foods. In response to our February 2000 recommendation, USDA implemented its food safety action database in April 2000. The database identifies and tracks key hold and recall information starting in October 1998. As of April 2002, the database lists 11 food safety actions, including, for example, the recall of 114,000 pounds of chicken that was contaminated with listeria in February 2000. Because of the limited number of actions recorded thus far, USDA has not conducted any analysis of the information contained in the database, but plans to continue maintaining it for future use. We made our second recommendation because, although USDA has established procurement policies and procedures to ensure the safety of foods donated to schools, these policies and procedures do not apply to foods purchased independently by schools. For example, contracts for donated foods may specify pathogen testing for every lot of certain products that are highly susceptible to contamination, or may contain contract provisions that establish specific temperature requirements for chilled and frozen products during processing and storage at the plant, transportation between processing plants, upon shipment from the plant, and upon arrival at final destination. However, there is no requirement that state and local authorities include similar food safety provisions in their procurement contracts. According to USDA’s regulations for schools participating in the school meal programs, the responsible school food authority may use its own procurement procedures, which reflect applicable state and local laws and regulations. Therefore, the extent to which schools address safety in their food procurement contracts may vary depending on state and local laws and procurement guidance that is available to them. To assist state and local authorities, we recommended that USDA provide them guidance on food safety provisions that could be included in their procurement contracts. USDA officials told us that they plan to address our recommendation by revising the school procurement guidance to include an example that addresses safety concerns. We believe, however, that USDA should include more information that would be useful to schools. Specifically, providing a list of the specific food safety provisions found in USDA- donated food contracts would help schools in preparing their own food procurement contracts. While USDA officials contend that local school districts have little negotiating power to require safety provisions because their purchases are mainly low-volume from commercial sources, USDA’s own data indicates that in the 1996-1997 school year, the latest year for which this data was available, 37 percent of school food authorities participated in cooperative arrangements that purchase in larger volume. Therefore, we believe that more detailed information on contract safety provisions could enhance the safety of foods purchased directly by schools. In particular, since local school authorities purchase 83 percent of the dollar value of school meals, it is important that they receive guidance from FNS on how best to achieve a comparable level of safety precautions through their procurement process. Based on limited work conducted in preparation for this testimony, we offer two additional observations that, if validated by further study, may contribute to greater safety for school children at minimal cost. First, USDA’s procurement officials told us that they have routine access to federal inspection and compliance records of potential suppliers and that they consider this information when they review bids before contracting. However, there is currently no established mechanism for state and local authorities in charge of purchasing food for schools to easily and routinely access such information. It may be desirable for USDA to consider whether it should provide state and local school officials with access to information collected through FDA’s and USDA’s inspections of school lunch food suppliers, potentially enabling them to make more informed purchasing decisions. USDA officials stated that this idea would have to be explored further to address potential legal impediments to such information sharing. FDA officials commented that this idea is worth considering. Second, FNS has developed a process for holding foods suspected of contamination that applies exclusively to food commodities that USDA purchases for donation to schools. The hold allows time for additional testing and inspection prior to asking for a recall of donated foods when safety concerns arise. Because FNS is the single common point of contact for all schools participating in the school meal programs, and because it does provide guidance to the schools on food nutrition and quality, an extension of FNS’ hold and recall procedures to include non-donated (school-purchased) foods would seem logical. USDA officials agreed with this concept and indicated that they intend to share the hold and recall procedures with schools in fiscal year 2003. USDA and FDA have not developed any specific security provisions to help protect food served through the school meal programs from potential deliberate contamination. But, according to USDA and FDA officials, actions designed to enhance the security of the federal food safety system as a whole would also enhance the security of meals served at schools. As we testified in October 2001, however, recent events have raised the specter of bioterrorism as an emerging risk factor for our food safety system.. We further stated that under the current structure, there are questions about the system’s ability to detect and quickly respond to any such event. Since our October 2001 testimony, both FDA and USDA have stated that they are better prepared to detect and respond to such an event. Both agencies are in the process of conducting risk assessments to determine where in the farm-to-table food continuum there is a critical need to provide additional resources. In addition, FDA staffing has already increased inspections of imported foods, added more inspections of domestic producers, and more laboratory testing of food products. Further, FDA has issued voluntary security guidelines to the sector of the food industry that it regulates on the need to (1) ensure physical security of processing and storage facilities, (2) ensure that chemical and biological agents that may be kept in their facilities or at in-house laboratories are under appropriate controls, and (3) verify the background of plant employees. Currently, the agency is receiving public comments and expects to revise the guidelines. USDA is also working on a similar set of guidelines that meat, poultry, and egg products processors could voluntarily adopt. Finally, agency officials told us that they have generally asked their field personnel to be on heightened alert for potential security concerns. We are initiating a review to determine how these guidelines are being implemented and how federal agencies plan to monitor their implementation. As we reported in February 2000, while no federal agency monitors the safety of school meals, USDA’s Food Safety and Inspection Service (FSIS) and FDA are responsible for enforcing regulations that ensure the safety of the nation’s food supply. FSIS is responsible for the safety of meat, poultry, and some eggs and egg products, while the FDA is responsible for all other foods, including fish, fruit, vegetables, milk, and grain products. However, as we stated most recently in our October 2001 testimony, the existing food safety system is a patchwork structure that hampers efforts to adequately address existing and emerging food safety risks whether those risks involve inadvertent or deliberate contamination. The food safety system is also affected by other overarching problems, such as the challenge of effectively coordinating the food safety activities of multiple agencies including coordinating multi-state outbreaks. For example, the current organizational and legal structure of our federal food safety system has given responsibility for specific food commodities to different agencies and provided them with significantly different regulatory authorities and responsibilities. As a result, we have inefficient use of resources and inconsistencies in oversight and enforcement. USDA and FDA oversee recalls when the foods they regulate are contaminated or adulterated. If a USDA-regulated company does not voluntarily conduct the recall, USDA can detain the product for up to 20 days. On the other hand, FDA, which currently does not have administrative detention authority for food under the Federal Food, Drug, and Cosmetic Act, must seek a court order to seize the food. Moreover, as we reported in August 2000, neither USDA nor FDA had provided guidance to industry on how to quickly initiate and carry out food recalls that involve potentially serious adverse health risk. We recommended that such guidelines instruct companies on time frames for quickly initiating and carrying out recalls, including procedures that expeditiously notify distribution chains and alert the public. USDA has revised its guidelines, and FDA is in the process of revising its guidance and expects to reissue the guidance in September 2002. Finally, Mr. Chairmen, in working on food safety issues over the past decade, we have reviewed USDA’s and FDA’s inspection systems and identified weaknesses in both. The agencies agreed with most of our recommendations and have either taken steps or are taking steps to improve inspections. We have also focused on specific products, many of which are included in school meals. For example, because of concerns about the risk of salmonella in eggs, we reviewed the adequacy of the federal system for ensuring egg safety. Our work shows that the current regulatory and organizational framework for egg safety makes it difficult to ensure that resources are directed to areas of highest risk. Similarly, we evaluated the seafood and shellfish safety program and determined that theses programs do not sufficiently protect consumers because of weaknesses in FDA’s implementation of the new science-based inspection system. FDA agreed with most of our recommendations. We also reviewed USDA’s oversight of meat and poultry products and concluded that, in order to better ensure safety, USDA needed to ensure that inspectors are properly trained on the new science-based system. USDA agreed with our recommendation and is providing enhanced training. In January 2002, our report on mad cow disease concluded that, although bovine spongiform encephalopathy (BSE) has not been found in the United States, federal actions do not sufficiently ensure that all BSE-infected animals or products are kept out of the country or that if BSE were found, it would be detected promptly and not spread. FDA, USDA, and Customs generally agreed with the report’s recommendations. | The national school lunch and breakfast programs provide inexpensive or free meals to more than 27 million children each day. During the 1990s, nearly 300 outbreaks of foodborne illness at the nation's schools sickened 16,000 students. The rise in the number of school outbreaks mirrors a rise in the number of outbreaks in the overall population, according to the Centers for Disease Control and Prevention (CDC). Because the CDC data include outbreaks attributable to food brought from home or other sources, GAO could not determine the extent to which food served in the school meal programs caused reported outbreaks. Data from 1998 and 1999 do show, however, that most of the outbreaks during those years were caused by foods served through the school meal program. Foods contaminated with salmonella and Norwalk-like viruses were the most common causes of outbreaks. GAO found that the Department of Agriculture has not developed security measures to protect foods served at schools from deliberate contamination. The existing food safety system is a patchwork of protections that fall short in addressing existing and emerging food safety threats. |
Most children enter foster care when the state’s child welfare agency determines that they have been subjected to abuse or neglect and it is not in their best interest to immediately return home. On September 30, 2002—the latest date for which HHS figures were available for our review, 532,000 children were in foster care in the United States. Generally, after investigating the circumstances that contributed to the abuse or neglect, state child welfare agency staff develop a plan to help the parent make improvements and create a safe and stable family environment. ASFA requires that states hold a permanency planning hearing at least once every 12 months to determine, among other things, when and if reunification with the child’s family is a safe and practical option. HHS estimated that just over 50 percent of the 281,000 children who exited foster care during fiscal year 2002 were reunified with a parent or principal caretaker. If the parent has not followed child welfare agency plans or has failed to change behaviors to make reunification safe, the state may identify an alternative goal to establish a permanent home for the child. These goals include adoption, independence, or legal guardianship. Independent living arrangements may be attained once children reach the age of 18—or 21 in some jurisdictions—and have not been reunified with their families or adopted and for whom federal reimbursement for foster care expenditures is no longer available. Legal guardianship is a judicially created relationship between a child and a caretaker whereby the caretaker is awarded custody and decision-making rights with respect to the child. An October 2004 report indicated that 35 states and the District of Columbia had established subsidized guardianship programs to help ensure permanent families for children. The federal government typically does not reimburse states for costs associated with subsidized guardianship. However, 7 states have operated or are currently operating federally funded guardianship projects through their participation in the Title IV-E waiver program. HHS data show that 4 percent of children exited foster care through guardianship in fiscal year 2002. HHS reports that in fiscal year 2002, 17 percent of children exited foster care through adoption. Unless a parent voluntarily relinquishes his or her rights, states must petition the court for a termination of parental rights (TPR) before a foster child can be adopted. ASFA requires, with few exceptions, that states file a TPR petition when a child has been in foster care for 15 of the most recent 22 months, but ASFA does not address the length of time needed to grant the petition to terminate. Before the termination is completed, states can begin to recruit for an adoptive family and even place a child in a pre-adoptive home with an interested family after this family has been approved. The adoptive family approval process generally involves background checks and a home study—a detailed examination of a family’s circumstances, including its employment and finances and family medical history—to ensure that the family will provide a safe and suitable placement. The key steps in the process for adopting children from state child welfare agencies are summarized in figure 1. In order to be eligible to receive federal funding, ASFA requires that states do not delay or deny the placement of a child for adoption when an approved family is available outside the jurisdiction that currently handles the child’s case and requires states to facilitate the timely adoptive placement of children through the effective use of cross jurisdictional resources. States govern the placement of children across state lines through a compact known as the Interstate Compact on the Placement of Children (ICPC). At the time of publication, the compact was being rewritten to improve the process of placing children across state lines. Families who adopt children with special needs can receive monthly subsidies. The Adoption Assistance Program, under Title IV-E of the Social Security Act, authorizes the federal government to partially reimburse the states for the subsidies they provide to families who adopt special needs children. Payments to the parents of an eligible child with special needs can include both one-time adoption assistance for expenses such as attorney fees and ongoing monthly assistance, which is used for any identifiable needs of the child. Special needs children must meet at least one criterion from the following list: (1) the child is a dependent child who would have been eligible for AFDC, as it existed in 1996; (2) the child is eligible for Supplemental Security Income (SSI); (3) the child is a child of a minor parent who is in foster care already and receiving foster care maintenance payments under Title IV-E; or (4) the child received adoption assistance previously, but the adoption dissolved or the adoptive parents died. If the child does not meet these eligibility criteria, but still meets the state’s definition of special needs, the state can provide a subsidy to the child’s adoptive family, but cannot claim federal reimbursement. The amount of the subsidy is determined through negotiations between the adoptive parents and a representative of the state agency based on the needs of the child and circumstances of the adoptive family. The subsidies are intended to help adoptive families manage the cost of caring for their special needs children. Adopted children often have difficulties with issues of loss, attachment, and identity formation that can lead to behavioral and developmental problems and require professional treatment. In addition, special needs children with physical and other mental disabilities may require specialized care and treatment. Adoption subsidies are available to families until children reach age 18 but may be extended to age 21 if a mental or physical disability necessitates continuation. In addition to reimbursing states for the adoption subsidies, the federal government pays adoption incentive funds to qualifying states. Under the Adoption Promotion Act of 2003, (Pub. L. No. 108-145), which amended the Adoption Incentives Program, a state is eligible for an award if the number of adoptions from the foster care system for the fiscal year under review exceeds the state’s baseline year, the highest number of adoptions in any previous year, beginning with fiscal year 2002. States may also receive an incentive payment based on the adoptions of children having special needs or children older than age 9. Specifically, when a state exceeds its baseline year in each category, it will receive an incentive payment of $4,000 for each child adopted from foster care, $2,000 for the adoption of each special needs child younger than age 9, and $4,000 for the adoption of each child aged 9 or older. Thus, the program encourages adoption generally while emphasizing the adoption of children with special needs. In fiscal year 2003, the federal government paid states more than $17 million in incentive payments through this program. Title IV-E adoption subsidies and adoption incentive awards are not the only federal assistance available to support adoption. Funds authorized under Title IV-B of the Social Security Act, the Temporary Assistance for Needy Families program (TANF), and the Social Services Block Grant (SSBG) have also been used to facilitate and sustain adoptions. We reported that in fiscal year 2002 states used more than $5 million in Title IV-B funds on adoption subsidy payments, more than $9 million on recruitment and training for foster and adoptive parents, and nearly $29 million on adoption support and preservation services. A recent survey on states’ fiscal year 2002 allocations of federal funds for child welfare found that states reported spending $56 million in TANF funds, $44 million in Title IV-B funds, and $22 million in SSBG funds on adoption and support services for adopted children. HHS’s Children’s Bureau administers and oversees federal funding to states for child welfare services under Titles IV-B and IV-E of the Social Security Act, and states provide these child welfare services, either directly or indirectly through contracts with private agencies. Among other activities, HHS staff are responsible for developing appropriate policies and procedures for states to follow and conducting administrative reviews to ensure that states are in compliance with established policies. HHS staff from its 10 regional offices provide technical assistance to states, review state planning documents, assist with state data system reviews, and assess states’ use of funds for foster care maintenance payments. Between 2001 and 2004, HHS completed its first round of Child and Family Services Reviews (CFSR), which assessed child welfare outcomes in all 50 states, the District of Columbia, and Puerto Rico. These reviews assessed states’ progress and achievement in many areas and found weaknesses related to adoption. For example, HHS reported that at least 27 states experienced challenges seeking terminations of parental rights in accordance with ASFA. In addition, HHS also reported that 37 of the 52 states failed to meet the national standard of finalizing adoptions within 24 months of the child’s most recent entry into foster care. To evaluate states’ performance on child welfare indicators, such as timely adoptions, HHS relies, in part, on its Adoption and Foster Care Analysis and Reporting System (AFCARS) to capture, report, and analyze information collected by the states. In addition, AFCARS is used to generate annual reports on foster care and adoption programs nationwide, and it is the primary source of data for the Adoption Incentives Program. We reported that the AFCARS data were not reliable and recommended that HHS make improvements. HHS officials agreed with our findings and stated that several data definitions in AFCARS would be updated and revised. In June 2004, HHS officials stated that the regulations related to making these changes were being drafted. As of April 2005, the regulations had not been issued, and HHS officials said they did not have a specific planned release date. States we visited reported that limited resources, court-related processes, and delays in completing interstate placements were the major challenges to special needs adoption. The limited resources impeded state agencies’ efforts to recruit adoptive families. Additionally, officials said that difficulties scheduling cases and the time involved with other court proceedings delayed finalizing adoptions. Officials also reported that delays in completing home studies hindered adoptions that involved interstate placements. In part because of resource limitations, adoptive parents in many states received lower subsidies and fewer services than foster parents. Officials in 4 of the 5 states we visited told us that budget issues in their states have caused reductions in or eliminations of adoption services. States are prohibited by statute from providing monthly adoption assistance payments that exceed the foster care maintenance payments that would have been paid if the child had been in a foster home. Officials in 4 of the states we visited said that most special needs children are adopted by their foster parents, and a 2002 report found that nearly two-thirds of children adopted from the child welfare system are adopted by their foster parents. In responding to a question in our survey, 31 of 49 states reported that adoption assistance payments were lower than foster care maintenance payments in those states, and more than half of the 31 states viewed lower adoption payments as a moderate to very great hindrance to the adoption of special needs children. According to an official in one of the states we visited, adoption subsidies are critical to helping families who adopt special needs children pay for the care and services these children need. Families adopting special needs children may face substantial costs for medical care and mental health services, and several of the experts we interviewed explained that prospective adoptive families may hesitate to adopt special needs children because they are concerned about the costs of providing services to meet their needs. In addition, services, such as respite care, provided by the state for foster children may be provided to a lesser degree or not at all to adopted children or to children being cared for by legal guardians. Our survey asked states about 13 types of services. For 9 of the 13 services, fewer states reported providing the services to adopted children than to foster children; for every service, the fewest number of states extended these services to children in guardianship arrangements. (See fig. 2.) Further, officials in 4 of the 5 states we visited confirmed that subsidies and services declined when foster parents became adoptive parents. THIS PAGE INTENTIONALLY LEFT BLANK In addition, many states reported that it was difficult to recruit families and limited resources affected their efforts. Nearly half of the 49 states responding to a relevant question in our survey indicated that difficulty recruiting families was a great or very great challenge to the adoption of special needs children. In 4 of the 5 states we visited, child welfare staff we interviewed told us that high caseloads limited the time caseworkers could spend recruiting families and placing children. In some cases, tight budgets led officials to make personnel decisions that made fewer experienced staff available to recruit adoptive parents. In Georgia, officials explained that because of budget and staffing constraints, instead of having workers who could specialize in various processes, such as recruiting adoptive parents, child welfare workers had to handle multiple aspects of each case. Further, in Michigan, officials explained that a budget saving plan to encourage early retirement led many experienced child welfare staff to retire. While the child welfare agency hired new workers, nearly all of them were inexperienced and needed both formal and on-the-job training. As a result, according to the foster and adoptive parents we interviewed in that state, these inexperienced workers were less effective than experienced workers at meeting families’ needs. Additionally, in part because of staffing and resource constraints, there are concerns about how long it takes to place children with families. Both a home study and a background check are required for adoptive families, but according to adoptive and waiting parents in one state, high caseloads limited the time caseworkers could spend completing these studies, and frequently it was several months from the time families indicated interest in adopting until their home studies were completed. In addition, states typically provide adoptive families with an orientation to the adoption process and relevant training, but caseworkers in one of the states we visited told us that because of resource constraints, training of prospective adoptive parents is limited, particularly in the rural areas. After home studies are completed and the families have been approved, families often wait for suitable placements. One study found that the matching and placement phase involved more uncertainty and misunderstanding for prospective adoptive families than any other step in the adoption process. The same study also found that one-quarter of potential adoptive parents felt that they were not given an accurate estimate of the time it would take for a placement. Another report noted that infrequent contact between caregivers—foster parents and guardians—and case managers resulted in caregivers leaving the foster care system and not pursuing adoption. In 3 of the states we visited, foster, adoptive, and pre-adoptive parents told us that because of staff shortages, high caseloads, and other duties, caseworkers did not give them the attention they needed. As a result, some adoptive and pre-adoptive parents who were trained lost interest or sought children through other means, such as private placements. In New Mexico, almost all of the potential adoptive families we talked with in one rural area had been waiting for more than a year to adopt. They expressed frustration over the lack of contact from the child welfare agency while they knew that there were many children waiting for placements. Correspondingly, 20 of 46 states responding to an open-ended question in our survey reported that high caseloads or insufficient staff were among the three greatest challenges to facilitating or finalizing the adoption of special needs children. Court-related delays were also cited as a challenge to the adoption of special needs children. Twenty-two of the 46 states responding to a relevant question in our survey indicated that court-related delays were among the three greatest challenges to the adoption of special needs children. In 3 of the states we visited, judges told us that it was hard to schedule termination of parental rights hearings because court dockets were full and because of the many parties involved in some hearings. In some cases, the participants include the judge, biological parents, foster parents, the caseworker, and multiple attorneys—one for each child in a sibling group, one for each biological parent, and one for the caseworker or child welfare department. Scheduling a hearing date that fits everyone’s schedule and allows all parties to attend can be difficult. In addition to difficulties in scheduling hearings, termination proceedings can last months. Many judges want to be sure that the biological parents have had sufficient opportunity to remedy the problems that led to their children being removed. If a parent seems to be making progress, even if the parent is not yet ready to resume custody of his or her child, the judge may postpone a decision. Even in cases in which the likelihood for reunification is low, attorneys in 3 of the 5 states we visited told us that some courts hesitate to terminate parental rights until adoptive families are found for children. According to HHS’s analysis of its Child and Family Services Reviews, in over half of the states reviewed between 2002 and 2004, many judges were reluctant to terminate parental rights either because adequate services had not been provided to parents or because an adoptive family had not been identified. Yet while some judges may not want to create a legal orphan before an adoptive placement is identified, judges we spoke with in 3 of the 5 states we visited said that the identification of prospective adoptive families did not play a role in their decision to terminate parental rights. Furthermore, the termination process can be delayed if an appeal is filed by a biological parent or a relative raises an objection. In Michigan, court officials told us that children’s relatives may come forward to protest when such a decision is imminent. Relatives’ objections can create delays because the child welfare agency must determine whether the relatives can be involved in the children’s care, and the court may also schedule further hearings concerning the details of their objections. Delays in completing home studies impeded the interstate placement of children and therefore delayed the adoption process. Of the 49 states responding to our survey, 26 cited the lengthy process to place children across state lines as a moderate to very great hindrance to the adoption of special needs children. In the course of seeking an adoptive placement, sometimes a child welfare agency in the state where the child resides finds a suitable family in another state. The agency in the state with the child, known as the sending state, seeks a placement in the state where a potential adoptive family lives—the receiving state. Generally, caseworkers from the sending state request that a receiving state complete a home study of the prospective family. However, caseworkers in the receiving state may assign this request a low priority because conducting the home study would take time away from their own caseloads. According to a survey of state officials conducted by the American Public Human Services Association (APHSA), 32 of the 45 respondents cited staffing and workload issues as the leading cause for delay in completing home studies requested by other states. Another frequently cited cause of delay was the low priority assigned to interstate placements by local workers. According to current interstate compact guidelines, 6 weeks or 30 working days is the recommended processing time from the date the receiving state gets notice from the sending state until the placement request is approved or denied. However, APHSA notes that sometimes the receiving state does not complete home studies for many months. In some cases, therefore, children linger in foster care when interstate placements are delayed. While the Adoption and Safe Families Act includes a provision that directs states to develop plans to facilitate the timely adoptive placement of children through the effective use of cross-jurisdictional resources, there are no national data to assess the timeliness of these placements. Data from AFCARS can show whether or not children were adopted outside their home state, and they also can be used to track the length of time from entry into foster care to termination of parental rights and adoption. However the system does not capture which states were involved or when placement requests were made or completed. Without such specific data, HHS does not know the extent to which states are cooperating, which states may need to improve their processes, or whether certain states are burdened by high numbers of requests for home studies in support of interstate placement. APHSA has developed a database for tracking interstate adoptions. Unlike HHS’s system, this database tracks the total number of children any participating state sent out of state or received for adoption and the total number of finalized adoptions a state made after receiving requests from other states. Participation in the association’s database is voluntary, and as of November 2004, 16 state agencies had provided their information. States and HHS have developed strategies and implemented programs to promote special needs adoptions, but few evaluations measure their effectiveness. States used both general and targeted recruitment efforts to help identify adoptive homes for special needs children. States have also provided special services and programs to help sustain adoptions. To assist states in their adoption efforts, HHS has supported many demonstration programs over the years. Although HHS has disseminated information and summaries about some of the programs and services, little has been done to assess the effectiveness of such programs, and as a result, neither HHS nor the states know which approaches have been most successful. States have used various methods to recruit adoptive families. They have placed ads on billboards; distributed or posted flyers and posters at booths during public events or in special locations, such as shopping malls, libraries, churches, and businesses; sent caseworkers to community fairs and parades; and used special public service announcements and media campaigns to generally recruit adoptive families. Many states have observed and participated in National Adoption Awareness Month each November, and some states have promoted adoptions by designating other special days. For example, officials in Massachusetts told us that they finalized 32 adoptions on a single day in May 2004. According to the National Adoption Day organization, more than 3,100 adoptions were finalized during National Adoption Awareness Month in 2003. To help facilitate adoption, states have contracted with private adoption agencies to recruit and train prospective families, developed Web sites, and partnered with adoption exchanges. Of the 49 states responding to our survey, 40 indicated that contracts with private agencies were an essential or very important recruitment method. In addition, all 5 of our site visit states, as well as others, operated Web sites that include photo listings of children awaiting adoption as well as information on adoption procedures and resources for prospective adoptive families. Also, 4 of the 5 states we visited, as well as other states, partnered with adoption exchanges— information and referral services for prospective adoptive families—to operate electronic registries of waiting children. For example, Michigan’s adoption resource exchange operates a Web site containing a calendar of training opportunities and events, a searchable database of children awaiting adoptive families, and general information on the adoption process. In addition, most states used targeted recruitment strategies that focused on a specific group of children. Of the 49 states responding to a question in our survey on methods for recruiting adoptive families for special needs children, 37 reported that television advertisements and stories were essential or very important, 35 states reported that advertisements in magazines and other periodicals were essential or very important, and 22 responded similarly regarding mass mailings or flyer distribution. For example, Kentucky officials noted in our survey that they created a special television public service announcement to recruit adoptive families for special needs children. The advertisement was filmed at the Governor’s home and included children with special needs. Another state, Georgia, issued a photo listing book, entitled “My Turn Now,” that includes those children who have been awaiting adoption for the longest period of time. Many states also hosted adoption promotion events throughout the year that targeted certain children, such as minorities or those in sibling groups. In Massachusetts, for example, the state agency has partnered with a local furniture store to host several adoption parties. The goal of the event is to help match prospective families with those children in attendance. State officials credit this business partnership with a number of successful adoptive matches. Another targeted strategy, known as the Heart Gallery, has been under way in New Mexico since 2001 and has also been implemented by a number of other states. This event has showcased professional photographs of children waiting to be adopted. Though the organizers in New Mexico have not collected data to track matches resulting from participation in the gallery event, one organizing official told us that several children who were showcased at the events have been adopted. Further, a Massachusetts official stated that within 2 months of implementing the Heart Gallery in that state, placements were found for half of the children showcased. In addition, some states are working with local community organizations and churches to help recruit and place particular children in adoptive homes. According to a National Governor’s Association report, 30 states and the District of Columbia have participated in an adoption program called One Church One Child, since 1980. The program seeks to recruit one family from each African-American church to adopt an African-American child. As indicated earlier in figure 2, states are providing some post-adoption services and resources, which many experts have said are critical to helping families sustain adoptions. Generally, post-adoption services are provided with the recognition that parents adopting children often face challenges they did not anticipate and for which they are not fully prepared, especially when the children have special needs. These services are intended to help reduce the number of adoptions that are dissolved. As previously noted, states generally provide fewer services to adoptive families than to foster families. However, 4 of the 5 states we visited have established centers to assist families after their adoptions were finalized— see table 1. However, according to state adoption officials, caseworkers, and adoptive parents we met during our site visits, better post adoptive mental health services are needed. In addition, several of the experts we interviewed expressed the opinion that many mental heath providers needed to develop and improve their competencies in adoption-related topics such as trust, abandonment, and attachment. Some states have established programs to do just this. For example, New Jersey’s Adoption Certificate Program, in coordination with Rutgers University School of Social Work and Continuing Education Department, developed a 45-hour postgraduate training program leading to an adoption certificate for mental health clinicians. The certificate program is intended to increase the knowledge of mental health practitioners regarding the core issues facing adoptive families, and to expand their clinical skills in attachment-based, family- focused therapeutic interventions. Oregon’s efforts present another example. Portland State University, in collaboration with Oregon’s Department of Human Services and Oregon’s Post Adoption Resource Center, has also developed a postgraduate training certificate program for mental health providers working with adoptive families. The training program includes hands-on strategies for coaching and working with adoptive parents to address their children’s challenging behaviors. According to program officials, the program has trained 27 therapists, and 15 more are expected to complete the program by June of 2005. The names of these therapists have been or will be forwarded to Oregon’s adoptions resource center to be included in referral information sent to adoptive families in need of mental health therapists. Most states have not conducted evaluations of their post adoption services. In responding to our survey, 9 states indicated that they have completed evaluations of post adoption services; 8 states said that they had evaluations under way, and 30 informed us that they had not conducted any evaluations prior to their completion of our survey. Evaluations play an important role in improving program operations. They can identify which services are most important to families, as well as help managers determine whether the services are achieving desired goals and if they can be provided more efficiently. Evaluation results can help individual states improve their programs and, if shared, can provide other states with valuable information to help avoid costly mistakes. Various HHS activities have helped states’ adoption efforts. Over the years, HHS has administered programs, sponsored campaigns, funded a resource center, and taken steps to disseminate information about adoptions. According to HHS officials, special needs children constitute the majority of children waiting for adoptive homes, and as such, they are the beneficiaries of the agency’s efforts to support adoption. HHS has promoted innovation for many years through the Adoption Opportunities Program and the Title IV-E Child Welfare Demonstration Program. The Adoption Opportunities Program, authorized by the Child Abuse Prevention and Treatment and Adoption Reform Act of 1978, as amended, generally provides 3-to 5-year grants and contracts to public and private adoption agencies. These grants and contracts have been used to support states’ efforts, such as increasing placement of minority children, recruiting minority adoptive families, and providing post adoption services for families with special needs children. Since the program’s inception, Congress has obligated more than $300 million for the Adoption Opportunities Program. In 2003, HHS administered about $7.3 million in first-year funding for 20 projects and in 2004 awarded $4.4 million in first- year funding for 13 projects. Also, to promote innovation, HHS has administered the Title IV-E Child Welfare Demonstration Program since 1994. Among other things, this program allows states to waive certain restrictions on the use of Title IV-E funds that heretofore have prevented states from providing support to guardians. Since 1996, 7 states have operated or are currently operating waiver projects that have provided monthly payments to relatives and other caregivers who agree to become a child’s legal guardian. The objective is to test whether providing monthly support to guardians, which is generally less than payments made to foster parents, can help reduce a state’s overall foster care costs and improve permanency outcomes for children. Since 2002, HHS has supported local efforts to recruit and support adoptive families and increase public awareness about adoption by sponsoring AdoptUSKids—a national initiative promoting adoption that is operated by a coalition under contract with HHS. AdoptUSKids has partnered with the Ad Council—a provider of public service announcements to raise awareness about social issues—to develop a national campaign to recruit adoptive families, and HHS has contributed more than $4.1 million to the effort. The campaign is expected to run for 3 years and feature a variety of public service announcements on television and radio, and in print media. Of this amount, AdoptUSKids has allocated $2 million to support state recruitment response teams to handle the anticipated interest the campaign is designed to generate. Members of these state-based teams are expected to respond to calls and e-mails from prospective parents, link them with the appropriate state agencies, keep prospective parents engaged in the adoption process by providing a point of contact, and help parents overcome the barriers they may face in pursuing adoption. Response teams are also expected to encourage local media stations to run AdoptUSKids ads and to network with local politicians and community leaders. The AdoptUSKids initiative also helps fund adoptive parent organizations around the country to recruit prospective adoptive families and support existing ones. As of October 2004, AdoptUSKids had awarded a total of $420,000 to 105 parent groups in 44 states. To recruit prospective adoptive parents, AdoptUSKids operates a national database of children waiting to be adopted and has established a Web site that includes photos; demographic profiles; and brief descriptions of interests, special needs, and the types of adoptive families that would be the most appropriate for the children. The site is available to the public, although prospective adoptive families can inquire about specific children only after their state has approved them for adoption. According to AdoptUSKids, as of April 2005, about 41 percent of the children featured on the Web site had been placed with families in pre-adoptive homes. Further, HHS has also dedicated the resources of one of its seven federally funded national resource centers to specifically address special needs adoption. Based in Michigan, the National Child Welfare Resource Center for Adoption provides training and technical assistance to states to help them achieve timely adoptions and develop program improvement plans to correct weaknesses identified through federal reviews. HHS has provided about $1 million annually to support this resource center. HHS also has acknowledged the work of others to promote adoption and has disseminated adoption-related information. HHS established the Adoption Excellence Awards in 1997 and since then has presented the award to public and private organizations, courts, and individuals. In 2004, HHS acknowledged the efforts of 17 groups and individuals who had a role in increasing the number of foster children placed in permanent homes. According to agency officials, the nonmonetary awards aim to raise awareness about adoption and publicly acknowledge best practices. To disseminate information about its programs and other activities concerning adoption, HHS has sponsored conferences devoted to adoption issues and sends a monthly electronic newsletter, the Children’s Bureau Express, to more than 9,700 readers. This newsletter highlights new developments in the adoption field, as well as provides readers information on conferences and funding opportunities. The agency also maintains an e-mail distribution list of states’ adoption and foster care program managers to help disseminate information on policies, procedures, and practices to the states and also maintains a Web site, operated by the National Adoption Information Clearinghouse, which collects and disseminates information concerning all aspects of adoption. Although HHS has administered demonstration programs for many years, the agency has done little to evaluate the projects funded through these programs and therefore does not know which ones have been most successful. For example, the Adoption Opportunities Program has been under way since the late 1970s, but HHS did not require evaluations from the grantees until 2002. In the absence of evaluations, the agency has published summaries of grantees’ final reports. For example, a document provided by HHS staff in 2002 and disseminated by the Clearinghouse synthesized the findings from 8 of 19 projects funded under this program. The document contains some information on the projects’ challenges, lessons learned, and accomplishments, as well as recommendations from the grantees. However, HHS has prefaced this material with a disclaimer, noting that it does not represent the official views of the agency. Although evaluations have been required for the last several years, HHS’s program staff told us they were still in the early stages of identifying criteria to help ensure that future evaluations from grantees will be done with sufficient rigor to help assess effectiveness. HHS has also required evaluations from Title IV-E waiver recipients, but little is known about the effectiveness of these projects, even though HHS has provided staff and technical assistance to help state grantees design, implement, and evaluate their projects. Rigorous design is an essential component to incorporate when evaluations are intended to develop conclusions about the effectiveness of a project. Such design could include random assignment or controlled quasi-experimental design. Of the seven state evaluations submitted between 2002 and 2004 that addressed guardianship, two were designed in a manner that allowed for comparisons between experimental and control groups. For example, the evaluation in selected regions of Illinois was the most methodologically rigorous of the seven, and its design incorporated random assignment, which allowed for reliable comparison between the control and experimental groups. The Illinois evaluation’s findings suggest that children for whom subsidized guardianship was an option experienced a 6 percent higher permanency rate than those in the control group and guardianship was also comparable with adoption in terms of safety and ensuring a child’s well being. The evaluations from the other 5 states were less rigorous in their design or implementation. For example, comparison groups used to evaluate guardianships in Oregon and New Mexico were not necessarily comparable in composition or makeup with the guardianship population supported by the project. Consequently, the difference in outcomes for those in guardianships could be due to internal differences or characteristics, rather than to the treatment (i.e., guardianship) itself. Other project evaluations were limited by reliance on group numbers too small for generalization and by poor response rates to assessment surveys and interviews. While the size of the project and the costs associated with measuring outcomes and collecting data should be considered in conducting evaluations, HHS officials acknowledged the weaknesses of the current work conducted by grantees and said they have learned more about the need for greater rigor as evaluations have been submitted. They also indicated that evaluations are managed by the states and HHS has very little control over how they are completed. Meanwhile, HHS has posted summaries of projects undertaken through the waiver program, and according to agency officials, they have drafted a synthesis of findings reported by grantees. The adoption assistance and adoption incentive programs have supported the adoption of special needs children, but data are lacking to determine if changes are needed to better facilitate adoption. The Title IV-E Adoption Assistance Program uses an income threshold for eligibility that is outdated and more restrictive than other cash assistance programs’ standards of needs and therefore limits eligibility. With regard to adoption incentives, all states have increased their annual number of adoptions enough to receive financial awards for doing so at least once but data are lacking to assess interstate placement challenges and credit states for collaborating. The Title IV-E Adoption Assistance Program was designed to help support the adoption of economically disadvantaged children with special needs. However, the income measure used to assess the standards of need in the AFDC program, as it existed in 1996, is outdated and in many states more restrictive than other programs’ standards of need, such as the measure used for TANF cash assistance eligibility. For example, in Massachusetts, a family of three could earn up to $633 per month and qualify for TANF, but this family would not qualify for AFDC unless the earnings were no more than $579—a difference of $54 per month. According to an HHS official, eligibility for AFDC and TANF is governed by complex rules, which therefore complicate comparison. Nonetheless, more than one-third of the 39 states responding to an open-ended question in our survey, as well as officials in 4 of the 5 states we visited, expressed the view that Title IV-E income eligibility criteria—based on AFDC eligibility—should be less restrictive. Further, making the income determinations has presented problems for some states. We asked officials in each of our 5 site visit states to comment on the administrative burden associated with the income eligibility criteria. Officials in 4 states said that determining whether children met the income requirements, by virtue of the parents’ income, was time-consuming and challenging, particularly if their incomes were not readily available through a state-maintained database. Between fiscal years 2000 and 2004, HHS found that nearly all states had made errors in applying the income criteria and determining the income eligibility for foster care maintenance determinations. Since states must also base adoption assistance income eligibility on parents’ income, similar mistakes are likely. HHS fined 50 of the 52 states it reviewed between 2000 and 2004 more than $14 million for claiming foster care maintenance payments for ineligible cases, and one of the most frequent reasons for fines, according to HHS officials, was the inappropriate application of the AFDC income criteria. While members of Congress, the Administration, and others have proposed changing or eliminating income requirements, HHS lacks data to assess the likely cost to the federal government of doing so. Nevertheless, state officials and adoption subsidy managers from 4 of the 5 states we visited recommended that Title IV-E not be tied to criteria once used for the old AFDC program. The Pew Commission on Children in Foster Care—a national nonpartisan group formed in 2003 and composed of legislators, judges, child welfare administrators, and others—has estimated that eliminating the AFDC criteria from the foster care and adoption programs would cost the federal government $1.6 billion annually. The commission based its figure on fiscal year 2002 expenditure data as well as estimated projections of the percentage of children who qualify under current regulations. A more reliable estimate cannot be made because HHS does not maintain critical data on those children and their families who are not eligible. Specifically, for those children deemed ineligible, HHS does not maintain family income data or data on the presence or absence of special needs. As a result, no one can determine how many families just missed the eligibility criteria and how many of these children had special needs. According to an HHS official, the agency has not done a formal cost estimate of expanding Title IV-E eligibility criteria, but it has been developing an approach in support of proposals that the administration has made since 2004. According to one agency official, these proposals would eliminate income eligibility determinations for foster care. However, without critical data and a cost estimate, the extent to which expanding eligibility for the Adoption Assistance Program would contribute to the nation’s growing fiscal imbalance is unknown. With regard to the Adoption Incentives Program, as figure 3 indicates, all states have been able to increase their annual number of adoptions enough to receive financial awards at least once since 1998. From 1998 to 2003, only South Dakota and Texas claimed the award each year, and 42 states earned it at least three times. The number of states receiving the award has fluctuated from year to year, however, as figure 4 illustrates. In 1999, 44 states earned the award—a reflection, perhaps, of states’ implementation of ASFA and their pursuit of permanency through adoption. By 2001, though, the number of states receiving the award dropped to 24, which may have been due to states’ inability to sustain high levels of adoptions. Since 2001, the number of states receiving the award has been on the rise. However, fewer states received the award in 2003 than in 1998, when the program began. Adoption incentive award amounts have varied, and states have used the funds to support an array of activities. For example, award amounts Texas earned ranged from $68,000 to nearly $3 million. States participating in a 2000 study reported using these awards to fund a variety of onetime activities, such as investing in post adoption services and making performance-based awards to local offices or counties. Our review of Child and Family Services Plans and Annual Progress and Services Reports from 5 states that received the award in 2002, found that these states used the funds to develop ad campaigns to recruit adoptive families, provide free legal services for adoption, and support child care for adoptive families. The Adoption Incentives Program rewards states for exceeding baselines. Some states reported that they focused on adoption prior to the implementation of the program but have since seen declines in the rate at which children enter foster care, and thus have been unable to finalize enough adoptions to claim the reward. According to officials from Massachusetts, while the state has continued to focus on adoption, it does not perceive the program to be an appropriate incentive because it simply rewards states for exceeding baselines rather than for other improvements such as placing children who have been in care the longest. As figure 5 indicates, a state theoretically could increase adoptions in the years subsequent to the establishment of its baseline and still not be in a position to claim the reward, especially if its baseline had been calibrated at a level it might not reach again. According to our survey, respondents had mixed opinions about the extent to which the program served as an incentive to promote special needs adoption. Twenty-two of the 49 states responding to a relevant survey question said the program was a great or very great incentive, while 24 responded that the program was a moderate or weak motivator. In addition, several of these respondents suggested that HHS further modify its baseline calculations. For example, states suggested adding a category to reward states for the adoption of children who have been in foster care for long periods of time, or altering the baseline to reflect increases year- to-year rather than rewarding states for exceeding historic baselines. In addition, the program does not provide a specific inducement for interstate placements. Under the program’s authorizing statute, the sending state can count the finalized adoption in its totals, but the receiving state does not get any credit for facilitating a placement, even though the receiving state must conduct the home study—a critical step in the adoption process. We do not have estimates of the costs incurred by states for conducting a home study, but officials in 1 state told us that prospective adoptive families who adopt through private agencies may pay as much as $3,000 to complete home studies. HHS officials noted that it would be difficult to track which states should be receiving the credit for facilitating interstate placements, given the limitations in the data collected in AFCARS. Furthermore, officials informed us that they do not have the authority to split the incentive award. Nevertheless, they acknowledged the challenges states face with regard to interstate placement and expressed the view that changes that would provide an incentive to facilitate interstate adoptions could help. While many states have increased the adoption of children with special needs, data and evaluations are lacking to assess the degree to which federal and state programs have promoted special needs adoptions. Interstate placements have delayed adoptions, but data to assess the timeliness of these placements are not available. Without such data, HHS cannot identify those states that may need to improve their processes or those burdened by requests for assistance. As a result, delays associated with interstate placements will likely persist, and some special needs children may linger in foster care. Although states and HHS have developed strategies and innovative programs to promote and support special needs adoptions, HHS has done little to assess the effectiveness of its programs and funded projects. As a consequence, HHS does not know which projects have been most successful and cannot be assured that federal funds used to support state projects have been used wisely. While Title IV-E Adoption Assistance has supported special needs adoption, it is unclear how many more children would qualify for the program if income standards were adjusted to today’s income standards of need. Further, without critical data and a cost estimate of expanding eligibility, the extent to which increasing the number of qualified children would contribute to the nation’s growing fiscal imbalance is unclear. As for the Adoption Incentives Program, it does not encourage states to collaborate on interstate placements, therefore failing to support an area that already presents barriers. We are making three recommendations to further improve the process and programs related to special needs adoption. To better understand delays associated with interstate placements, the Secretary of HHS should assist states in collecting and reporting data related to the interstate placement processes, especially the time needed to complete home studies and the sending and receiving state for each child placed across state lines. Such assistance could include modifying HHS’s central data system, AFCARS, in conjunction with the agency’s ongoing efforts to update and revise this system. HHS should analyze the data to assess the extent to which home studies cause delays or impede interstate adoptions and to identify which states are facilitating timely interstate placements. If supported by its findings, HHS should consider proposing legislation to amend existing law so that both sending and receiving states could claim an interstate adoption for purposes of determining award eligibility. To improve HHS’s ability to assess the effectiveness of its funded projects, the Secretary of HHS should develop guidance to ensure that rigorous design elements are incorporated into projects and related evaluations. Such guidance could consider the nature and structure of the projects and include measures to control costs. To assess the extent to which Title IV-E adoption assistance eligibility criteria exclude some economically disadvantaged children with special needs, the Secretary of HHS should (1) gather data on the economic circumstances of special needs children who do not currently qualify for IV-E and (2) develop a model to estimate the federal cost of expanding eligibility. We received written comments on a draft of this report from HHS. These comments are reproduced in appendix II. HHS also provided technical comments, which we incorporated when appropriate. HHS did not explicitly agree or disagree with the recommendations, but stated that two of our recommendations were being considered as part of a process to determine what, if any, revisions would be made to the agency’s central data system, AFCARS. Specifically, HHS stated that the recommendation to collect data related to interstate placements and the recommendation to gather data on disadvantaged children with special needs would be considered as part of its AFCARS review. With regard to our recommendation that HHS develop guidance to improve project evaluations and help assess the effectiveness of funded projects, HHS stated that such actions were unnecessary and noted that it had taken steps to strengthen evaluation requirements and provided technical assistance. Nevertheless, HHS acknowledged that a number of demonstration projects have sometimes yielded results of limited utility because of problems adhering to negotiated evaluation protocols. Also, HHS stated that it is committed to continuing to improve the quality of information generated by funded projects and it will continue to work with states to identify rigorous, administratively feasible evaluation strategies. We continue to recommend that HHS develop additional guidance to improve evaluations. Such guidance is needed to improve the quality of the results from funded projects which will enable managers to assess their effectiveness. HHS also commented on our findings related to the evaluations conducted under the Title IV-E waiver program. HHS stated that our summary of these evaluations was somewhat misleading. It noted that several states in which guardianship is a focus of the demonstration have used experimental design. Also HHS said that the Oregon demonstration was focused primarily on testing the use of flexible funding, and therefore the evaluation of the guardianship components used other methods and focused on descriptive data. We modified the report to clarify the aspects of rigorous design. However, we did not change our description of the Oregon evaluation because it accurately portrayed the evaluation, which included information on the impact and effectiveness of the guardianship component of the project. We also provided a copy of our draft report to child welfare officials in the 5 states we visited and received technical comments from Georgia, Massachusetts, Michigan, and Oregon. We incorporated these comments when appropriate. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time we will send copies of this report to the Secretary of Health and Human Services, state child welfare directors, and other interested parties. In addition, we will make copies available to others on request. Also, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8403 or AshbyC@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of our study were to (1) identify the major challenges to placing and keeping special needs children in adoptive homes, (2) examine what states and the Department of Health and Human Services (HHS) have done to facilitate special needs adoptions, and (3) assess how well the Adoption Assistance Program and the Adoption Incentives Program have worked to facilitate special needs adoptions and what changes, if any might be needed to further facilitate adoptions. To gather information about these objectives, we utilized multiple methodologies: (1) a Web-based survey to state child welfare agencies; (2) site visits to 5 states; (3) interviews with HHS officials, staff from key National Resource Centers, and child welfare researchers and practitioners, as well as discussion groups with adoptive parents and state adoption program managers; (4) a review of 10 selected states’ 5-year reports and 5-year plans that HHS requires as part of its ongoing child welfare oversight, as well as a review of federal adoption assistance and promotion laws and HHS regulations; and (5) a review of adoption-related studies and evaluations conducted by HHS, the states, and nongovernmental organizations. We conducted our work between May 2004 and April 2005 in accordance with generally accepted government auditing standards. To gather information about states’ experiences with special needs adoption, we distributed a Web-based survey to the adoption program managers in all 50 states, the District of Columbia, and Puerto Rico on September 17, 2004. The survey contained a number of both closed- and open-ended questions. To determine whether the survey questions were clear, unbiased, and used appropriate language, we pretested the survey instrument with officials in Delaware, Pennsylvania, Maryland, New York, Virginia, Ohio, and the District of Columbia prior to distribution. After an appropriate period of time had passed after initial survey distribution, we conducted an extensive follow-up process that included e-mails and phone calls to states that had not yet completed the survey. At the culmination of this process, we received and analyzed responses from 50 states. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize these nonsampling errors. For example, social science survey specialists designed the questionnaire in collaboration with GAO staff with subject matter expertise. Then, the draft questionnaire was pretested with a number of state officials to ensure that the questions were relevant, clearly stated, and easy to comprehend. When the data were analyzed, a second, independent analyst checked all computer programs. Since this was a Web-based survey, respondents entered their answers directly into the electronic questionnaire. This eliminated the need to have the data keyed into a database, thus removing an additional source of error. We took several steps to assess the reliability of the data obtained through our survey. During our pretests, we asked state officials questions to determine the reliability of the data they could provide, such as how accurate their data entry systems were and how confident they would be estimating the data we requested. On the basis of these responses, we decided to include an open-ended question in the survey instrument that would give states an opportunity to discuss any limitations in the data they sent us. After receiving final surveys from 50 states, we examined the responses to that particular open-ended question, along with all the closed-ended data questions, and made decisions about which to report on. We then examined the output to test for inconsistencies, took steps to resolve these inconsistencies with the relevant states, and determined that the data were sufficient and reliable for the purposes of our report. To gather more detailed information about the challenges states face promoting and sustaining adoption, as well as some of the practices they’ve implemented to overcome challenges, we selected 5 states to visit—Georgia, Massachusetts, Michigan, New Mexico, and Oregon— based on differences in their success achieving adoption incentive awards, along with their differences in location, size of child welfare population, degree of privatization of services, and whether they had state or locally administered systems. In preparation for the visits and to understand the unique circumstances in each state, we talked with HHS’s regional office staff and field experts and obtained and reviewed relevant literature from each of the 5 states, such as studies of adoption efforts and promising practices. During our visits to each state, we talked with officials from the state child welfare agency, along with officials and staff from at least one local agency office. Specifically, in each state we spoke with the adoption program manager; caseworkers and supervisors; foster and adoptive parents; judges, attorneys, and other court personnel, such as guardians and advocates; and private agency officials under contract with the state. To gather information about HHS’s role in promoting special needs adoption and generating related research and evaluation, we interviewed HHS officials from Central Office and all the Regional Offices. We also spoke with staff from National Resource Centers involved in special needs adoption and permanency issues and interviewed nearly 20 child welfare experts and researchers to learn additional information about challenges confronting states’ promotion and maintenance of special needs adoption. We also conducted separate discussion groups with adoptive parents and state adoption program managers. We conducted a discussion with 11 adoptive parents from 8 states who were attending the annual conference of the North American Council on Adoptable Children to learn their perspectives on the adoption process, subsidy rates, and post-adoption services. We also held a discussion group with adoption program managers from 18 states during the annual meeting of the National Association of State Adoption Programs. During this discussion, we learned more about the federal role in promoting and sustaining adoption and obtained managers’ perspectives on Title IV-E funding and the provision of subsidies to adoptive parents. To learn more about how states were spending the adoption incentives funds they had received and what their plans were to recruit and retain adoptive families using federal funds, we reviewed 10 states’ 2005-2009 Child and Family Services Plans and 2004 Annual Progress and Services Reports—documents required by HHS as part of federal funding participation. We selected 10 states—half of which received an adoption incentive award in 2002—the latest date for which figures were available at the time of our selection and analysis—and half of which did not. Since we wanted to include documents from our 5 site visit states in the sample, we collected the plans and reports from another 5 states, selected randomly based on their receipt or nonreceipt of the award. Among the 10 states whose documents we reviewed, Georgia, Kentucky, New Hampshire, Oregon, and Pennsylvania received an award in 2002, and Alaska, Massachusetts, Michigan, Mississippi, and New Mexico did not. We summarized the plans and reports that HHS’s regional offices provided to us for these states, including excerpts from unapproved plans, and included this information where appropriate. We also reviewed relevant laws and regulations describing the Adoption Assistance and Adoption Incentives Programs. During the course of the work, we reviewed more than 20 adoption studies that had been conducted by states, university professors, and independent child welfare researchers. We also reviewed 14 evaluations, including those required under the federal Title IV-E waiver program, that were designed to assess the effectiveness of adoption, permanency, and post adoption projects. For each of the selected studies that are used in this report, we determined whether the study’s findings were generally reliable. To do so, two GAO social science analysts evaluated the methodological soundness of the studies using common social science and statistical practices. For example, they examined each study’s methodology, including its limitations, data sources, analyses, and conclusions. In addition to those named above, Joy Gambino, Joah Iannotta, Kopp Michelotti, Vernette Shaw, and Carolyn M. Taylor made key contributions to this report. Susan Bernstein, Karen Burke, Michele Fejfar, Catherine Hurley, Kevin Jackson, Stuart Kaufman, Jason Kelly, Luann Moy, and Jay Smale also provided key technical assistance. Indian Child Welfare Act: Existing Information on Implementation Issues Could Be Used to Target Guidance and Assistance to States. GAO- 05-290. Washington, D.C.: April 4, 2005. Foster Youth: HHS Actions Could Improve Coordination of Services and Monitoring of States’ Independent Living Programs. GAO-05-25. Washington, D.C.: November 18, 2004. D.C. Child and Family Services Agency: More Focus Needed on Human Capital Management Issues for Caseworkers and Foster Parent Recruitment and Retention. GAO-04-1017. Washington, D.C.: September 24, 2004. Child and Family Services Reviews: States and HHS Face Challenges in Assessing and Improving State Performance. GAO-04-781T. Washington, D.C.: May 13, 2004. Child and Family Services Reviews: Better Use of Data and Improved Guidance Could Enhance HHS’s Oversight of State Performance. GAO- 04-333. Washington, D.C.: April 20, 2004. D.C. Family Court: Operations and Case Management Have Improved, but Critical Issues Remain. GAO-04-685T. Washington, D.C.: April 23, 2004. Child Welfare: Improved Federal Oversight Could Assist States in Overcoming Key Challenges. GAO-04-418T. Washington, D.C.: January 28, 2004. D.C. Family Court: Progress Has Been Made in Implementing Its Transition. GAO-04-234. Washington, D.C.: January 6, 2004. Child Welfare: States Face Challenges in Developing Information Systems and Reporting Reliable Child Welfare Data. GAO-04-267T. Washington, D.C.: November 19, 2003. Child Welfare: Enhanced Federal Oversight of Title IV-B Could Provide States Additional Information to Improve Services. GAO-03-956. Washington, D.C.: September 12, 2003. Child Welfare: Most States Are Developing Statewide Information Systems, but the Reliability of Child Welfare Data Could Be Improved. GAO-03-809. Washington, D.C.: July 31, 2003. D.C. Child and Family Services: Better Policy Implementation and Documentation of Related Activities Would Help Improve Performance. GAO-03-646. Washington, D.C.: May 27, 2003. Child Welfare and Juvenile Justice: Federal Agencies Could Play a Stronger Role in Helping States Reduce the Number of Children Placed Solely to Obtain Mental Health Services. GAO-03-397. Washington, D.C.: April 21, 2003. Foster Care: States Focusing on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-03-626T. Washington, D.C.: April 8, 2003. Child Welfare: HHS Could Play a Greater Role in Helping Child Welfare Agencies Recruit and Retain Staff. GAO-03-357. Washington, D.C.: March 31, 2003. Foster Care: Recent Legislation Helps States Focus on Finding Permanent Homes for Children, but Long-Standing Barriers Remain. GAO-02-585. Washington, D.C.: June 28, 2002. District of Columbia Child Welfare: Long-Term Challenges to Ensuring Children’s Well- Being. GAO-01-191. Washington, D.C.: December 29, 2000. Child Welfare: New Financing and Service Strategies Hold Promise, but Effects Unknown. GAO/T-HEHS-00-158. Washington, D.C.: July 20, 2000. Foster Care: States’ Early Experiences Implementing the Adoption and Safe Families Act. GAO/HEHS-00-1. Washington, D.C.: December 22, 1999. Foster Care: HHS Could Better Facilitate the Interjurisdictional Adoption Process. GAO/HEHS-00-12. Washington, D.C.: November 19, 1999. Foster Care: Kinship Care Quality and Permanency Issues. GAO/HEHS- 99-32. Washington, D.C.: May 6, 1999. Foster Care: Agencies Face Challenges Securing Stable Homes for Children of Substance Abusers. GAO/HEHS-98-182. Washington, D.C.: September 30, 1998. | On September 30, 2002, the most recent date for which Department of Health and Human Services (HHS) data were available, about 126,000 foster children were waiting to be adopted. Estimates suggest that a significant portion of these children had one or more special needs, such as a medical condition or membership in a minority group, that may discourage or delay their adoption. Federal support in the form of adoption subsidies and incentive payments to states is available to promote special needs adoption. This report (1) identifies the major challenges to placing and keeping special needs children in adoptive homes, (2) examines what states and HHS have done to facilitate special needs adoptions, and (3) assesses how well the Adoption Assistance Program and the Adoption Incentives Program have worked to facilitate special needs adoptions, and determines if changes might be needed. According to state child welfare officials, limited resources, court processes, and delays in completing interstate placements challenged the adoption of children with special needs by hindering recruitment of adoptive families and delaying the adoption process. In particular, adoptive parents in many states received lower subsidies and fewer services than foster parents. In addition, child welfare officials, court staff, and judges said that the adoption process can take months to complete because hearings to terminate parents' rights are hard to schedule and may involve appeals. Further, officials said that interstate placements are often hampered by delays in completing home studies of prospective families, although no data exist to assess the timeliness of such placements. States and HHS have developed and implemented strategies and programs to promote special needs adoptions, but few evaluations measure their effectiveness. Four of the 5 states we visited sponsored post adoption resource centers. However, only 9 of 49 states responding to a relevant question in our survey indicated that they had evaluated the effectiveness of their services. At the federal level, HHS supported and promoted local innovation, provided technical assistance, and disseminated information, but the agency has done little to assess the effectiveness of the programs it has funded. When HHS has taken steps to have states assess funded projects, the agency has not ensured sufficient rigor to assess effectiveness. The Adoption Assistance and Adoption Incentives Programs have provided support for special needs adoptions, but data are lacking to determine if changes are needed to better facilitate adoption. The former uses an income eligibility threshold that is more restrictive than other cash assistance programs' standards of need and may not include all who might otherwise qualify. Since 1998, the Adoption Incentives Program has provided financial awards to almost all states for increasing adoptions, but does not provide a specific inducement for interstate placements. Data to track and credit states for collaborating on interstate placements are not available. |
The Food Stamp Program is designed to promote the general welfare and to safeguard the health and well-being of the nation’s population by raising the nutrition levels of low-income families. Recipients use their food stamp benefits to purchase allowable food products from authorized retail food merchants. Eligibility for food stamp benefits is determined on a household basis. A household can be an individual, a family, or another group who lives together and customarily purchases and prepares food in common. Applicants must provide a Social Security number for each household member. The value of the food stamp benefits for a household is determined by the number of eligible household members and their income, adjusted for assets and such costs as expenses for shelter and utilities. Nationally, the average monthly value of the benefit per household member is about $73. The household’s monthly food stamp allotment increases with each additional member, provided income limits are not exceeded. Households that receive food stamps are required to report changes in household membership, such as the loss of a member, to the administering state agency. Within USDA, the Food and Nutrition Service (FNS) administers the Food Stamp Program through agreements with state agencies. FNS is responsible for approving state plans for operation and for ensuring that the states are administering the program in accordance with regulations. The states are required to establish a performance reporting system to monitor the program, including a quality control review process to help ensure that benefits are issued only to qualifying households and that the benefit amounts are correct. State agencies are responsible for imposing penalties for violations of program requirements and are responsible for recovering food stamp overpayments. The federal government pays all of the benefit costs and one-half of the administrative costs for each state. In 1996, USDA paid the states about $1.7 billion to administer the program. The program is administered by states. Eligibility workers in service centers work directly with clients to certify household eligibility and determine benefit amounts at the time of application and at least annually thereafter. With respect to deceased individuals, SSA’s information is more comprehensive than that gathered by state agencies. SSA compiles information in its Death Master File from a wide variety of sources, including the Department of Veterans Affairs, the Health Care Finance Administration, funeral directors, and its own internal claims and postentitlement processes. SSA also includes in the Death Master File death information that it purchases from the states through agreements negotiated with each state. About half of these agreements restrict SSA’s ability to disclose this information to agencies in other states. Each Social Security number in the Death Master File has been verified to ensure that it is associated with the appropriate name, date of birth, and gender for each deceased individual. SSA updates its file monthly. In contrast, state information regarding deceased individuals is initially compiled at the local level by, for example, county departments of health, which gather the information from local funeral homes and other sources, including coroners. The counties forward the information to a designated state agency, such as the state bureau of vital statistics. During calendar years 1995 and 1996, about $8.5 million in food stamp benefits were improperly collected by households that included deceased individuals—nearly 26,000 in total—in the four states we examined. (See table 1.) While these individuals were counted in food stamp households for an average of 4 months, we identified 177 instances in which deceased individuals were counted as beneficiaries for the full 2 years covered by our review. We also identified 20 instances in which such individuals were counted in more than one state during the period of our review. The deceased individuals whom we identified in our match were members of households of varying sizes, some with multiple members and some with a single member—the deceased individual was the household. For households with multiple members, the household may have included a deceased individual as a member at application, or the member may have passed away while on the food stamp rolls. But benefits continued to be issued on the presumption that the individual was present in the home. For single-member households, some other individual obtained the benefits. In these cases, the food stamps could have been issued either to a person designated as the deceased individual’s authorized representativeor to someone who fraudulently represented himself or herself as the deceased individual. Food stamp benefits are issued either as coupons or via electronic benefit transfer systems. For coupons, issuance procedures require clients to present various items of identification, such as Food Stamp Program cards bearing their signature, in order to pick up food stamps from a service center or other outlet. A small number of the coupons are mailed to the clients. Under an electronic benefit transfer system, the state agency issues access cards (similar to debit cards) and personal identification numbers to clients who obtain benefits through point-of-sale terminals in stores. However, the effectiveness of the issuance procedures to ensure that only eligible participants receive benefits depends on how rigorously the procedures are followed by the responsible staff and clients. Deceased individuals are included in food stamp households because (1) local agencies use unverified and incomplete information to determine the composition of a household when calculating benefits and (2) recipients of benefits sometimes do not notify the agencies of changes in household composition. Some states have attempted to verify the information that food stamp clients provide on household composition through computer matching of this information with deaths reported to the state, although the program does not require such matching. The success of these efforts has been mixed, largely because the states do not have complete, accurate, and timely data. Currently, even the information SSA reports to the states on deaths is incomplete—SSA provides information only on deceased individuals who received both SSA benefits and food stamp benefits, not just food stamp benefits. Most agencies primarily rely on food stamp applicants to provide accurate information on household composition and to report subsequent changes, such as the loss of a household member. In general, the Food Stamp Program takes this approach because it has to balance the issues of clients’ convenience, administrative simplicity, and payment accuracy; consequently, controls over determining household composition are not as rigorous as they could be. A household that wishes to receive benefits must present an application listing members and their Social Security numbers and provide information about income and other eligibility factors. Eligibility workers review this information, obtain identification documents such as a driver’s license, interview a household representative, and certify eligibility. In addition, they recertify the household at least annually. However, at no time are all household members required to appear and present identification. Furthermore, clients are responsible for identifying changes in household composition. According to FNS, which identifies error rates for each state by reviewing a random sample of cases, clients’ errors or misrepresentations contribute significantly to incorrectly issued benefits, particularly when overpayments occur. In 1996, FNS reported that about 7 percent of the benefits issued nationwide were overpayments and that 57 percent of the overpayments were attributable to intentional or unintentional inaccuracies in client-provided information. Nevertheless, FNS’ regulations do not require the verification of client-provided information on household composition, unless the eligibility workers deem the information “questionable.” The regulations allow each state agency to develop guidance for identifying questionable information. In the states we visited, the guidance defined questionable information as applicants’ statements that were contradictory or did not agree with the information that was in the case record or otherwise available to the eligibility workers. FNS has not required the states to match Social Security numbers of deceased individuals with the numbers provided for the Food Stamp Program. When the eligibility workers in the states we visited suspected questionable or fraudulent information, they could refer the application to investigators before granting aid. Investigators in each state told us that they try to verify questionable information on household composition by visiting homes and making collateral contacts to confirm information with friends, neighbors, or landlords. According to the investigators, these techniques are hit-or-miss, time-consuming, costly undertakings and provide information that is only as reliable as its source. Furthermore, investigative resources are generally very limited. Although some state agencies have employed their own computer matches as a means of identifying deceased individuals who are included in food stamp households, the practice does not appear to be widespread. Of the states we visited, California, Florida, and New York have established a matching program between the state’s public assistance rolls (for all assistance programs, not just food stamps) and the state’s death records from its vital statistics agency. According to FNS, only two other states, Illinois and Ohio, currently perform a monthly computer match between state records of deceased individuals and their food stamp rolls, and two other states, Maryland and Pennsylvania, have conducted matches, but not routinely. The California Department of Health Services conducts a monthly match of its assistance eligibility rolls, including that for food stamps, with state death records from its vital statistics agency. However, because the agency’s Social Security numbers are not verified, and the information is limited to California, mismatches may occur, and some deceased individuals may not be identified. While Florida officials consider their match to be very useful, the state’s reliance on unverified Social Security numbers and other identifying information reduces its effectiveness. The officials appreciate the positive effects of their match on the overall integrity of assistance programs (food stamps, Medicare, and others) because it eliminates ineligible individuals from the rolls and discourages fraud and abuse. However, because the agency’s match is based solely on Social Security numbers, and these numbers are not verified in the state’s record of deceased individuals, invalid matches are produced. During the first year of the match (initiated in December 1995), 4,528 matches were acted on by eligibility workers in the following way: 1,439 cases were updated, 21 cases were referred for fraud investigation, and 57 cases were determined to be duplicative. According to a state official, the remaining 3,011 matches required no action because (1) the case file had already been revised or (2) the match was invalid because although a Social Security number matched, other data— such as date of birth, gender, and race—did not. Access to SSA’s death information, in which the Social Security number, name, date of birth, and gender have been verified, would reduce the number of invalid matches. The New York State matching effort was suspended in June 1997 because the outdated death information used in the match resulted in invalid matches. The match, which had been in place since the late 1970s, was conducted using only the state’s vital statistics data from the previous year. Eligibility workers stopped following up on the match results because they often found that appropriate action had already been taken as a result of more recent information provided by other sources, such as household members or obituary listings. In 1996, a new state law required the state to conduct a computer match to identify deceased individuals included in households receiving federal and state assistance, primarily so that liens could be placed on the estates of individuals owing funds to the state. In response to this requirement, the state is redesigning the matching program and establishing a process with the state’s vital statistics bureau to ensure that current data are used. SSA’s death information, if available to the state, would provide the most comprehensive and current source of information. SSA provides limited information to the states on deceased beneficiaries of its own programs, Retirement, Survivor and Disability Insurance (RSDI) and/or Supplemental Security Income (SSI), through its State Verification and Exchange System (SVES). SVES is a computer system that the states use to verify the Social Security numbers of applicants to the Food Stamp Program and to determine if applicants are receiving RSDI or SSI benefits. However, SVES does not automatically notify the states of the deaths of food stamp recipients who did not also receive RSDI or SSI benefits. For SSA beneficiaries, SVES will automatically alert the states if RSDI or SSI benefits have been terminated or altered because of death or other conditions, and will also provide the SSA-verified date of death and changes in benefits. However, for individuals who do not receive SSA benefits but who have applied for food stamp benefits, SSA only verifies the accuracy of the Social Security number(s), name(s), and date(s) of birth submitted in the application. SSA does not notify the states if those Social Security numbers belong to deceased individuals. Matching SSA’s comprehensive Death Master File with states’ information on food stamp participants would be an effective and inexpensive way of identifying deceased individuals included in food stamp households. Because SSA already has a system in place for providing death information to the states, it would be even more cost-effective for SSA to routinely provide death information on food stamp participants to the states rather than having the states conduct computer matches of the food stamp rolls and their death records. However, in order for SSA to provide this additional information, it would have to (1) modify its SVES and (2) be given the authority to provide the data to the states. The availability of such information would provide ancillary benefits, such as helping state agencies identify deceased individuals in other assistance programs. Although the lack of reliable information adversely affected the success of matching programs in California, Florida, and New York, both an FNS study and our own experiences demonstrate that automated data matches by states using food stamp records provide a cost-effective means of reducing fraud and improving program integrity. A 1995 FNS study of the Income and Eligibility Verification System (IEVS), which compares wage, benefit, and other payment information reported by food stamp clients with records in six government agencies’ databases, demonstrated the cost-effectiveness of programs using computer matches to verify beneficiary information.In the two sample states it reviewed, FNS found that all of the IEVS matching programs had a cost-effectiveness ratio (program savings compared with the costs of the match, follow-up, and claims collection) greater than 1, indicating that every dollar spent on IEVS returned more than a dollar in savings to the program. We found during this and our prior review of prisoners’ participation that developing the computer programs to identify participation by ineligible individuals did not require a large investment of programmers’ time. Our programmers required an average of about 20 days to develop a program for each state. This effort required them to become familiar with the files, resolve any apparent data problems, and create and run each program. State programmers may require less time because they are already familiar with the food stamp data in their state. The cost of having states conduct computer matching is relatively low for the return generated: According to the 1995 study of IEVS, data-processing costs were approximately 2 cents per case, and investigative follow-up and claim collection costs were about $5 to $7 for all matches, whether or not there were overpayments. Although the states we reviewed that matched their vital statistics data with the food stamp rolls had mixed success, their success rate could be improved if they used the more comprehensive data maintained by SSA. However, states wishing to conduct such matches may have difficulties because of the size of the SSA database—which includes 57 million records. Moreover, SSA would have to provide its data files to all the states that wanted to conduct such matches, which would be a costly and inefficient method of matching deceased individuals with food stamp rolls. Computer matching of SSA’s Death Master File information with information on food stamp recipients would yield more comprehensive results than states’ efforts to match such beneficiary and death information in their own state records. Unlike states’ information, the Death Master File includes, for example, participants who would not be included in a state’s or local agency’s vital statistics information because they died outside of the state or of the local agency’s jurisdiction. In addition, SSA’s information, including each individual’s Social Security number, name, gender, and date of birth, is verified, while this information is not verified in states’ vital statistics records. As previously discussed, SVES currently verifies information on Social Security numbers and on SSA benefits provided to food stamp applicants for the states, and notifies the states of any changes in SSA benefit payments for participants in the Food Stamp Program. While SVES provides an established means for this exchange of data, two problems would have to be addressed if SVES were also to provide information on deceased individuals whose Social Security numbers are being used only for food stamp benefits. First, SSA officials stated that the agency would have to make a minor modification to SVES in order for it to identify individuals who are deceased and received food stamp benefits but not any SSA benefits. According to SSA officials, while SVES is not currently configured to query the Death Master File with state-submitted information, the software needed to do so has been developed and validated. The officials stated that SVES was originally designed to include this capability. Developed by SSA about 6 years ago, the software would have to be updated and activated to provide this information. According to SSA officials, while the cost and time required to do this programming is unknown, it is not expected to be prohibitive. Second, and more significantly, SSA does not have the authority to provide death information obtained from one state to other states. Under section 205 (r)(1) of the Social Security Act, SSA has the authority to enter into agreements with the states to obtain states’ death information. In addition, section 205 (r)(3) of the Social Security Act authorizes SSA to provide death information to federal and state agencies administering federal benefit programs to “the extent feasible.” However, some of the state agreements restrict SSA’s ability to disclose such information. According to SSA, over half of the agreements between SSA and the states contain such restrictions. This problem of disclosure has been recognized for some time. In 1991, we recommended that the Congress remove these restrictions. In 1993, the Congress passed legislation to remove such restrictions on disclosure to federal agencies to ensure that federal payments or other benefits are not erroneously paid to deceased individuals (26 U.S.C. 6103 (d)(4)). However, the legislation did not cover state agencies administering such federal programs. One of the Department of Health and Human Services’ recommendations for the National Performance Review would have resolved this problem. The recommendation called for establishing a federal clearinghouse for death information that could have been used by federal and state agencies. Legislation to establish such a clearinghouse was introduced in the 103rd Congress but was not enacted. In addition to providing accurate, comprehensive match data to identify deceased individuals in the Food Stamp Program, access to SSA’s Death Master File information would provide opportunities to states to identify deceased individuals in other assistance programs and to improve the integrity of their food stamp data. The states use SVES to verify information for applicants and current recipients of all assistance programs, including the Food Stamp Program, Medicare, and the states’ programs of aid to families and children and general relief. SSA’s information on deceased individuals could also be used to identify agency errors. We identified a couple of cases in which the household reported the loss of a member, but, for some reason, the state or local agency did not remove that person from the benefit calculation, causing an overpayment. A notice of a match with SSA’s data sent to the eligibility worker would provide another opportunity for the case to be looked at and adjusted to reflect the change in household size. SSA’s death information could also help agencies to profile the circumstances under which benefits are erroneously issued to deceased and other ineligible individuals. For example, an examination on the basis of household size of instances in which identified deceased individuals counted as members of food stamp households could be useful in determining if the problem is predominantly caused by (1) multimember households’ not reporting deceased members or (2) individuals’ fraudulently using the name, date of birth, and Social Security number of deceased individuals. An agency could then take appropriate steps to address the problem, such as reinforcing the responsibility of households to report changes in composition to the agency. Similarly, examining the method of food stamp issuance (electronic benefit transfer, mail, or clients’ pickup) could alert an agency to the issuance method under which having deceased individuals counted as members of food stamp households is most prevalent and help it to select appropriate countermeasures. Similarly, identifying the eligibility workers responsible for a disproportionate number of cases with deceased individuals could identify the need for additional guidance or training. The inclusion of deceased individuals in households receiving food stamp benefits compromises the integrity of the Food Stamp Program and results in overpayments. Conventional methods for detecting such individuals have not been fully effective, resulting in overpayments in the states we reviewed. A match by states using SSA’s Death Master File information or, preferably, a modification to SSA’s computerized verification system that provides SSA’s deceased beneficiary information to the states could be a cost-effective method for identifying such individuals in food stamp households and reducing overpayments. To make this possible, SSA would need to be given the authority to provide this information to the states. In order to ensure the integrity of the Food Stamp Program by preventing deceased individuals from being counted as household members, we recommend that the Congress enact legislation to enable SSA to disclose all information from its Death Master File to the states administering the Food Stamp Program. Until the Congress enacts legislation to enable SSA to disclose all information from its Death Master File to the states administering the Food Stamp Program, we recommend that the Secretary of Agriculture work with the Commissioner of the Social Security Administration to encourage the states to voluntarily allow such disclosures. We further recommend that the Secretary of Agriculture direct the Food and Nutrition Service to emphasize to the states the need to identify deceased individuals and remove them from the rolls of food stamp households. We provided copies of a draft of this report to the U.S. Department of Agriculture and the Social Security Administration for review and comment. Their comments and our responses are in appendixes III and IV, respectively. In commenting on the draft report, the Department agreed with the report’s recommendations to improve the availability and use of data from the Social Security Administration so that deceased individuals would not be counted as members of food stamp households. The Department stated that the integrity of the Food Stamp Program would be improved with better access to Social Security’s death record information. While agreeing with our report’s overall findings and recommendations, the Department believed that our report was too definite about the magnitude of the overpayments and that our methodology did not provide an exact determination of the extent to which issued benefits were actually used. As our report recognizes, without a detailed review of each of the 26,000 cases we identified, it is not possible to precisely calculate the level of the associated overpayments. Instead, to demonstrate the general magnitude of the dollar values involved, we prepared an estimate using average monthly payments per person in the states involved. Our estimating approach, which we believe was reasonable, could understate or overstate the actual values. In any event, we believe the key observation remains: The large number of deceased individuals counted in food stamp households that we identified suggests a systemic problem needing immediate attention. In commenting on the draft report, the Social Security Administration agreed with our conclusion that the use of its Death Master File could improve efforts to identify deceased individuals counted as members of food stamp households. Social Security stated, however, that our report’s recommendation to the Congress concerning Social Security’s authority to release information in its Death Master File was not needed. It said that while some of this information was restricted and could not be released to the U.S. Department of Agriculture’s Food and Nutrition Service and the states administering the Food Stamp Program, Social Security already has the authority to provide 95 percent of the death information it possesses. We believe there is no sound reason why the U.S. Department of Agriculture and the states should not have the benefit of all the information possessed by Social Security as they strive to reduce fraud, waste, and abuse in the Food Stamp Program. Furthermore, we do not believe the data now shared by Social Security can address 95 percent of the problem; available data from the Food and Nutrition Service indicate that a significant number of deceased individuals now included in food stamp households cannot be identified with the information Social Security now provides. Congressional action to enable Social Security to disclose all the death information it possesses to the Food and Nutrition Service and the states would remove the only legitimate obstacle to having the Social Security Administration share information that would help another federal agency reduce fraud, waste, and abuse in its program. We conducted our work from March 1997 through January 1998 in accordance with generally accepted government auditing standards. Our detailed methodology is presented in appendix II. We are providing copies of this report to appropriate congressional committees, interested Members of Congress, and other interested parties. We will also make copies available to others on request. As arranged with your office, unless you publicly announce its contents earlier, we will make no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of Agriculture, the Commissioner of the Social Security Administration, and other interested parties. Major contributors to this report are listed in appendix V. If you have any questions about this report, please contact me at (202) 512-5138. In 1996, California, Florida, New York, and Texas represented almost 36 percent of the cost of benefits in the Food Stamp Program and approximately 35 percent of the nation’s participants. In response to the Congress’s strong interest in reducing the level of fraud, waste, and abuse in the Food Stamp Program, we reviewed food stamp beneficiaries’ data to determine whether deceased individuals, who are not eligible for food stamps, were inappropriately included as members of households receiving food stamps. Specifically, we determined (1) how many deceased individuals were included as members of households that received food stamp benefits and the estimated value of improper benefits that were issued to the households, (2) how these individuals could be included without being detected, and (3) whether computer matching or other methods could effectively identify such individuals. To determine if deceased individuals were included as members of households that received food stamp benefits and the estimated value of benefits that were issued to the households, we matched the food stamp records of the four states with the largest benefits in the Food Stamp Program and the Social Security Administration’s (SSA) Death Master File. Specifically: Florida, New York, and Texas state welfare agencies provided us with computer files containing information on all members of households and the amount of food stamp benefits issued to these households during calendar years 1995 and 1996. The data provided personal identifiers, including name, Social Security number, date of birth, gender, and the months in which food stamp benefits had been issued to the household of which each individual was a member. The state agencies had verified the Social Security numbers for the data on food stamp beneficiaries through SSA’s Enumeration Verification System. In California, which only maintains eligibility information for households at the state level, we determined that eligibility was predictive of issuance in two counties, so we used eligibility information in lieu of issuance data. SSA provided a copy of its Death Master File, which has compiled information since 1937. The data provided the same personal identifiers as obtained for food stamp beneficiaries and listed the date of death for each individual. We matched the verified Social Security numbers of deceased individuals with the verified Social Security numbers in the states’ records of membership in food stamp households. For those deceased individuals identified as members of households, we determined the periods in which food stamp issuance occurred after the date of death. We estimated the dollar value of food stamps issued to households with deceased members by applying the state’s average monthly issuance per individual recipient from 1995 and 1996 to each period in which issuance occurred after the date of death. Food stamp benefits are calculated for households, not for individuals. As such, it is difficult to determine the exact value of benefits issued to a deceased individual included in a household, unless he or she is the only member of a household. Even then, the amount will vary from individual to individual, on the basis of such factors as income, assets, and the cost of shelter. Therefore, we relied on the average monthly benefit issued per person in the locations we reviewed, which ranged from a high of $82 in New York to a low of $65 in California. In recognition of the notification and processing time frames that allow 10 days for clients to report household changes and 10 days for the state agency to take action, we did not consider any issuance in the month of death or in the following month, where appropriate, to be an overpayment. Because of the quality control program operated by the U.S. Department of Agriculture’s Food and Nutrition Service (FNS) and the states’ ongoing quality assurance efforts, we accepted the computerized food stamp data as reliable. To provide additional confidence in the data’s accuracy, we reviewed a limited number of food stamp case files at social service centers in six large metropolitan areas: Los Angeles County, California; Orange County, California; San Diego County, California; San Antonio, Texas; Tampa, Florida; and New York City, New York. We compared the name, Social Security number, and date of birth of individuals in the computerized data with information in the relevant case files and found the differences to be insignificant. We did not attempt to verify dates of benefit issuance because many case files did not contain complete information. The reliability of SSA’s death information was confirmed in our prior report, which found that nearly all the information was accurate, and in a 1994 Internal Revenue Service review that reported that up to 98 percent of the data was accurate. To determine why the inclusion of deceased individuals in food stamp households was not detected, we visited state agency officials in Sacramento, California; Tallahassee, Florida; Albany, New York; and Austin, Texas; to discuss and review policy and procedures for verifying applicant data and any subsequent changes, including the loss of a household member. We discussed fraud detection and computerized data matching efforts, quality control and assurance efforts, and methods of food stamp issuance with state officials. In addition, at the social service centers in the six large metropolitan areas we selected for review, we discussed the processes for food stamp application, data verification, certification, and recertification. We discussed local fraud detection and computerized data matching efforts. While reviewing case files at each location, we validated to the extent possible the death of a participant. To determine whether computer matching or other methods could effectively identify deceased individuals included in food stamp households, we discussed with agency officials in each of the states we visited their opinions regarding the value of such a match. We contacted state officials who had implemented a match to identify such deceased individuals to determine the cost, quality, savings, and barriers to matching. To determine the effort associated with data matching to identify such individuals, we calculated the time used by our programmer to develop and implement the match programs and reviewed studies performed for FNS and the Office of Management and Budget regarding the costs and effectiveness of matching routines. The following are GAO’s comments on the U.S. Department of Agriculture’s letter dated January 15, 1998. 1. We agree with USDA’s observation that our methodology did not allow an exact determination of the dollar value of benefits issued on behalf of deceased household members and the extent to which the benefits issued were actually used. Our estimates of overpayments are based on the number of deceased individuals we identified and FNS’ per person average monthly value of food stamp benefits provided in each state. Given the various factors that determine specific benefit amounts—including household income, assets, costs of housing, and the number of individuals in the household—actual overpayments could not be determined without a detailed analysis of the 26,000 cases we identified—the actual overpayments may have been lower or may have been higher. Our estimates are presented to show the general magnitude of the problem. The fact that almost 26,000 deceased individuals were included in food stamp households indicates a significant, systemic problem that needs to be addressed. 2. Concerning USDA’s view that data matching will not allow the recovery of all overpayments, the states are required to recover overpayments by establishing claims against households, and they have several years to take action on those claims. In addition, the states can recover overpayments by reducing future food stamp benefits. While state agencies may be unsuccessful in recovering overpayments from some households whose membership includes deceased individuals, such as single-member households, the use of SSA’s comprehensive death information will still yield savings to the program by (1) identifying deceased individuals in the application process before any benefits are issued and (2) preventing additional issuance once the deceased individual is identified. Furthermore, such efforts have the effect of reinforcing the requirement that clients report changes in household composition. 3. Concerning USDA’s view that the report does not discuss all the costs of identifying and following up on information regarding deceased individuals in food stamp households, we noted in this report the results of a 1995 Food and Nutrition Service study of the Income and Eligibility Verification System (IEVS), which is used to identify unreported and underreported income. The study found that data-processing costs were approximately 2 cents per case, and investigative followup and claim collection costs were about $5 to $7 per case for all cases, whether or not they were overpayments. The cost of identifying and following up on deceased individual cases would be similar to those incurred under IEVS. As such, our recommendation to use the existing SSA system was made with the goal of maximizing efficiency and minimizing costs by simply adding a vital piece of information to reports that are already routinely used by eligibility workers. We continue to believe that we have recommended the most cost-effective method for identifying deceased individuals on food stamp rolls—one that would require state agencies, as part of the normal course of their work, to follow up on the information provided. 4. We have modified the report title to better capture the key issue identified in this report; namely, that thousands of deceased individuals are being inappropriately included in food stamp households. The following are GAO’s comments on the Social Security Administration’s letter dated January 16, 1998. 1. We continue to believe that our recommendation to the Congress has merit. As SSA concedes in its comment, the agency has death information that if shared with USDA and the states would help reduce the number of deceased individuals inappropriately included in food stamp households. However, SSA states that it does not have the authority to disclose such information to USDA or the states. In this context, we believe that USDA could better ensure the integrity of the Food Stamp Program if it had all the information already in the hands of another federal agency. If the Congress enacted legislation enabling SSA to share this information with the states, this legislation would help USDA reduce fraud, waste, and abuse in this program. Such legislation could, but would not have to, amend the Social Security Act. The Congress has partially addressed the issue of restricted state death data in a 1993 amendment to the Internal Revenue Code. Under this provision, the Internal Revenue Service may not disclose federal tax information to a state unless that state allows federal agencies to use restricted state death data for the purpose of ensuring that federal benefits and other payments are not erroneously paid to deceased individuals. 26 U.S.C. 6103 (d) (4). While this provision covers USDA, it does not include state agencies administering federal benefit programs, such as the Food Stamp Program. If the Congress wished, this provision could be amended to cover such state agencies. 2. We do not share SSA’s view that making roughly 95 percent of its death information available to the states administering the Food Stamp Program is adequate to solve the problem of deceased individuals being counted as members of food stamp households. For the four states included in our review, we identified almost 26,000 deceased individuals that were being counted as members of food stamp households. While in this instance we cannot determine what proportion of these individuals were identified from SSA’s data that are currently withheld from USDA and the states, previous GAO work related to this issue has demonstrated that using SSA’s data was extremely useful in identifying and reducing overpayments in other federal benefit programs. As part of that work, we estimated that millions could be saved annually if agencies had access to the restricted death information. In addition, FNS data regarding the characteristics of food stamp households provides evidence that a significant number of deceased individuals included in food stamp households may be excluded from the data that SSA currently makes available to states. As is noted in this report, SSA only provides information through the State Verification and Exchange System (SVES) on deceased individuals who were Supplemental Security Income (SSI) or social security beneficiaries. In 1995, FNS reported that 83% of individuals in food stamp households did not receive SSI, and that 87% did not receive social security income. In the final analysis, therefore, we don’t believe there is merit in SSA’s view that the information it already provides is good enough. We believe there is no sound reason why USDA and the states should not have the benefit of all the information possessed by SSA as they strive to reduce fraud, waste and abuse in the Food Stamp Program. 3. We have modified the footnote to table 1 to reflect SSA’s comment. Keith Oleson, Assistant Director David Moreno, Project Leader Leo Acosta Brad Dobbins Don Ficklin Jerry Hall Alan R. Kasdan 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 Food Stamp Program, focusing on: (1) how many deceased individuals were included as members of households that received food stamp benefits and the estimated value of improper benefits that were issued to the households; (2) how these individuals could be included without being detected; and (3) whether computer matching or other methods could effectively identify such individuals. GAO noted that: (1) GAO identified nearly 26,000 deceased individuals in the four states GAO reviewed who were included in households receiving food stamps for the 2-year period 1995 through 1996; (2) these households improperly collected an estimated $8.5 million in food stamps benefits; (3) the inclusion of deceased individuals in food stamp households goes undetected because agencies rely primarily on unverified information on household membership provided by food stamp applicants and participants; (4) states are not required to match applicant-provided social security numbers with the social security numbers of deceased individuals; (5) however, several state agencies match information on the applicant's household members with information on deceased individuals from their state's vital statistics agency; (6) these states' efforts have had mixed success because the states have not always had verified, comprehensive death information; (7) while the Social Security Administration (SSA) makes information on its deceased beneficiaries available to state agencies through its State Verification and Exchange System, this information is limited to the recipients of specific SSA benefits; (8) states' computer matching of individuals in food stamp households with data in SSA's more comprehensive Death Master File would provide a cost-effective mechanism to accurately and independently identify deceased individuals included in food stamp households; (9) it would be even more cost-effective, however, for SSA to notify the states when a food stamp participant dies, rather than having the states conduct computer matches, because SSA already has a system in place to identify deceased individuals who received food stamp benefits but not social security benefits; and (10) furthermore, some states place restrictions on the use of the death data they provide to SSA; the agency currently does not have the authority to disclose restricted death information to other states administering federal benefit programs. |
Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the proposed creation of a new Federal Statistical Service, which would be formed by consolidating the Bureau of the Census and the Bureau of Economic Analysis (BEA) from the Department of Commerce and the Bureau of Labor Statistics (BLS) from the Department of Labor. H.R. 2521 would bring these agencies together into a new independent agency to be headed by an Administrator appointed by the President and confirmed by the Senate. Our testimony today applies five key principles that the Comptroller General has identified as useful for consideration in efforts to reorganize or streamline government agencies. These principles are: Reorganization demands a coordinated approach. Reorganization plans should be designed to achieve specific, identifiable goals. Once the goals are identified, the right vehicle or vehicles must be chosen for accomplishing them, including organizational structure and tools. Implementation is critical to the success of any reorganization. Oversight is needed to ensure effective implementation. In applying these principles to the proposed bill to create the Federal Statistical Service, we have drawn on our previous work on the statistical agencies (see appendix) as well as ongoing work requested by the Chairman of the House Committee on the Budget, who raised no objection to our discussing the preliminary results from this work on statistical agency funding, legal mandates, and the organization of the Canadian statistical system. Statistical activities are spread throughout the federal government. The mission of the agencies forming the federal statistical system is, in general, to collect, produce, and disseminate statistical information that is relevant to the needs of data users both within and outside the government itself. The agencies are to ensure that the information is accurate, reliable, and free from political interference and are to impose the least possible burden on individuals, businesses, and others responding to data collection requests. The Office of Management and Budget (OMB) has identified 72 agencies as comprising the federal statistical system. Its criterion in identifying these agencies was that each spend at least $500,000 annually on statistical activities. Together, these 72 agencies requested over $2.7 billion for fiscal year 1996. Of the 72 agencies, 11 are considered to be the principal statistical agencies. These 11 agencies, which include Census, BEA, and BLS, together spend approximately $1.1 billion. Census, BEA, and BLS accounted for $796.6 million of this total. Meeting the government’s needs for information in an efficient manner is a complex undertaking that requires coordination among the different statistical agencies. H.R. 2521 takes note of this, finding that “improved coordination and planning among the statistical programs of the Government is necessary to strengthen and improve the quality and utility of federal statistics and to reduce duplication and waste in information collected for statistical purposes.” The needs for statistical information for government decisionmaking and administration are extensive. Some of these needs are well known, such as the use of the Consumer Price Index (CPI) to adjust individual income tax brackets and Social Security payments to offset inflation or the use of Census data in formula grants to states and to apportion congressional and other legislative representation. There are many others. Work that we are doing at the request of the Chairman of the House Committee on the Budget has identified over 200 statutory references to uses of statistical information and reporting requirements relative to the 11 principal statistical agencies. it also would be useful if the bill were to more explicitly describe the relationship that Congress envisions between OMB and the proposed Federal Statistical Service, which would be the dominant statistical agency. It would also be instructive to consider whether the protections the bill contains to ensure that the new Service would be free from political interference might also complicate OMB’s task of coordinating the federal statistical system. Coordination within the federal statistical system has also been limited by statutes that restrict data sharing among statistical agencies in order to protect the confidentiality of individuals, businesses, and organizations that provide data. Sharing data would allow statistical agencies to meet the needs of data users without imposing added burdens on data providers. We would expect that consolidating Census, BEA, and BLS is intended to enable these three agencies to share data more efficiently than they can today and to coordinate their data collection and analysis activities more effectively. However, H.R. 2521 does not specifically authorize the three agencies to share data or specify any revision to current confidentiality limitations. Nor does it authorize data sharing among or between the other 69 agencies in the rest of the federal statistical system. Without the explicit authority to share data, the three agencies may not be able to realize the coordinative benefits H.R. 2521 aims to achieve. As the Comptroller General has noted, the key to any successful reorganization plan—and the key to building a broad consensus supporting it—is the delineation of specific, identifiable goals the reorganization is intended to achieve. By designing the proposed consolidation with such goals in mind, there is a greater chance of a shared understanding among decisionmakers of what changes will be sought in a reorganization or consolidation. Focusing on these goals would then provide the Administrator of the proposed Federal Statistical Service with guidance on how to balance competing objectives, such as cutting costs or ensuring better quality of services, and how to create not only short-term advantages but sustained, long-term gains. Specific, identifiable goals will also help Congress and the President hold the new agency accountable for meeting them. enhancing the efficiency of operations, enhancing adherence to professional standards, establishing clear national priorities for statistical programs, and ensuring the quality of data. In a time of declining budgets, making government operations more efficient is a constant goal. Eliminating duplication of government operations through a consolidation presents opportunities for increasing such efficiency. Two potential sources of greater efficiency and cost savings are the avoidance of duplicative data collection by agencies and the use by one agency of another agency’s staff to collect data when that use would be more economical. Our work has shown significant areas in which these three agencies have avoided duplication by relying on one another for data collection, on both a reimbursable and nonreimbursable basis. For example, Census now conducts the Consumer Expenditure Survey for BLS; data from this survey are used in developing the market baskets that underlie the Consumer Price Index. Thus, some of the savings that might be sought in a consolidation may have already been realized. However, the statistical agencies’ inability to share data has led to a duplication in data collection efforts; such duplication can increase both the cost of operating the statistical activities and the burdens on data providers. While we do not know how much might be saved if these three agencies had a greater ability to share data, we have identified instances where duplication of effort exists between Census and the other agencies included in the proposed consolidation. For example, because of an inability to share data, both Census and BLS survey businesses, and each has had to compile its own list of businesses. rules or legal requirements, the guidelines are intended to be consistent with current laws and statistical theory and practice. Our review concluded that the agencies generally adhered to the guidelines, although in some cases individual agencies had not sufficiently communicated to data users the procedures that they had in place to ensure their independence from political interference. We also concluded that laws intended to protect confidentiality had limited agency efforts to coordinate their activities and share data, contrary to the committee’s guidelines. Our work as well as work done by others has shown that the United States lacks an effective means for setting national priorities for the use of funds for statistical activities. This is due, in part, to the independent manner in which each agency in the federal statistical system decides how to use its funds and, in part, to the limits on OMB’s ability to influence decisions on allocating funds by other agencies. The proposed bill should resolve this issue for the three agencies to be consolidated to the extent that the head of the proposed Service would be able to set priorities for the use of its funds. Although H.R. 2521 would create a Federal Council on Statistical Policy, the proposed bill does not directly address the issue of setting funding priorities for the other 69 federal statistical agencies. were funded, and the funding levels varied considerably among the different agencies producing economic statistics. Agency consolidation alone would not address the problems with the quality of data. Accordingly, the Subcommittee may want to include provisions in the bill to address these issues of quality, such as a requirement for an action plan for fixing them. In considering any change in the organizational structure of the federal statistical system, an important question is whether consolidation is the most effective way of ensuring that the system produces the high-quality statistical information needed by decisionmakers and that it does so in a cost-effective manner that avoids needlessly burdening individuals and businesses. At least four options, viewed independently or in some combination, seem conceivable for addressing problems associated with the federal statistical system. Understanding these options, we believe, will provide a conceptual framework useful for considering the merits of H.R. 2521. One option would be to consider alternatives to the dominant paradigm of having federal employees collect, analyze, and disseminate information through the use of appropriated funds. Alternatives include the privatization of at least some aspects of data collection, analysis, or dissemination; additional contracting out; or the imposition of user fees. We have not explored these alternatives for the federal statistical system and are, therefore, not in a position to elaborate on them. However, we believe that the Subcommittee should consider charging the proposed consolidated agency with exploring the best tools for accomplishing the goals desired from consolidation. resources, including staff, easily. OMB previously played a stronger role in setting priorities for use of statistical agency funding when it had more staff assigned to this function. A third option would be to consolidate the three major agencies as proposed in H.R. 2521. Potential advantages of such a consolidation seem to include better quality data through such means as the use of common data collection methods and more efficient survey designs; a better use of funds through clearer priorities; and cost savings and reduced burden on data providers through a greater sharing of data and agency resources, thereby avoiding duplication. Potential disadvantages could include the possible lessening of the responsiveness of the consolidated agencies to the needs of their current parent departments and their constituencies, the possibility of breaches of confidentiality by housing so much information about individuals and businesses in one agency, and the possible power such an agency might have, given its possession of so much information. A fourth option would be to consolidate more than the three agencies covered in H.R. 2521. In exploring this option, it might be helpful to consider models in other countries. Because Canada has long had a single statistical agency, Statistics Canada, it is often used as a reference point for considering proposed consolidations in the United States. We are currently preparing a report for the Chairman of the House Committee on the Budget that describes the Canadian statistical system. While this report is not yet complete and we did not evaluate the effectiveness of the Canadian system, we did identify several clear differences between the Canadian and the U.S. systems. The Canadian system is much more centralized, with Statistics Canada containing many of the activities currently divided among the 11 principal U.S. statistical agencies and being responsible for the majority of the government’s statistical information. The head of Statistics Canada has a higher level position than that of the U.S. Chief Statistician, has direct control over the agency’s budget, and can set and change priorities and shift resources easily. Statistics Canada also (1) has access to all of the government’s administrative records, (2) can share survey and other data among its components and other government agencies and nongovernmental organizations, and (3) is subject to strict and uniform privacy requirements. According to Statistics Canada officials, these privacy requirements also help ensure a high voluntary response rate to data collection efforts. While Canada’s centralized system may appear to offer several advantages over the U.S. system, several factors need to be considered as part of the comparison. These factors include the following: Canada’s parliamentary system of government may lead to a clearer definition of government policy and priorities and the ensuing needs for statistical information than our system, which contains different branches of government sharing power. The United States is a much larger nation and has a larger and more complex economy than Canada. Canada, with a population of 29 million people, is also much smaller than the United States, which has a population of 264 million. The task facing the federal statistical system in the United States thus is larger and more complex than that facing Statistics Canada. For example, financial markets in the United States involve greater reliance on sophisticated financial products, such as futures and other derivatives, than their Canadian counterparts. The volume of transactions conducted in the United States using derivatives and similar financial products is difficult to measure for statistical purposes. The Canadian statistical system is much smaller than the U.S. system. For example, the fiscal year 1996 budget for Statistics Canada was about $210 (in U.S. dollars) million compared to the nearly $800 million combined budget for BEA, BLS, and Census; the approximately $1.1 billion budget for the 11 principal agencies; and the $2.7 billion budget for the entire federal statistical system. The Canadian public has accepted that a government agency will have broad access to all government records for statistical purposes. Statistics Canada officials attribute this acceptance to strong controls designed to ensure confidentiality of individual data and to the Canadian policy of identifying the intended uses of data to data providers. While similar confidentiality controls exist in the United States, proposals that would allow data sharing and broaden statistical agency access to other data have not been approved. reorganization. The problems that the new agencies experienced included delays in (1) obtaining the participation of key agency officials and adequate staffing and office space and (2) establishing support functions, such as accounting and payroll systems. In our 1981 report, we recommended that future reorganization plans establish a high-level task force or other mechanism to facilitate implementation of the reorganization. In particular, we said that agencies that would lose or gain resources or functions and support agencies, such as OMB, the General Services Administration, and the Office of Personnel Management, should be represented on the task force. In our view, reorganizing statistical agencies would impose similar requirements for successful implementation. Under the proposed bill, staff and responsibilities would be moved out of two cabinet departments and into a newly created Federal Statistical Service. This Service would need to provide the supporting systems, such as personnel, payroll, and accounting, required for continued operation of Census, BEA, and BLS functions. Requiring that the heads of these agencies, appropriate personnel from the Departments of Labor and Commerce, and representatives from OMB and other support agencies participate in planning the consolidation should increase the chances that the proposed reorganization would occur while minimizing disruption of the work of the consolidated agencies and their current parent departments. Similarly, we have frequently noted that government financial systems need to be strengthened to provide agency leadership with the timely and accurate information needed to control costs, measure performance, and achieve needed management improvements. In too many cases, however, weaknesses in these systems prevented the achievement of these goals. Again, ensuring that an effective and reliable financial system is in place should enhance the ability of the proposed Administrator of the Federal Statistical Service and other managers of the new agency to accomplish their missions. Such a system will be essential if the new Service is to be able to comply with standards established by the Government Performance and Results Act, the Government Management Reform Act, and the Chief Financial Officers Act. These three laws are intended to establish a framework for enhancing the management, performance, and operations of federal agencies. In this regard, the Subcommittee may wish to require that a Chief Financial Officer be appointed for the Federal Statistical Service. Finally, as part of planning for the implementation of the proposed consolidation, it would be important to identify the operating efficiencies and cost savings anticipated, the specific areas from which the savings are to be achieved, the specific steps that need to be taken to produce the desired savings, and the individuals responsible for achieving them. In our opinion, the likelihood of actually making operations more efficient and capturing savings is critically dependent on careful and comprehensive implementation planning. This planning must also take into account the resulting need for realignment of support functions at the Departments of Commerce and Labor. Such realignment could be significant. Census and BEA together account for 22 percent of the full-time equivalent staff of Commerce, and BLS accounts for nearly 15 percent of Labor’s total staff. Sustained congressional oversight will be needed to ensure the effective implementation of the reorganization envisioned under H.R. 2521. Congress may need to realign its committee jurisdictions and budget account structure if it is to provide coherent direction to and consistent oversight of the new Federal Statistical Service. In earlier statements on principles for government reorganizations, we also have suggested that one key step would be for congressional committees of jurisdiction to hold comprehensive oversight hearings, annually or once during each Congress. In the case of the proposed Service, such hearings should examine performance information that the Service would be required to generate to comply with the Government Performance and Results Act. Such hearings should also examine the audited financial statements that are to be developed to comply with the Government Management Reform Act. Additional information from congressional support agencies including us; Inspector General reports; performance evaluations of the proposed Service’s operations, which it would conduct; and expert assessments of its operations and the quality of its statistical products should be key components of such hearings. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or Members of the Subcommittee may have. Decennial Census: Fundamental Design Decisions Merit Congressional Attention (GAO/T-GGD-96-37, Oct. 25, 1995). Commerce Dismantlement: Observations on Proposed Implementation Mechanism (GAO/GGD-95-233, Sept, 6, 1995). Statistical Agencies: Adherence to Guidelines and Coordination of Budgets (GAO/GGD-95-65, Aug. 9, 1995) Government Reorganization: Observations on the Department of Commerce (GAO/T-GGD/RCED/AIMD-95-248, July 25, 1995) Economic Statistics: Status Report on the Economics Statistics Initiative (GAO/GGD-95-98, July 7, 1995). Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166, May 17, 1995) Economic Statistics: Measurement Problems Can Affect the Budget and Economic Policymaking (GAO/GGD-95-99, May 2, 1995). Measuring U.S.-Canada Trade: Shifting Trade Winds May Threaten Recent Progress (GAO/GGD-94-4, Jan. 19, 1994) Bureau of the Census: Legislative Proposal to Share Address List Data Has Benefits and Risks (GAO/T-GGD-94-184, July 21, 1994) Decennial Census: Focused Action Needed Soon to Achieve Fundamental Breakthroughs (T-GAO-GGD-93-32, May 27, 1993) Gross Domestic Product: No Evidence of Manipulation in First Quarter 1991 Estimates (GAO/GGD-93-58, Mar. 10, 1993) Census Reform: Major Expansion in Use of Administrative Records for 2000 is Doubtful (T-GAO-92-54, June 26, 1992) Decennial Census: 1990 Results Show Need for Fundamental Reform (GAO/GGD-92-94, June 9, 1992) Formula Programs: Adjusted Census Data Would Redistribute Small Percentage of Funds to States (GAO/GGD-92-12, Nov. 7, 1991). 1990 Census: Reported Net Undercount Obscured Magnitude of Error (GAO/GGD-91-113, Aug. 22, 1991). Expanding the Role of Local Governments: An Important Element of Census Reform (GAO/T-GGD-91-46, June 15, 1991). 1990 Census Adjustment: Estimating Census Accuracy - A Complex Task (GAO/GGD-91-42, Mar. 11, 1991). The Decennial Census: Potential Risks to Data Quality Resulting From Budget Reductions and Cost Increases (GAO/T-GGD-90-30, Mar. 27, 1990). 1990 Census: Overview of Key Issues (GAO/GGD-89-77BR, July 3, 1989). Status of the Statistical Community After Sustaining Budget Reductions (GAO/IMTEC-84-17, July 18, 1984) 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 proposed legislation that would create a Federal Statistical Service by consolidating the Census Bureau, the Bureau of Economic Analysis (BEA), and the Bureau of Labor Statistics (BLS). GAO noted that: (1) any reorganization of these agencies should consider the principles of coordination, goal orientation, organization, implementation, and oversight; (2) coordination among statistical agencies is limited by statues that restrict data sharing, and the proposed legislation would not specifically remove those restrictions or restrictions affecting other statistical agencies; (3) goals to consider in establishing the new agency could include enhanced operational efficiency, adherence to professional standards, national priorities for statistical programs, and enhanced data quality; (4) alternatives for addressing problems in the federal statistical system include privatization, improving the current decentralized system by increasing data sharing, consolidating Census, BEA, and BLS, or consolidating additional federal statistical agencies; (5) while Canada's centralized statistics agency appears to offer advantages over the U.S. system, the United States is a much larger and more complex nation than Canada, the Canadian statistical system is much smaller, and the Canadian public has accepted that a government agency will have broad access to statistical information; (6) adequate planning will be necessary for successful implementation of a consolidated statistical agency; and (7) sustained congressional oversight will be required to ensure successful implementation of a consolidated agency. |
IRS has made a concerted effort to implement the Restructuring Act’s taxpayer rights and protections mandates. Not surprisingly, given the magnitude of change required by these provisions, work remains in completing, and in some instances expanding on, current implementation efforts. To manage Restructuring Act implementation, IRS delegated lead responsibility for each of the provisions to the affected organizational unit and required those units to develop detailed implementation plans. For example, IRS assigned to its Collections unit the lead responsibility for implementing the 22 collection-related taxpayer protection provisions in title III of the act. Our review of each of these plans identified numerous action items, such as developing tax regulations, forms, instructions, and procedures, as well as milestones for completing the actions. According to IRS officials, although IRS has met all of the legal requirements of the provisions whose effective dates have passed, it is still in the process of completing several actions or implementation steps. For example, in order to meet the effective dates of some provisions, IRS issued temporary procedures until the final rulemaking could be completed. insufficient controls to establish accountability and control over assets. Accordingly, we made a number of recommendations to IRS regarding these problems and are awaiting a final response concerning its plans to implement the recommendations. In another instance, IRS has made changes to meet the Restructuring Act’s mandate but does not have information necessary to determine whether the implementation steps have been sufficient. The act prohibits IRS from using enforcement statistics to impose or suggest production quotas or goals for any employee, or to evaluate an employee based on such enforcement quotas. IRS has taken a number of actions to implement this mandate, such as issuing a handbook on the appropriate use of performance measures and conducting agencywide training sessions. IRS has also taken action on our recommendations, such as by clarifying the requirements for IRS managers to certify that they have not used enforcement statistics inappropriately. In its spring 1999 survey, IRS found that about 7 percent of Collections employees and 9 percent of Examination employees reported that their supervisors had either discussed enforcement statistics with them or used statistics to evaluate their performance. Until it has more recent comparison data, IRS will not know if its actions were sufficient to fulfill the Restructuring Act’s mandate. IRS has also experienced some difficulty in implementing the Restructuring Act. Two notable examples are the decline in enforcement actions, particularly liens, levies, and seizures and the backlog of “innocent spouse” cases. IRS’ use of enforcement actions to collect delinquent taxes has declined significantly since passage of the act. Comparing pre-Restructuring Act data on IRS’ use of liens, levies and seizures, with fiscal 1999 data shows that lien filings were down about 69 percent, levies down about 86 percent, and seizures down about 98 percent. Moreover, according to IRS, collections from delinquent taxpayers were down about $2 billion from fiscal year 1996 levels. fiscal year 1997, the last full year before passage of the Restructuring Act, about 42 percent of seizures resulted in the tax debt being fully resolved. In most cases, the debt was resolved when the taxpayers produced funds to fully pay their tax liabilities and have their assets returned. Prior to the seizures, the involved taxpayers had been unresponsive to other IRS collection efforts, including letters, phone calls, personal collection visits, and levies of bank accounts and wages. We concluded from these observations that there was little likelihood that the tax debts would have been paid without the seizure actions. At the conclusion of our seizure work in 1999, it was clear to us that neither IRS management officials nor front line employees believed that seizure authority was being used when appropriate. Front line employees expressed concerns about the lack of guidance on when to make seizures in light of Restructuring Act changes. Accordingly, we made recommendations aimed at (1) clarifying when seizures ought to be made, (2) preventing departures from process requirements established to protect taxpayer interests, and (3) delineating senior managers’ responsibilities for ensuring that seizures are made when justified. Effective use of tax collection enforcement authority, such as seizing delinquents’ property to resolve their tax debts, plays an important role in ensuring voluntary compliance---a practice dependent on taxpayers having confidence that their neighbors or competitors are complying with the tax law. A second example of IRS difficulty in implementing the Restructuring Act is related to “innocent spouse” cases. The Restructuring Act expanded innocent spouses’ right to seek relief from tax liabilities assessed on jointly filed returns. IRS published forms and temporary guidance to implement this provision and has just recently issued permanent guidance on equitable relief provisions. However, as Commissioner Rossotti has acknowledged, IRS was administratively unprepared to deal with the volume of requests for relief because its data systems did not allow the separation of single tax liability for spouses into multiple liabilities. Thus, IRS established manual processes and controls to deal with the requests, a measure requiring about 330 additional staff. As of October 1999, of the 41,000 relief requests received, only about 12 percent had been processed to the point where at least a preliminary determination had been reached. IRS considers the remaining relief requests to be a significant backlog that will require an average of about 12 staff hours per case to resolve. Underlying the Commissioner’s modernization strategy is the understanding that fulfilling the Restructuring Act’s mandate to place greater emphasis on taxpayer rights and needs while ensuring compliance depends on two key factors. First, IRS must make material improvements in the processes and procedures through which it interacts with taxpayers and collects taxes due. Second, IRS must make efficiency improvements that will allow reallocation of its limited resources. Historically, however, IRS has not had much success designing and implementing these kinds of process changes. The Commissioner has argued, and we agree, that this difficulty is due in large part to systemic barriers in IRS’ organization, management, and information systems. Accordingly, and in compliance with the Restructuring Act, the Commissioner has begun to implement a multifaceted modernization strategy, the first stages of which are designed to address these systemic barriers. Notwithstanding a reduction in the number of its field offices, IRS’ organizational structure has not changed significantly in almost 50 years. Under this structure, authority for serving taxpayers and administering the tax code is decentralized to 33 districts and 10 service centers, with each of these geographic units organized along functional lines—such as collection, examination, and taxpayer service. This has resulted in convoluted lines of authority. In the collection area, for example, IRS has three separate kinds of organizations spread over all 43 operational units that use four separate computer systems to collect taxes from all types of taxpayers. This decentralized structure has also allowed disparity among districts in their compliance approaches and, as a result, inconsistent treatment of taxpayers. To illustrate, in our review of IRS’ use of its seizure authority, we found that seizures were as much as 17 times more likely for delinquent individual taxpayers in some district offices than in others. Similar variations exist in other IRS programs as well. and tax issues. Through its new taxpayer-focused operating divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility. For example, IRS estimates that individual taxpayers account for 75 percent of all filers, yet only 17 percent of the tax code is ordinarily relevant to them. By creating a division devoted solely to individual taxpayers, IRS is creating a situation in which managers and employees in that division will be able to focus on compliance and service issues related to individual taxpayers and will need expertise in a much smaller body of tax law. Creating a simpler, more coherent organization and management structure is an important step, but it does not guarantee good management. IRS’ managers, at all levels, need to be skilled in results-oriented management, including planning, performance measurement, and the use of performance data in decisionmaking. Without these skills, IRS cannot be assured that its employees and the agency as a whole are performing as expected with regard to both taxpayer rights and enforcement. Our work has shown that ensuring that IRS has the capacity it needs in this area will be a challenge. For example, in our recent work on IRS seizures, we found that IRS did not generate information sufficient for senior managers to use in monitoring the program. IRS did not have a fully developed capability to monitor the quality of seizure work in terms of the appropriateness of seizure decisionmaking or the conduct of asset management and sales activity. In addition, collection managers were not systematically provided with information on the type of problems experienced by taxpayers involved in a seizure or on the resolution of those problems. We concluded that IRS managers were not collecting the information needed to effectively oversee the program and made recommendations to improve oversight. Our point today, however, is that generating and using basic management information needs to be routine among IRS managers at all levels and across all taxpayer groups and functions. The organizational and management changes I’ve described, while significant, will not be sufficient to achieve IRS’ mission. As an agency still dealing with the repercussions of a performance system that was, for many years, based on enforcement statistics, IRS well knows that performance measures can create powerful incentives to influence both organizational and individual behavior. Consequently, IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals, including that of giving due recognition to taxpayers’ rights and interests. Developing and implementing performance measures are difficult tasks for any organization, but especially for an organization like IRS that must ensure both quality taxpayer service and tax law compliance. At the operational level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through the business results measures of quality and quantity. Mindful of concerns that the Service had focused on revenue production as an end in itself, IRS established what it believes are outcome-neutral quantity measures. For example, instead of measuring the revenue generated by compliance employees, IRS is generally monitoring the total number of cases closed, regardless of how those cases were closed. We have reported in the past that IRS employees’ performance focused more on IRS’ objectives of revenue production and efficiency than on taxpayer service. Guided by these concerns and the Restructuring Act’s explicit prohibitions against using enforcement statistics to evaluate employees, IRS now recognizes that employees must have a clearer line of sight between their day-to-day activities, their resulting performance evaluations, and the agency’s broader goals. IRS is still exploring several different approaches for revising its employee evaluation system to make the relationship between employee performance and agency performance more transparent. accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers. Without this type of data, IRS managers will continue to have a difficult time monitoring and managing program outcomes—including identifying taxpayer needs and evaluating the effectiveness of programs to meet those needs. In doing our work on small business compliance issues, for example, we found that IRS could not reliably provide data on the extent to which small businesses filed various required forms, when they made tax deposits, or the extent to which they were involved in a variety of enforcement processes. For years, IRS has struggled to modernize its information systems to support high quality taxpayer service and management information needs. In 1995, we made over a dozen recommendations to correct management and technical weaknesses that jeopardized the modernization process. In February 1998, we made additional recommendations to ensure, among other things, that IRS develops a complete systems architectural blueprint for modernizing its information systems. Subsequently, in fiscal years 1998 and 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to our recommendations, were met. While IRS has made progress in addressing our recommendations and complying with the legislative conditions, the Service has not yet fully implemented our recommendations. As a result, at the direction of the Senate and House appropriation subcommittees responsible for IRS’ appropriation, we have continued to monitor and report on IRS’ system modernization efforts. gains to allow IRS to better target its resources to promote compliance and taxpayer service. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other Members of the Committee may have. For future contacts regarding this testimony, please contact James R. White at 202-512-9110. Thomas M. Richards, Deborah Parker Junod, Charlie Daniel, and Ralph Block made key contributions to this testimony. | Pursuant to a congressional request, GAO discussed the Internal Revenue Service's (IRS) progress in implementing the taxpayer rights and protection mandates of the IRS Restructuring and Reform Act of 1998 and IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems. GAO noted that: (1) IRS has embarked on a concerted effort to implement the taxpayer rights and protection provisions; (2) in some instances, implementation is not complete, and in some others, it is too early to tell if implementation is successful; (3) IRS has experienced difficulties in implementing some aspects of the mandates; (4) these difficulties included determining when enforced collection actions, such as the seizure of delinquent taxpayers' assets, are appropriate and dealing with requests for relief under the innocent spouse provisions; (5) to streamline its management structure and create a more taxpayer-focused organization, IRS is in the midst of instituting a major reorganization; (6) IRS' new organization structure is built around four operating units, each with end-to-end responsibility for serving a group of taxpayers with similar needs; (7) through its new taxpayer-focused divisions, IRS is centralizing management of key functions and creating narrower scopes of responsibility; (8) IRS needs to develop an integrated performance management system that aligns employee, program, and strategic performance measures and creates incentives for behavior supporting agency goals; (9) at the operating level, IRS is measuring its progress toward these goals through customer satisfaction surveys and through business results measures of quality and quantity; (10) IRS' system difficulties hinder, and will continue to hinder, efforts to better serve taxpayer segments; (11) IRS has dozens of discrete databases that are function specific and are designed to reflect transactions at different points in the life of a return or information report--from its receipt to disposition; (12) as a consequence, IRS does not have any easy means of accessing comprehensive information about individual taxpayer accounts or summary data on groups of taxpayers; (13) GAO made over a dozen recommendations to correct management and technical weaknesses that jeopardized IRS' information systems modernization process; (14) in fiscal years 1998 to 1999, Congress provided IRS funds for systems modernization and limited their obligation until certain conditions, similar to GAO's recommendations, were met; (15) while IRS made progress in addressing GAO's recommendations and complying with the legislative conditions, IRS has not yet fully implemented GAO's recommendations; and (16) GAO believes that IRS' ongoing efforts to modernize its organizational structure, performance management system, and information systems are heading the agency in the right direction. |
FRA enforces federal railroad safety statutes under a delegation of authority from the Secretary of Transportation. FRA’s mission is to protect railroad employees and the public by ensuring the safe operation of freight and passenger trains. FRA has three major safety-related activities: (1) administering safety statutes, regulations, and programs, including the development and promulgation of standards and procedures, technical training, administration of postaccident and random testing of railroad employees, and management of rail-highway grade-crossing projects; (2) conducting research on railroad safety and national transportation policy; and (3) enforcing federal safety statutes, regulations, and standards by inspecting railroad track, equipment, signals, and railroad operating practices. FRA also enforces the provisions of the Hazardous Materials Transportation Act as it applies to rail. The Staggers Rail Act of 1980 prompted many changes in the composition and operations of the freight industry. The act provided the railroads with greater flexibility to negotiate freight rates and respond to market conditions. It established a federal policy that freight railroads would rely, where possible, on competition and the demand for services, rather than on regulation, to establish reasonable rates. As a result, the freight railroad industry has changed substantially over the past 20 years. Today’s freight rail industry has fewer large railroads; hauls more tonnage over fewer miles of track; and employs fewer people, locomotives, and railcars. Specifically, Mergers and acquisitions have reduced the number of class I railroads from 88 in 1976 to 10 in 1998: Amtrak and 9 class I freight railroads—Burlington Northern and Santa Fe Railway Company; Consolidated Rail Corporation (Conrail), CSX Transportation; Grand Trunk Western Railroad, Inc.; Illinois Central Railroad Company; Kansas City Southern Railway Company; Norfolk Southern Corporation; Soo Line Railroad Company; and Union Pacific Railroad Company. The number of large railroads could decline further if the Surface Transportation Board approves the acquisition of Conrail by CSX Transportation and Norfolk Southern Corporation, and Canadian National Railway’s purchase of Illinois Central Railroad. Class I freight railroads are carrying more tonnage over longer distances. In 1996, each train hauled an average of 2,912 tons, up from 1,954 tons in 1976, and the average length of the haul was 842 miles, up from 564 miles in 1976. Class I freight railroad employment declined by 62 percent between 1976 and 1996—from 483,000 to 182,000 employees—and is forecast to continue to decline over the next 10 years. Class I freight railroads have eliminated, abandoned, or sold 42 percent of their trackage between 1976 and 1996. According to FRA officials, the total rail network is projected to decline slightly each year. While deregulation and improvements in rail technology have facilitated operational and economic changes, the level of railroad safety has also changed over the past 20 years. In general, railroad safety has improved—railroad accident and fatality rates are down from their 1976 levels. As shown in figure 1, the number of train accidents declined from 10,248 in 1976 to 2,584 in 1996—a 75-percent reduction. While the number of accidents declined rapidly prior to 1987, progress continued at a slower rate from 1987 to 1996. During this time, class I freight railroads—which account for most of the industry’s freight revenue and more than three-quarters of its train miles—had begun to use fewer people and equipment to haul more tonnage over fewer miles of track. The number of rail-related fatalities also declined during this period. As figure 2 shows, rail-related fatalities declined from 1,630 in 1976 to 1,039 in 1996—a 36-percent reduction. Nonetheless, this progress is tempered by the more than 1,000 deaths that occur each year on the nation’s rail lines. Nine out of ten rail-related deaths are the result of either collisions between cars and trains at highway grade crossings or trespassers killed by trains while on railroad property. Beginning in 1993, FRA reassessed its safety program to leverage the agency’s resources and establish a cooperative approach that focuses on results to improve railroad safety. With rail traffic expected to continue to grow, FRA anticipated the need for new approaches to enhance its site-specific inspections. As a result, FRA formalized this shift from inspection to collaboration with three initiatives. First, in 1994, FRA took the lead responsibility for coordinating the Department of Transportation’s (DOT) multiagency plans to reduce fatalities at rail-highway crossings. Second, in 1995, FRA formally established a Safety Assurance and Compliance Program through which the agency would work cooperatively with railroad labor and management to identify and solve the root causes of systemic safety problems facing the railroads. Third, in 1996, FRA established the Railroad Safety Advisory Committee to develop recommendations for the agency’s more complex or contentious rulemakings by seeking consensus among the affected parties. While 1996 data and preliminary data for 1997 show improvements in some key indicators, it is still to early to determine whether FRA’s new approach will sustain a long-term decline in accidents and fatalities. About 94 percent of railroad fatalities occur as a result of either collisions between cars and trains at highway grade crossings or trespassers killed by trains while on railroad property. In 1994, FRA took the lead role in DOT’s Rail-Highway Crossing Safety Action Plan—an effort targeting federal, state, and industry actions to improve rail-highway crossing safety and reduce fatalities among trespassers. To successfully implement the plan, FRA is working with other federal agencies, the states, and the railroads to strengthen education and research activities; enhance federal, state, and local enforcement efforts; and increase or preserve federal rail-highway crossing safety funds. In 1994, DOT established a 10-year goal of reducing the number of rail-highway grade-crossing accidents and fatalities by 50 percent. In 1996, the number of rail-related fatalities declined to 1,039—the lowest level in 10 years. (See fig. 2.) FRA attributed the improved statistics to its safety initiatives, including the rail-highway crossing program. Whether the plan contributed to the decline is uncertain: Past trends indicate the total number of railroad fatalities declined by 34 percent from 1976 to 1983 (from 1,630 to 1,073) but then fluctuated within a range of 1,036 and 1,324 deaths between 1983 and 1996. While preliminary data for 1997 show a continued downward trend for accidents, fatalities were projected to increase from 1,039 in 1996 to 1,048 in 1997. In 1994, FRA began the Safety Assurance and Compliance Program (SACP) with the Chicago and Northwestern Railroad and Southern Pacific Railroad. FRA initiated the program in response to a period of little decline in accident statistics, the belief that a continuation of existing approaches would not produce any further declines, and President Clinton’s directive to federal regulatory agencies that their inspection and enforcement programs be designed to achieve results, not punishment. As of April 1998, FRA had conducted initial SACP meetings with senior management at 55 railroads and planned to initiate SACPs at approximately 12 additional smaller railroads by the end of fiscal year 1998. FRA does not plan to conduct SACP assessments of all of the more than 600 railroads in the United States. Instead, FRA inspectors are expected to look for systemic problems at smaller railroads through FRA’s traditional site-specific inspections. FRA cites improvements in safety statistics since 1993 as evidence that SACP is improving safety throughout the nation’s railroad system. From 1993 through 1996, rail-related fatalities declined by 19 percent, employee injuries declined by about 40 percent, and train accidents declined by 7 percent. However, accidents involving Union Pacific and CSX trains during 1997 have raised questions about the effectiveness of FRA’s SACP. Despite FRA’s intensive safety reviews of both of these railroads during 1995 and 1996, the railroads had 10 accidents and collisions in the summer of 1997 that resulted in eight deaths. In response, FRA sent teams of 75 to 80 inspectors to each railroad to document safety problems and ensure that the railroads had addressed problems found in earlier reviews. FRA found a number of safety deficiencies at both railroads and made several recommendations targeted to improving railroad operations. For example, FRA found that Union Pacific supervisors’ workloads prevented them from effectively monitoring and evaluating their employees’ performance and recommended that Union Pacific provide affected employees with additional training to ensure compliance with safety regulations; FRA’s review of CSX revealed inadequate track maintenance and recommended that CSX evaluate its staffing levels and hire additional employees where needed. FRA plans to continue to monitor each railroad’s progress. In March 1996, FRA established a Railroad Safety Advisory Committee consisting of representatives from railroad management, labor unions, and others to provide FRA with recommendations on important rail safety issues through a consensus-based process. According to FRA, it uses the Advisory Committee to obtain the views of those most affected by regulatory decisions, improve the quality of rules, reduce the time required to complete them, and reduce the likelihood of litigation after they are promulgated. However, the committee’s participation supplements rather than eliminates required steps in the rulemaking process. Since the inception of the Advisory Committee, the FRA Administrator has referred 14 rulemaking tasks to it. (See app. I.) Several of the tasks referred to the committee concern complex or controversial matters that FRA had been working on for several years. For example, FRA had been working on the Locomotive Crashworthiness, Track Safety, Railroad Communication, and Freight Power Brake rules for 4 years before referring them to the Advisory Committee. In two cases, FRA had missed the statutorily mandated issuance date. FRA has not yet issued any final rules developed by the committee. The collaborative approach that FRA has adopted for obtaining voluntary compliance with railroad safety rules has shifted some of FRA’s resources away from site-specific inspections, which have historically served as FRA’s primary means of ensuring compliance with safety regulations. This shift is most evident in the 23-percent decline in the number of inspections conducted between 1994 and 1997. In addition, the agency’s partnering or inspection efforts do not systematically address improving the workplace safety of railroad employees and ensuring that railroad bridges receive inspection oversight that is comparable to other railroad areas. FRA has chosen not to issue regulations addressing many workplace safety issues, although illnesses and injuries to railroad employees accounted for most of the 12,558 rail-related injuries and illnesses that occurred in 1996. In addition, FRA’s 1995 decision not to promulgate bridge safety regulations requires FRA personnel to rely primarily on the railroads’ voluntary correction of bridge safety problems. FRA’s efforts to increase cooperation with the railroad industry add new responsibilities for its 270 inspectors. Nearly all inspectors participate in SACP by conducting formal discussions with labor, participating in senior management meetings, or focusing on SACP-related issues when conducting routine site-specific inspections. In addition, inspectors participate in the Advisory Committee’s working groups and task forces. As a result of their additional responsibilities, FRA inspectors have been conducting fewer site-specific inspections. These inspections have served an important oversight function. After increasing slightly between 1985 and 1992, the number of inspections conducted by FRA began to decline in 1993 and declined further by 1997. The number of inspections conducted in 1997 (52,742) was 23 percent below the 68,715 inspections conducted in 1994. This lower number of inspections reflects the fact that a greater number of railroads have not received inspections, and inspectors conduct fewer reviews of the railroads’ own inspection efforts. The number of rail-related injuries and illnesses has declined from 65,331 in 1976 to 12,558 in 1996. As figure 3 shows, most of these injuries and illnesses involved railroad employees. Preliminary data for 1997 show a continued decline, with rail-related injuries and illnesses decreasing to 11,540. Railroads must report injuries that require medical treatment or result in work restrictions and lost work days. Efforts to reduce injuries to workers must rely on the combined efforts of FRA and the Occupational Safety and Health Administration (OSHA). FRA generally oversees workplace safety issues intrinsic to railroad operations, while OSHA is responsible for issues that would be associated with any industrial workplace. However, FRA’s and OSHA’s presence on railroad property varies greatly. For example, in 1997, FRA conducted over 52,000 inspections of track, railroad equipment, and operating practices related to train operations. In contrast, OSHA inspectors normally visit railroad properties only in response to an employee or union complaint about working conditions or when investigating a workplace accident that resulted in the injury of three or more employees. FRA inspectors have no authority to cite railroads for workplace safety problems that fall under OSHA’s jurisdiction. However, if FRA inspectors observe unsafe work practices, such as an employee welding without proper eye protection, they can point out the problem to railroad supervisory personnel for voluntary compliance. Labor representatives expressed concern that because of OSHA’s limited resources, certain workplace safety and health issues are not adequately addressed under the split responsibility. FRA relies on the voluntary cooperation of the railroads, rather than regulations, to ensure the structural integrity of the nation’s 100,700 railroad bridges. A 1995 FRA policy statement provides railroads with advisory guidelines to use in implementing their own bridge inspection programs. FRA expects its track inspectors to observe structural problems on bridges as they perform their routine inspections and seek cooperative resolutions with the railroad. FRA states that the railroads have generally taken corrective action in response to inspectors’ observations. However, unlike safety problems with track, signals, or equipment, for which inspectors can cite defects or recommend violations, inspectors have no such discretion when dealing with potentially serious bridge problems. Their only recourse is to close the bridge if conditions present an imminent hazard of death or personal injury. FRA officials said that developing railroad bridge regulations will dilute the agency’s capacity to address issues that the agency believes are more important. While railroad management agrees with FRA’s policy that regulations are not needed, railroad labor officials disagree and note that bridge safety is equally as important as track safety, for which FRA has promulgated regulations. In our July 1997 report, we recommended that FRA use injury data collected under recently revised reporting requirements to consider developing regulations to address workplace safety and use appropriate mechanisms, including SACP, to ensure that findings of potential structural problems on bridges are properly addressed by the bridges’ owners. In response, FRA agreed to issue new employee workplace rules when railroad operations are involved if the railroads’ voluntary corrective measures are not effective. In addition, FRA concurred with our recommendation regarding structural bridge safety problems but said it will continue to pursue nonregulatory guidance and monitoring to ensure the safety and integrity of bridges. Mr. Chairman, this concludes my testimony. I would be happy to respond to any questions that you or Members of the Subcommittee may have. Rail Safety Enforcement and Review Act - 9/3/92 Rail Safety Enforcement and Review Act - 9/3/92FRA initiative, Regulatory Flexibility ActPetition to reconsider aspects of an existing rule Petition to develop a rule (Table notes on next page) 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 operational and safety trends in the rail industry over the past 20 years and how the Federal Railroad Administration (FRA) has revised its rail safety program to address these trends. GAO noted that: (1) the railroad industry has changed significantly since the Staggers Rail Act of 1980 made it federal policy that railroads would rely, where possible, on competition and the demand for services, rather than on regulation, to establish reasonable rates; (2) from 1976 to 1998, mergers and acquisitions have significantly reduced the number of class I freight railroads; (3) these larger railroads have cut costs, increased the tonnage their trains carry, downsized their workforces, and eliminated, sold, or abandoned thousands of miles of unprofitable or little-used track; (4) during this same period, overall railroad safety has improved; (5) reported accident and fatality rates are down 75 and 36 percent, respectively, from 1976 levels; (6) despite this progress, each year about 1,000 people die as a result of grade-crossing accidents and trespassing, at least 9,000 railroad employees are injured, and thousands of people are evacuated from their homes because of hazardous materials released during train accidents; (7) FRA instituted an important shift in its safety program in 1993 to address safety problems in the rail industry; (8) rather than continuing to use violations and civil penalties as the primary means to obtain compliance with railroad safety regulations, FRA decided to emphasize cooperative partnerships with other federal agencies, railroad management, labor unions, and the states; (9) the partnering efforts generally focus on the nation's larger railroads and have resulted in FRA inspectors' conducting fewer site-specific inspections of the railroad industry overall; (10) while 1996 and preliminary 1997 data, the latest data available, show improvements in safety, it is too early to determine if FRA's new approach will sustain a long-term decline in accidents and fatalities; and (11) in addition, FRA's new partnering efforts do not systematically respond to concerns about the level of workplace injuries for railroad employees and about the safety of railroad bridges. |
When the United States and its coalition allies invaded Iraq on March 17, 2003, and the Iraqi government no longer functioned, many areas experienced widespread looting and the breakdown of public services, such as electricity and water in the cities. U.S. and coalition forces were then confronted with the challenges of restoring public order and infrastructure even before combat operations ceased. Given the extensive looting, as we reported in 2005, DOD could not assume that facilities and items within the facilities would remain intact or in place for later collection without being secured. Many facilities, such as abandoned government research facilities and industrial complexes, were no longer under the control of the former regime and had been looted. For example, hundreds of tons of explosive materials that had been documented by the International Atomic Energy Agency prior to March 2003 at the Al Qa Qaa explosives and munitions facility in Iraq were lost after April 9, 2003, through the theft and looting of the unsecured installations. We also reported that regarding radiological sources in Iraq, DOD was not ready to collect and secure radiological sources when the war began in March 2003 and for about 6 months thereafter. According to knowledgeable DOD officials, field unit reports, lessons learned reports, and intelligence information, U.S. and coalition forces were unable to adequately secure conventional munitions storage sites in Iraq, resulting in widespread looting of munitions. These sources indicated that U.S. and coalition forces were overwhelmed by the number and size of conventional munitions storage sites, and DOD had insufficient troop levels to secure these sites because of prewar planning priorities and certain assumptions that proved to be invalid. Despite war plan and intelligence estimates of large quantities of munitions in Iraq, knowledgeable DOD officials reported that DOD did not plan for or set up a program to centrally manage and destroy enemy munitions until August 2003, well after the completion of major combat operations in May 2003. The costs of not securing these conventional munitions storage sites have been high, as looted explosives and ammunition from these sites have been used to construct IEDs that have killed and maimed people. Furthermore, estimates indicate such munitions are likely to continue to support terrorist attacks in the region. U.S. forces were overwhelmed by the number and size of conventional munitions storage sites in Iraq and they did not adequately secure these sites during and immediately after the conclusion of major combat operations, according to senior-level military officials, field unit reports, lessons learned reports, and intelligence reports. Pre-OIF estimates of Iraq’s conventional munitions varied significantly with the higher estimate being five times greater than the lower estimate. The commander of CENTCOM testified before the U.S. Senate Committee on Appropriations on September 24, 2003, that “there is more ammunition in Iraq than any place I’ve ever been in my life, and it is all not securable.” Furthermore, the sites remained vulnerable from April 2003 through the time of our review. For example, an assessment conducted from April 2003 through June 2003 indicated that most military garrisons associated with Iraq’s former republican guard had been extensively looted and vandalized after the military campaign phase of OIF ended. It concluded that the most prized areas for looting were the depots or storage areas. The assessment further concluded that the thorough nature of the looting and the seemingly targeted concentration on storage areas suggested that much of the looting in the areas assessed was conducted by organized elements that were likely aided or spearheaded by Iraqi military personnel. Moreover, in early 2004, 401 Iraqi sites—including fixed garrisons, field sites, and ammunition production facilities—were reviewed to assess their vulnerability and the likelihood that anticoalition forces were obtaining munitions from those sites. Of the 401 sites, a small number of sites were considered highly vulnerable because of the large quantity of munitions, inadequate security, and a high level of looting. The majority of the sites were assessed as having low vulnerability—not because they had been secured, but because they had been abandoned or totally looted. The review considered virtually all the sites to be partially secured at best and concluded that U.S. and coalition troops were able to guard only a very small percentage of the sites. DOD senior-level officials and lessons learned reports stated that U.S. forces did not have sufficient troop levels to provide adequate security for conventional munitions storage sites in Iraq because of OIF planning priorities and certain assumptions that proved to be invalid. According to DOD officials, ground commanders had two top priorities during major combat operations that were set forth in the February 2003 OIF war plan. First, to overthrow the regime, DOD planned for and successfully executed a rapid march on Baghdad that relied on surprise and speed rather than massive troop buildup, such as was used in 1991 during the first Gulf War. This rapid march to Baghdad successfully resulted in the removal of the regime. Another critical planning priority was finding and securing the regime’s stockpiles of WMD, which the administration believed were a threat to coalition forces and other countries in the region. The OIF war plan assumed that there was a high probability that the regime would use WMD against U.S. and coalition forces in a final effort to survive when those forces reached Baghdad. As a result, a CENTCOM planner for OIF stated that ground commanders had to prioritize limited available resources against the volume of tasks, both stated and implied, contained in the war plan. Several critical planning assumptions upon which the February 2003 OIF war plan was based also contributed to the number of U.S. troops being insufficient for the mission of securing conventional munitions storage sites, including the following: The Iraqi regular army would “capitulate and provide security.” The OIF war plan assumed that large numbers of Iraqi military and security forces would opt for unit capitulation over individual surrender or desertion. As stated in the OIF war plan, the U.S. Commander, CENTCOM, intended to preserve, as much as possible, the Iraqi military to maintain internal security and protect Iraq’s borders during and after major combat operations. According to a study prepared by the Center for Army Lessons Learned, this assumption was central to the decision to limit the amount of combat power deployed to Iraq. On May 23, 2003, the Coalition Provisional Authority dissolved the Iraqi Army, which the CENTCOM commander assumed would provide internal security. Iraqi resistance was unlikely. Although the OIF war plan laid out the probability of several courses of action that the regime might take in response to an invasion, the plan did not consider the possibility of protracted, organized Iraqi resistance to U.S. and coalition forces after the conclusion of major combat operations. As a result, DOD officials stated that the regime’s conventional munitions storage sites were not considered a significant risk. Postwar Iraq would not be a U.S. military responsibility. The OIF war planning, according to a Joint Forces Command lessons learned report, was based on the assumption that the bulk of the Iraqi government would remain in place after major combat operations and therefore civil functions, including rebuilding and humanitarian assistance, could be shifted from military forces to U.S. and international organizations and, ultimately, the Iraqis, within about 18 months after the end of major combat operations. Therefore, DOD initially did not plan for an extended occupation of the country or the level of troops that would be needed to secure conventional munitions storage sites in particular or the country in general. Joint assessments further showed that OIF planning assumptions contributed to security challenges in Iraq. According to a 2006 report by the Joint Center for Operational Analysis, OIF planning did not examine the consequences of those assumptions proving wrong, further contributing to insufficient force levels to prevent the breakdown of civil order in Iraq. The Joint Staff strategic-level lessons learned report also discussed the effect inaccurate planning assumptions had on force levels. According to this report, overemphasis on planning assumptions that could not be validated prior to critical decision points resulted in a force structure plan that did not consider several missions requiring troops, such as providing security for enemy conventional munitions storage sites. Despite prewar intelligence assessments of large amounts of conventional munitions, knowledgeable DOD officials stated that DOD did not set up a central office until July 2003 or set up a program to centrally manage and destroy Iraqi munitions until after August 2003. These steps were taken well after major combat operations were completed in May 2003, because the department did not perceive conventional munitions storage sites as a threat. The central office was initially set up to address operational problems found during an assessment of nine Iraqi sites. This assessment found that DOD lacked priorities for securing the sites and uniform procedures and practices for securing and disposing of munitions. It also uncovered serious safety problems in the handling, transportation, storage, and disposal of munitions. In August 2003, the Engineering and Support Center awarded contracts for the Coalition Munitions Clearance Program, and the first demolition of munitions under the program was conducted in September 2003. The program’s initial goals were to destroy the stockpiles at six depots and to have all enemy ammunition outside the depots destroyed or transported to the depots. The program also was tasked with assisting in the establishment, management, and transfer of depots to the new Iraqi army. According to the Engineering and Support Center, the program has received more than $1 billion and has destroyed or secured more than 324,000 tons of munitions. This number, combined with military disposal operations, has accounted for more than 417,000 tons of munitions, leaving an unknown amount of conventional munitions in the hands of resistance groups or unsecured. This unknown amount could range significantly, from thousands to millions of tons of unaccounted conventional munitions. According to Multi-National Coalition-Iraq officials, unsecured conventional munitions from the former regime continue to pose a risk to U.S. forces and others. For example, some conventional munitions storage sites in remote locations have not been assessed recently to verify whether they pose any residual risk. These officials also stated that smaller caches of weapons, munitions, and equipment as well as remaining unexploded ordnance, scattered across Iraq, represent a more pressing and continuing risk. These officials said that the coalition is working to reduce this risk by searching for and finding a growing number of caches, but it will be some time before it can clean up all the munitions in Iraq. The extent of the threat from smaller caches, however, is difficult to quantify because the location or amount of munitions hidden or scattered around the country is unknown. As reported by DOD and key government agencies, the human, strategic, and financial costs of not securing conventional munitions storage sites have been high. Estimates indicate that the weapons and explosives looted from unsecured conventional munitions storage sites will likely continue to support terrorist attacks throughout the region. Government agencies also have assessed that looted munitions are being used in the construction of IEDs. IEDs have proven to be an effective tactic because they are inexpensive, relatively simple to employ, deadly, anonymous, and have great strategic value. To illustrate, the Congressional Research Service reported in 2005 that IEDs caused about half of all U.S. combat fatalities and casualties in Iraq and are killing hundreds of Iraqis. Moreover, Multinational Forces in Iraq reported that the attacks against the coalition and its Iraqi partners continued to increase through July 2006, representing at least 40 percent of all attacks on coalition forces. While DOD has taken many actions in response to OIF lessons learned, we found that to date DOD has not taken action to incorporate the security of an adversary’s conventional munitions storage sites as a strategic planning and priority-setting consideration during planning for future operations. A critical OIF lesson learned is that unsecured conventional munitions storage sites can be an asymmetric threat to U.S. forces, as illustrated by intelligence assessments that show one potential adversary, for example, also has considerable munitions stockpiles that would require a sizable occupying force to secure or destroy. Despite the strategic implications regarding unsecured conventional munitions storage sites, our analysis shows that securing those sites generally is not explicitly addressed in military policy and guidance, particularly at the joint level. We reviewed 17 DOD publications—which Joint Staff officials told us were relevant to our review—to determine the extent to which each of those publications contained guidance on the security of conventional munitions storage sites. A list of these publications can be found in our March 2007 report. In reviewing these documents, we found little evidence of guidance regarding conventional munitions storage site security. Although several publications addressed defeating IEDs during an insurgency after major combat operations have ended or provided tactical-level guidance on how to dispose of explosive hazards, including munitions, or make those hazards safe, none explicitly addressed the security of conventional munitions storage sites during or after major combat operations as a tactical, operational, or strategic risk. Because of DOD’s understandable focus on current operations, the department’s actions in response to OIF lessons learned generally have emphasized countering the use of IEDs by an insurgency or terrorists during posthostility operations. The specific actions DOD has taken are discussed in our report. These actions are good first steps toward broadening DOD’s focus beyond the ongoing tactical and operational counter-IED efforts used against Saddam loyalists, rejectionists, or external terrorist groups in Iraq to planning and executing strategic counter-IED campaigns for future operations. However, the actions do not directly address the strategic importance of securing conventional munitions storage sites during major combat operations so that they do not become the source of materials for making IEDs during an occupation or become used for other forms of armed resistance. Based on our work, a critical OIF lesson learned is that unsecured conventional munitions storage sites can represent an asymmetric threat to U.S. forces during future operations. Furthermore, other potential adversaries are also learning lessons from the United States’ experiences in Iraq and will likely use asymmetric warfare against U.S. invading forces. We believe these potential adversaries will likely develop military doctrine to avoid direct military confrontation with the United States if possible and try to undermine the United States’ political commitment with unconventional warfare. Therefore, the number, size, and geographic separation of an adversary’s munitions storage sites could pose a significant security challenge during an occupying force’s follow-on operations. A large amount of munitions in such an adversary’s country could require an occupying force to dedicate significant manpower to secure or destroy the contents of the major munitions storage sites. Furthermore, the remnants of an adversary’s forces, insurgents, or terrorists could draw from any large conventional munitions storage network left unsecured by an occupying force. In our report, we concluded that a fundamental gap existed between the OIF war plan assumptions and the experiences of U.S. and coalition forces in Iraq, contributing to insufficient troops being on the ground to prevent widespread looting of conventional munitions storage sites and resulting in looted munitions being a continuing asymmetric threat to U.S. and coalition forces. The human, strategic, and financial costs of this failure to provide sufficient troops have been high, with IEDs made with looted munitions causing about half of all U.S. combat fatalities and casualties in Iraq and killing hundreds of Iraqis and contributing to increasing instability, challenging U.S. strategic goals in Iraq. Further, DOD does not appear to have conducted a theaterwide survey and assessed the risk associated with unsecured conventional munitions storage sites to U.S. forces and others. Such a survey and assessment combined with associated risk mitigation strategies—such as providing more troops or other security measures—could assist DOD in conserving lives and in meeting its strategic goal to leave a stable nation behind when U.S. forces ultimately leave Iraq. We recommended that the Joint Chief of Staff conduct a theaterwide survey and risk assessment regarding unsecured conventional munitions in Iraq and report ensuing risk mitigation strategies and the results of those strategies to Congress. We also concluded that in preparing for future operations DOD’s actions in response to OIF lessons learned primarily have focused on countering IEDs and not on the security of conventional munitions storage sites as a strategic planning and priority-setting consideration for future operations. Although good first steps, these actions do not address what we believe is a critical OIF lesson learned, the strategic importance of securing conventional munitions storage sites during and after major combat operations. Unsecured conventional munitions storage sites can represent an asymmetric threat to U.S. forces that would require significant manpower or other resources during and after major combat operations to secure. Therefore, since joint doctrine is to present fundamental principles as well as contemporary lessons that guide the employment of forces, we believe that it is important that DOD clearly and explicitly address the security of conventional munitions storage sites in revisions to joint doctrine. Therefore we recommended that the Joint Chiefs of Staff incorporate conventional munitions storage site security as a strategic planning factor into all levels of planning policy and guidance, including joint doctrine, instructions, manuals, and other directives. DOD partially concurred with our first recommendation that the department conduct a theaterwide survey and risk assessment regarding unsecured conventional munitions in Iraq. DOD stated that while it is imperative that a complete and thorough assessment of conventional munitions storage sites be conducted, military commanders in theater are aware of the significant risk posed by the sites, and similar studies and assessments have been conducted over the past 3 years. DOD also stated that from a manpower perspective, an in-depth, theaterwide survey is not feasible without significantly degrading ongoing efforts in Iraq and the region. As the evidence in our report clearly supports, we made this recommendation because we did not see any evidence of a strategic-level survey or an effective, theaterwide risk mitigation strategy to address the commanders’ awareness of this significant risk or the findings of the studies and assessments regarding security of conventional munitions storage sites. Accordingly, the intent behind our recommendation is to have DOD assess the risks associated with unsecured conventional munitions sites on a strategic, theaterwide basis to develop an effective risk mitigation strategy. DOD partially concurred with our second recommendation that the department report ensuing risk mitigation strategies and the results of those strategies to Congress. In commenting on this recommendation, DOD stated that risk mitigation is doctrinally sound; however, the department and Joint Staff recommend that these briefings to Congress remain at the strategic level. In making this recommendation, it was not our intention to detract tactical units from the current warfighting mission or to suggest congressional oversight is needed for each tactical unit. Instead, we are recommending that DOD alert Congress of its assessment and the actions being taken to mitigate the strategic risk associated with unsecured conventional munitions in Iraq. DOD partially concurred with our third recommendation that the department incorporate the security of conventional munitions storage sites as a strategic planning factor into all levels of planning policy and guidance and stated that the Joint Staff will incorporate the appropriate language in joint doctrine, manuals, and instructions. DOD stated that (1) Iraq is a separate case and should not be considered the standard for all future operations and (2) war plans must reflect proper prioritization based on desired operational effects and resources available as it may not always be possible or desirable in a resource- and time-constrained environment to secure all sites or destroy all munitions. We agree with these statements. The purpose of this report was not to suggest that Iraq be the standard for all future conflicts or to restrict commanders’ planning prerogatives. Instead, the report suggests that as DOD incorporates OIF lessons learned into joint doctrine, it includes what is a key OIF lesson learned—an adversary’s stockpile of conventional munitions can be an asymmetric threat to U.S. forces. Mr. Chairman and members of the subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you may have. For questions about this statement, please contact Davi D’Agostino at (202) 512-5431. Other individuals making key contributions to this statement include: Mike Kennedy, Assistant Director, Renee Brown, Donna Byers, John Van Schiak, and Nicole Volchko. 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 is releasing a report today on lessons learned concerning the need for security over conventional munitions storage sites which provides the basis for this testimony. Following the invasion of Iraq in March 2003--known as Operation Iraqi Freedom (OIF)--concerns were raised about how the Department of Defense (DOD) secured Iraqi conventional munitions storage sites during and after major combat operations. This testimony addresses (1) the security provided by U.S. forces over Iraqi conventional munitions storage sites and (2) DOD actions to mitigate risks associated with an adversary's conventional munitions storage sites for future operations on the basis of OIF lessons learned. To address these objectives, GAO reviewed OIF war plans, joint doctrine and policy, intelligence reports, and interviewed senior-level DOD officials. The overwhelming size and number of conventional munitions storage sites in Iraq combined with certain prewar planning assumptions that proved to be invalid, resulted in U.S. forces not adequately securing these sites and widespread looting, according to field unit, lessons learned, and intelligence reports. Pre-OIF estimates of Iraq's conventional munitions varied significantly, with the higher estimate being 5 times greater than the lower estimate. Conventional munitions storage sites were looted after major combat operations and some remained vulnerable as of October 2006. According to lessons learned reports and senior-level DOD officials, the widespread looting occurred because DOD had insufficient troop levels to secure conventional munitions storage sites due to several OIF planning priorities and assumptions. DOD's OIF planning priorities included quickly taking Baghdad on a surprise basis rather than using an overwhelming force. The plan also assumed that the regular Iraqi army units would "capitulate and provide internal security." According to an Army lessons learned study, this assumption was central to the decision to limit the amount of combat power deployed to Iraq. GAO analysis showed that the war plan did not document risk mitigation strategies in case assumptions were proven wrong. Furthermore, DOD did not have a centrally managed program for the disposition of enemy munitions until August 2003, after widespread looting had already occurred. According to officials from Multi-National Coalition-Iraq, unsecured conventional munitions continue to pose a threat to U.S. forces and others. Not securing these conventional munitions storage sites has been costly, as government reports indicated that looted munitions are being used to make improvised explosive devices (IED) that have killed or maimed many people, and will likely continue to support terrorist attacks in the region. As of October 2006, the Multi-National Coalition-Iraq stated that some remote sites have not been revisited to verify if they pose any residual risk nor have they been physically secured. DOD has taken many actions in response to OIF lessons learned, however, DOD has given little focus to mitigating the risks to U.S. forces posed by an adversary's conventional munitions storage sites in future operations planning. DOD's actions generally have emphasized countering the use of IEDs by resistance groups during post-hostility operations. GAO concludes that U.S. forces will face increased risk from this emerging asymmetric threat when an adversary uses unconventional means to counter U.S. military strengths. For example, potential adversaries are estimated to have a significant amount of munitions that would require significant manpower to secure or destroy. GAO concludes that this situation shows both that Iraqi stockpiles of munitions may not be an anomaly and that information on the amount and location of an adversary's munitions can represent a strategic planning consideration for future operations. However, without joint guidance, DOD cannot ensure that OIF lessons learned about the security of an adversary's conventional munitions storage sites will be integrated into future operations planning and execution. |
Members of the U.S. military serve in different branches in locations across the country and around the world. The various branches within DOD include the Department of the Air Force, the Department of the Army, and Department of the Navy, which also incorporates forces of the Marine Corps. DOD also oversees the members of the Coast Guard along with the Department of Transportation. As of 2004, approximately 1.4 million active duty military personnel served in the various branches in more than 6,000 locations. In addition, 2 million retirees receive pay and benefits from the department. DOD is also the largest employer and trainer of young adults in the United States, recruiting about 200,000 individuals into active duty in 2004—the majority of them recent high school graduates. As shown in figure 1, the pay of typical junior enlisted staff—grades E-1 through E-3— ranges between $1,143 and $1,641 per month. Entry-level military personnel are generally young and have limited education and incomes. A 2002 private research organization report that examined the financial situation of military members noted that the military hires primarily young, untrained, entry-level employees. Comparing data from various surveys done of large numbers of civilians and military members, this report found that less than 5 percent of junior enlisted personnel held bachelor’s degrees compared to 27 percent of the civilians. In terms of income, this report found that 87 percent of junior enlisted personnel had total monthly family incomes of $3,000 or less. However, a DOD commission that reviews military compensation has found that military members are paid at the 70th percentile or higher of comparably educated civilians. In addition, military members receive housing and subsistence benefits, with about half living in on-base housing and many having access to military facilities that provide meals. Various aspects of the military life can increase the challenges that service members face in managing their finances. According to the private research report, factors that appeared to increase the financial distress among military members were the family separations resulting from changes in duty stations and deployments away from home. According to our report on military relocations, DOD reported that about one-third of all military members make Permanent Change of Station (PCS) moves every year. The average length of time spent at each location can also be brief, with 20 percent of such relocations lasting less than 1 year and about 50 percent lasting 2 years or less. Leaving or retiring from the service also represents the last major transition in a service member’s career, with data indicating that most enlisted personnel leave after their initial duty commitment. As with their civilian counterparts, military service members may be offered various types of financial products, including life insurance. Types of life insurance commonly sold include term, whole, universal, and variable life insurance products. Many companies offer term life insurance, which generally provides basic death benefits for a specified time period, such as 10 or 20 years. At the end of this term, the insured can usually renew the coverage at a higher premium rate for another set term period. The coverage on a term policy may also end if the insured person ceases making the required periodic premium payments. Under a whole life policy, an insured person can make level premium payments, which will provide the specified amount of death benefits. Because the premium generally stays the same throughout the time that the policy is in force, premiums for whole life insurance are generally higher initially than for comparable amounts of term life coverage. Whole life insurance policies can build cash value, which can be borrowed upon, though this will reduce death benefits until the loan is repaid in full. Some whole life policies are known as “modified whole life insurance” in which the policyowner pays a lower than normal premium for a specified initial period, such as 5 years, after which time the premium increases to a higher amount that is payable for the life of the policy. Universal life products may also provide permanent insurance—like a whole life policy—but may also offer their purchasers more flexibility. Under such policies, the holder can vary the amount of the premium to build up the cash value of the policy by increasing the amount of the payment, or can pay less into the policy at other times, when money is needed for other purposes. Similarly, under a variable life policy, a cash value accumulates that can be used to invest in various instruments, such as common stocks, bonds, or mutual fund investments. However, with a variable life policy, the policyholder (and not the company) assumes the investment risk tied to the product. If these investments perform well, the death benefits paid on the policy can increase; conversely, if the investments perform poorly, the purchaser may have to increase their premiums to keep the policy in force. The federal government offers service members life insurance as part of their total benefits package. Each member is eligible for inexpensive coverage under Servicemembers’ Group Life Insurance (SGLI), which provides group term life insurance. Until September 1, 2005, service members were automatically covered for the maximum amount of $250,000 of insurance on their first day of active duty status, unless they decline or reduce their coverage, but Congress has now increased this amount to $400,000. Service members leaving the military can also opt to continue coverage through the government-sponsored coverage provided to veterans. Although many life insurance policies exclude coverage for deaths resulting from acts of war, these government-sponsored policies do not contain this exclusion. State government entities are the primary regulators of insurance companies and agents in the United States. When first establishing operations, an insurance company must obtain a charter or license in order to write business in a state. This state becomes its state of domicile. Insurers may obtain approval to market products in multiple states, and therefore the sales by insurers can be overseen by multiple state regulators, though financial solvency of each company is primarily overseen by the regulator in the company’s state of domicile. Some insurance companies market their products using their own proprietary sales force. Some companies may also use agents employed by independent firms who may be marketing the products of multiple companies to their customers. The state insurance regulators oversee the insurance companies and agents that do business in their jurisdictions in several ways, including reviewing and approving products for sale and examining the operations of companies to ensure their financial soundness or proper market conduct behavior. Although each state has its own insurance regulator and laws, the National Association of Insurance Commissioners (NAIC) provides a national forum for addressing and resolving major insurance issues and for allowing regulators to develop consistent policies on the regulation of insurance when consistency is deemed appropriate. This association consists of the heads of each state insurance department, the District of Columbia, and four U.S. territories. It serves as a clearinghouse for exchanging information and provides a structure for interstate cooperation for examinations of multistate insurers. NAIC staff also coordinate the development of model insurance laws and regulations for consideration by states. Its staff also review state insurance departments’ regulatory activities as part of its national financial accreditation program. To meet their financial investment needs, military members may also be offered various securities products. These can include stocks issued by public companies that are traded in various markets, or debt securities, such as bonds that provide interest income to their holders. A common securities product that many investors purchase is a mutual fund. Mutual funds are investment companies that pool the money of many investors, and then invest them in other assets, such as stocks or bonds. By holding the shares of the mutual fund, investors can benefit from owning a broad portfolio of diversified securities managed by professional money managers, whose services they might otherwise be unable to obtain or afford. Investors are charged mutual fund fees, which cover the day-to-day costs of running a fund. Mutual funds are sold through a variety of distribution channels. For instance, investors can buy them directly by telephone or mail, or they can be sold by sales forces, such as the account representatives of third party broker-dealers. Some mutual funds assess sales charges (also called “loads”), which are generally paid at the time of purchase to compensate these sales personnel. Securities—and the firms that market them—are overseen by various regulators. At the federal level, the Securities and Exchange Commission (SEC) oversees securities issued by public companies. The firms that market securities to investors, known as broker-dealers, must also register and subject themselves to SEC oversight. This includes complying with various requirements for regulatory reporting, financial soundness, and sales practice regulations designed to protect investors. In addition to oversight by SEC, broker-dealers also are overseen by private entities known as self-regulatory organizations. The New York Stock Exchange and NASD (formerly called the National Association of Securities Dealers) are two examples of such organizations. State regulators also oversee securities activities. Congressional concerns over the adequacy of military member’s financial literacy and the processes in place to address financial product sales have prompted recent reviews and legislative actions. In response to a Congressional committee’s request to review military members’ financial condition, we recently reviewed and reported on the financial condition of active duty service members and their families. We also reported on DOD’s efforts to evaluate programs to assist deployed and non-deployed service members in managing their personal finances and the extent to which junior enlisted members received required personal financial management training. As part of this study, we found that the financial conditions of deployed and non-deployed service members and their families are similar, but deployed service members and their families may face additional financial problems related to pay. We also found that DOD lacks an oversight framework for evaluating the effectiveness of its personal financial management training programs across services, and that some junior enlisted service members were not receiving personal financial management training required by service regulations. In addition, we reviewed and reported on the extent of violations of DOD’s policies governing the solicitation of supplemental life insurance to active duty service members and DOD personnel’s compliance with procedures for establishing payroll deductions (commonly referred to as allotments) for supplemental life insurance purchases. The findings of this review are discussed later in this report. In response to concerns over the sale of questionable financial products to military members, the House of Representatives passed legislation in 2004 and 2005 requiring additional protections for service members. In February 2005, a similar bill was introduced in the U.S. Senate. Both bills contain various congressional findings, including the finding that military members are being offered high-cost securities and life insurance products by some financial services companies engaging in abusive and misleading sales practices. According to the bills, Congress finds that the regulation of these products and their sale on military bases has been clearly inadequate and requires congressional legislation to address these issues. These bills have been referred to the Senate Committee on Banking, Housing, and Urban Affairs for further consideration. A limited number of insurance companies that appear to target junior enlisted military members nationwide and around the world have sold certain costly, problematic insurance products, sometimes using inappropriate sales practices. These insurance products combine life insurance coverage with a side savings fund. The insurance products typically provide small amounts of death benefits and are considerably more costly than coverage offered to service members by the government or other private firms. Although they combine insurance with a savings component promising high returns, many military personnel did not benefit because any savings accumulated on these products can be used to extend the insurance coverage if service members ever stop making payments and fail to request a refund of their savings. A number of financial regulators are also investigating the claims that these companies have been using inappropriate sales practices when soliciting military members, including examining allegations that agents have been inappropriately marketing the insurance products as “investments.” Some of these companies have also been subject to past disciplinary actions by insurance regulators and for violations of DOD regulations governing commercial solicitation on military installations. According to state insurance regulators we contacted, at least six insurance companies were marketing products combining insurance and savings funds with provisions that reduce the likelihood that military purchasers would accumulate any lasting savings with such products. These state insurance regulators are currently reviewing the operations of these companies. Several of these companies share common ownership, with three owned by the same firm and two others having key executives from the same family. These companies operate extensively throughout the United States, with four licensed to sell insurance in at least 40 states, and the other two licensed in at least 35 states. In addition, as of July 2005, DOD approved five of these companies to conduct business at U.S. military installations overseas. These insurance companies also appeared to market primarily to junior enlisted service members. According to state insurance regulators we contacted, the companies primarily sold insurance policies to military personnel during their first few years of service, including during their initial basic training or advanced training provided after basic training. Although the exact number of service members that have purchased these products is not known, regulators told us that these companies sell thousands of policies to military personnel each year. We also found evidence that large numbers of these products were being sold. For example, base personnel at one naval training facility we visited said they regularly received several hundred allotment forms each month to initiate automatic premium payment deductions from military members’ paychecks for these insurance products. The insurance companies that target military service members are primarily marketing a hybrid product that combines a high-cost insurance policy with a savings component. According to insurance regulators we contacted, and company marketing materials that we examined, the insurance component generally consists of either a term or modified whole life policy that would provide death benefits generally ranging from $25,000 to $50,000 for premiums of approximately $100 per month in the first year with different variations in the premium amounts for subsequent years, depending on the product. In addition to the insurance component, part of the total monthly payment is allocated to a savings fund. Based on our review of these products, most (or all) of the service member’s payments in the first year are applied to the insurance component of the product. In subsequent years, more money is allocated to the savings fund to varying degrees, depending on the specific product. The companies marketing these products advertised that they paid relatively high rates of return on these savings funds. At the time we conducted our work, all of the companies were promising to pay 6.5 percent interest, or higher, on the savings fund portions of their products with a minimum of no less than 4 percent interest guaranteed. In contrast, as of August 30, 2005, the average national interest rate paid for a money market account was 2.16 percent. Company officials also told us that in the past they had paid much higher interest rates. For example, one company’s marketing materials for their product stated that over the past 25 years they had paid an average rate of 11.4 percent on the savings fund. Further, another company’s marketing material stated that their saving fund interest rate for the past 10 years averaged over 10 percent. The six companies that were marketing primarily to military members were selling two primary variations of these combined insurance and saving products. Three of the companies sold a product that provided 20 years of term life insurance. However, the premium payments for this product were structured so that purchasers would pay for the entire 20 years of life insurance coverage within the first 7 years. As a result, most of the service member’s monthly payment for the first 7 years was allocated to the life insurance premium, not the savings fund. After the seventh year, all subsequent payments are to be deposited into the savings fund. In addition, this product also promised the full return of the total premiums paid for the insurance at the end of the 20th year, although state insurance regulators told us they were not aware of any policies that had reached this 20-year point and received this refund. Figure 2 provides an example of how the payments would be allocated for a service member purchasing this “7-year premium” term insurance product, assuming a monthly payment of $100 and a savings portion crediting the guaranteed 4 percent simple interest paid annually. Three other companies marketing primarily to military members sold other variations of the combined insurance and savings product. Generally, these products combined a modified whole life insurance policy with a savings fund. Under the basic terms of these products, most of the service members’ first year’s payments would be applied to the life insurance premium and the remainder allocated to the savings fund. From the second year on, the allocation proportions reverse where most of the money is applied to the savings fund. Premium payments on these products could continue for the life of the purchaser, although the face value of the death benefit would be reduced to half its initial amount after a certain period or when the policyholder reached a certain age, depending on the product. Figure 3 provides an example of how the payments could be allocated for a service member purchasing this type of product with a $100 total monthly payment and 4 percent simple interest credited on the savings fund. These insurance products also cost significantly more than other life insurance coverage available to service members. Prior to September 2005, all service members could purchase $250,000 of term life insurance through SGLI for $16.25 per month. Since September 1, 2005, the total coverage has increased to $400,000 for $26 per month. According to the Department of Veterans Affairs, which administers the SGLI program, 98 percent of all service members opt to receive this coverage. After leaving the service, service members can convert their SGLI coverage to a Veterans’ Group Life Insurance (VGLI) policy which now also provides up to $400,000 of low- cost term life insurance for veterans, with rates dependent upon age. For example, veterans between the ages of 40 and 44 years of age can purchase $50,000 of life insurance for less than $10 per month. In addition to government-sponsored coverage, service members can also purchase similar coverage, including covering combat deaths, from other insurance companies. For example, according to officials of one company that sells insurance and other financial products to military personnel directly, they could provide a 20-year-old service member an additional $250,000 of life insurance to supplement SGLI for $15 to $20 per month. In addition to being many times more expensive than other products already available to military members, companies have been selling insurance products to service members who generally do not appear to need additional life insurance, according to state regulators we contacted. These regulators also said the companies that targeted military members typically marketed their products to junior enlisted service members, who often have no dependents. During our review, we obtained data from the Defense Finance and Accounting Service (DFAS), which maintains military personnel pay records, indicating that most service members that appeared to have purchased life insurance products from some of these insurance companies had no dependents. For example, according to DFAS data on Marine Corps service members, over 6,500 pay deduction allotments to send premium payments to banks used by three of these insurance companies, starting between July 2004 and June 2005, indicated that approximately two-thirds were unmarried service members with no other dependents. Data available from other Services on allotments sent to these insurance companies during the same period also indicated that most of the service members had no dependents. Regulatory officials we contacted noted that the amount of coverage available to these members from SGLI would likely be adequate for their insurance needs, and thus no additional insurance coverage would be necessary. Officials with one of the companies that targeted military members told us that the insurance they sell has benefited some service members. For example, their company has paid $37 million in death claims for service members in the last 5 years, including $1.5 million to survivors of service members killed in the recent conflict in Iraq. The insurance products with combined insurance and savings components being sold by several companies to service members had provisions that reduced their benefits to purchasers that could not--or did not--pay into the product for a long-term period. According to regulators we contacted and our review of selected policies, the products being sold by at least six companies had an automatic premium payment provision, which allows the companies to use money accumulated in the service member’s savings fund to automatically pay any unpaid insurance premiums. The provision extends the period of time that the service member is covered under the life insurance policy if the service member does not proactively contact the insurance company to cancel the insurance policy and request a refund of the savings fund. After the automatic premium payment provision is triggered and the savings fund becomes depleted, the policy then terminates, or lapses. Regulators we contacted were critical of the impact that this provision can have on purchasers of these products. For example, an official at one state regulatory agency described this provision as allowing the company to “parasitize” the savings fund for its own benefit. In contrast, representatives of one company told us that this provision allows the service member to receive extended life insurance coverage. Many military members that purchased these products only made their payments for a short period of time. State insurance regulators we contacted believed that most service members that purchased these products from these companies stopped making payments within the first few years, and that the lapse rates were significantly higher than industry norms. During our review, we received data on the percentage of policies that lapsed or terminated during the first year on products offered by four insurance companies that substantiated lapse rates above industry averages. For instance, information we obtained from one company that targets the military market segment indicated that approximately 40 percent of products purchased had lapsed or terminated within the first year. Data provided to us from three other firms indicated that the majority of policies had lapsed after being held between two and three years. The characteristics of the military population that these companies were marketing to increases the likelihood that service members will stop making payments and not receive any savings they have accumulated in these products. Regulatory officials we spoke with said that one of the reasons so many service members discontinue making payments is that they leave the service and thus the automatic deductions of their premium payments to these companies also stop. Company officials we spoke with told us that service members ceasing payments can request and receive refunds of the amounts accumulated in their savings accounts. However, according to regulators we contacted, companies do not always receive such requests from service members at the time payments cease. According to these regulators, many service members may not have received refunds of any accumulated savings given that such funds are automatically depleted to pay for the insurance policy for an extended period until such amounts were exhausted. As a result, many of the service members who simply stop paying into the product likely did not receive any of the money they had paid into the savings portion of the product. As such, they obtained some extended life insurance coverage after their payments ceased that, as shown previously, was more expensive than insurance they already receive and that they would not likely have purchased except for the promised savings provision. According to our analysis, the amount of time that it takes for a service member’s savings fund on the products these six companies were selling with a monthly payment of $100 to become totally depleted through the automatic payment provision varied. Figure 4 shows the impact on a service member that purchases the 20-year term life product with the 7- year premium period with $30,000 of insurance coverage, makes $100 monthly payments for 4 years totaling $4,800, and then stops making payments. As the figure shows, the money in this service member’s savings fund would be totally depleted to pay the subsequent insurance premiums in just over 1 year. This occurs because the policy requires that the entire 20 years of coverage be paid for in the first 7 years, which results in the monthly premium being larger than comparable policies. In addition, because almost all of the service member’s payments during the first few years are allocated to the insurance policy, the accumulated value of the savings fund is modest. For the modified whole life product previously discussed, which required lower premium payments and larger savings accumulation after the first year, the savings fund of service members that ceased making their payments after 4 years would be sufficient to extend the $30,000 of life insurance coverage for another 13 years. In contrast, a service member could have used the $100 monthly payment to instead purchase $30,000 of SGLI term coverage at a cost of only about $23 per year—totaling $92 for 4 years—and invest the remaining $4,708 into the Thrift Savings Plan (TSP), which is the low-cost retirement savings plan available to military members and federal employees. Although ceasing payments on SGLI after 4 years would terminate the service member’s life insurance, the money contributed to the TSP and left to earn just 4 percent interest would grow to about $9,545 in 20 years. In addition to the high costs associated with the insurance portion of these combination products, other provisions diminished the value of the savings component as well. According to regulators we contacted, withdrawal penalties and unique methods of interest crediting significantly reduced the advertised rate of return for these products. Typically, service members withdrawing all or part of the accumulated money in the savings fund any time after purchase within the first 10 years would be assessed early withdrawal penalties. For example, one of the companies assessed an early withdrawal fee of 10 percent in the first year, with this fee declining by 1 percent each subsequent year until reaching zero in the 10th year. Several companies credit the amount accumulated on the basis of either the year- end balance or the average balance--whichever is less. For sufficiently large withdrawals, a service member would not receive any interest at the end of that policy year on the money withdrawn from the fund. Under this methodology, amounts withdrawn during the year earn no interest, thereby reducing (in some instances significantly) the advertised rate of return. Insurance companies that market primarily to military members have been frequently accused of using inappropriate sales practices by regulators, DOD, and others. As part of our review, we identified at least 15 lawsuits or administrative actions that had been taken against companies that market primarily to military members. In many of these actions taken by state and federal regulators, federal law enforcement organizations, or others, the companies were accused of misrepresenting the products as investments or identifying themselves as representatives of independent benefit or fraternal organizations. (Appendix II lists these actions.) For example, in December 1998, two of the insurance companies that target military members settled a lawsuit filed by DOJ in Washington state that alleged that their agents had misrepresented their insurance policies as investment plans. As part of the settlement the companies had to offer refunds to approximately 215 service members in certain states who purchased life insurance polices between 1994 and 1997. In an agreement with the Attorney General's Office in the state in which one of the companies was domiciled, each of the companies also made $1 million donations to a university in that state. More recently, after the Georgia Insurance and Safety Fire Commissioner initiated investigations to review allegations of improper insurance sales practices at military installations in that state, two insurance companies have agreed to make refunds of about $2.4 million to soldiers who had purchased insurance products. After a series of articles in The New York Times raised concerns over sales of financial products to military members, state regulators in as many as 14 states began new investigations into the practices of companies that target service members. According to regulators in these states, various sales practice concerns are being examined. As of September 2005, the investigations by these states generally had not been concluded. In addition to efforts by insurance regulators, law enforcement organizations and securities regulators are also reviewing the activities of some of the insurance companies that target military members. One of the issues that is again a focus of regulators and others in their new investigations, is whether the companies and their agents were inappropriately marketing these products--not as insurance--but primarily as investment products. State insurance laws generally require any product with an insurance component to be clearly identified and marketed as insurance. However, regulators in various states raised concerns that the companies targeting service members were deemphasizing the insurance aspects of the product. Some state officials told us that the companies would have considerable incentive to obscure the insurance aspects of the product because 98 percent of service members already obtain a substantial amount of life insurance through the government-offered SGLI program. Insurance regulators we contacted told us that when marketing to military members these companies typically emphasize the investment provision of the products even though most, if not all, of the payments in the first year are used to pay the insurance premiums. Furthermore, most of this amount is then used by the companies to pay sales commissions to the selling agents. The marketing materials for the companies that we examined also emphasized the savings component of the products. For example, a script from a sales presentation of one company mentions the insurance coverage third, after describing other product benefits. It also highlighted that the cost of the insurance was “free” if the service member completes the product terms. Insurance regulators with whom we spoke mentioned that such a sales presentation is designed to overcome objections from service members that they did not need any additional life insurance. In addition, examiners in one state reported in 2002 that one of the companies’ materials referred to the premium payments for the insurance product being sold to service members as “considerations” or “contributions,” which were terms that they said were typically used when selling investment products. Our review of information provided by legal offices at Fort Benning, Georgia, and Great Lakes Naval Training Center, Illinois, also indicated issues related to insurance products being marketed and sold primarily as investment products. The design of the products themselves may have also been misleading. Despite emphasizing the investment returns and high rates of promised interest earnings that were possible with these products, regulators in one state told us that the companies may have assumed that their actual policyholders would not generally attain these returns. As part of a class action case previously filed against one of these companies, presented as evidence were a series of internal company memorandums dating from around the time the company was proposing to begin selling a combined insurance and saving fund product. In one of these documents, a company official states the assumption that product purchasers would not earn the initially-promised 11 percent interest, or any amount even close to that, because the product’s savings fund “is inextricably coupled with a rather expensive traditional life insurance policy,” and has restrictive interest crediting and withdrawal provisions. According to a deposition taken of a former company official, the company also assumed that many purchasers would not hold the product for very long. For example, this official stated that the company assumed that as many as 45 percent of purchasers would stop paying into the product within 1 year and another 25 to 30 percent would stop paying by years 2 and 3. In contrast, data from a service that tracks the rates at which insurance policyholders stop paying on their policies—called lapse rates— indicates that the lapse rate in the first year on term life policies requiring monthly premium payments averaged less than 15 percent. Other federal regulators are also investigating the extent to which the companies that market primarily to military members were marketing insurance as investment products. According to SEC officials with whom we spoke, insurance products marketed as investments may need to be registered as securities. Currently, insurance policies and annuity contracts issued by an entity subject to supervision by state insurance or banking regulators are exempt from securities registration. Under existing case law, one factor that is important in determining whether an insurance product is entitled to this exemption is the manner in which the product is marketed. Under a safe harbor created by SEC Rule 151, one condition for annuity contracts to avoid being subject to the federal securities laws is to not be marketed primarily as an investments. As of September 2005, SEC staff told us their inquiries into some of these companies’ operations were continuing. In addition, DOJ officials also confirmed that they are investigating some insurance companies that market primarily to military members. Officials with several of the companies that market primarily to military members told us that they clearly inform service members that the product they are offering is insurance. For example, officials at one of the companies showed us documents that they said are to be initialed and signed in multiple places by purchasers of their product that indicate that the product is insurance. An investigation by DOD personnel into sales at one naval facility indicated that many members knew they were buying insurance as well. However, an investigator of one of the states that previously sanctioned one of these companies told us that they had received information indicating that the company’s sales agents may have found ways to present the products without the service members realizing they were buying insurance. Such allegations illustrate the difficulties that regulators face in determining whether inappropriate sales practices were being used. Insurance regulators and other investigators are also investigating whether some of the companies have been misrepresenting the nature of the products in the forms used to initiate deductions for the premiums from service members’ pay. According to DOD staff responsible for personnel pay systems, service members can have various types of allotments deducted from their pay, including deductions to be sent to savings accounts or to pay for insurance they purchase. However, for insurance allotments for junior enlisted members (those at rank E-3 and below), a 7- day “cooling off period” is required to pass before the allotment can be processed. Although these companies were selling insurance products, state regulatory officials we contacted were concerned that, in some cases, the companies were mislabeling the government pay deduction forms to reinforce the appearance that these purchases were investments and not insurance. For example, we reviewed pay allotment documents that appeared to indicate the service member purchasing this product was initiating a pay deduction that would be sent to a savings account in the member’s name at a bank. In addition, the service member would also be asked to complete a form that authorized the recipient bank to withdraw the premiums due on the insurance product from the service member’s account at that bank. However, state insurance regulators told us that the service members did not actually have accounts at these banks; rather, the money was deposited in a single account belonging to the insurance company. After we contacted officials at some of the banks to which these insurance companies were having service member payments routed, bank officials confirmed to us that the service members did not have accounts at the bank, but rather, contributions were sent to accounts belonging to the insurance companies. Thus, routing the payments to a bank with the allotment appearing as a bank allotment on the service member’s pay statement, rather than an insurance allotment, could reinforce the impression that the service member had purchased an investment product rather than insurance. Insurance regulators in one state also told us that they found instances in which insurance agents were assisting service members to access online military pay systems to add allotments for insurance premiums. Our own review found additional evidence of possible irregularities involving pay allotment forms and other activities by agents selling these combined insurance and saving products. During a review of documents used to initiate allotments from service members’ pay at two military installations we visited, we also found several examples of allotment deduction forms that seemed as though the service member involved had a savings account at a bank used by the insurance company. We also noted several other potentially irregular activities. In some instances, insurance agents mailed allotment forms to the finance office that processes pay transactions for service members stationed at one of these bases using bank envelopes that had a bank’s address as its return address. The use of bank envelopes could help convince base personnel that these were savings rather than insurance allotments, and thus not subject to any required “cooling off period.” In another example of insurance company agents attempting to make the service member allotments used to pay for these insurance products appear to be savings allotments, we saw multiple instances of the use of an allotment form bearing the signature of the same bank official as the initiator of the allotment. After we contacted this bank official, he told us that he had once signed such a form but that the repeated use of the form with his signature was being done by the insurance agents without his knowledge. The results of these reviews and indications of potential fraud were referred to our special investigators, who are conducting further reviews and have initiated contacts with other law-enforcement organizations, DOD investigative agencies, and state regulatory departments. Our review of allotment forms raised questions about whether agents marketing products targeting military members were encouraging service members to reduce tax withholdings and other savings contributions, thus providing a source of income to invest in the insurance products. Specifically, we found several examples of forms canceling service members’ TSP contributions and altering the number of exemptions claimed on service members’ W-4 forms (reducing the amount of tax withheld from their pay) that were submitted along with insurance allotment forms. Forgoing investment in TSP (which is generally recognized as being one of the lowest-cost ways to invest for retirement available anywhere) to purchase expensive insurance would not generally be in the service member’s best interest financially. By reducing the member’s withholdings and TSP contributions, the agents in these cases may have been attempting to overcome service member objections about affording the additional payment for the insurance product. In addition, reducing a service member’s withholdings could potentially result in additional taxes due at year’s end. Another sales practice issue that insurance regulators we contacted have been concerned about is whether some individuals that are selling insurance were not clearly representing themselves as insurance agents when marketing to military service members. In the past, DOD has found that insurance agents who have marketed to service members frequently identify themselves as counselors from benefits associations. Such entities provide counseling on obtaining government benefits or other services and may also offer their members discounts on other products, such as auto services. By representing themselves as benefits counselors, insurance agents may more readily gain access to service members. However, regulators and others have documented prior instances in which insurance agents marketing to military members misrepresented themselves as benefits association employees. For example, in December 2002, DOJ announced a settlement against an insurance company that targeted military members whose agents had misrepresented themselves solely as employees of a benefits association. According to the DOJ complaint, this company had allegedly defrauded military service members who purchased life insurance policies from the company by having its agents pose as independent and objective counselors representing a non- profit fraternal organization that offered as one of its benefits the ability to purchase the company’s life insurance. However, the company’s agents allegedly failed to disclose to the service members that they only were compensated through commissions from the insurance company, and that the company was making undisclosed payments to the benefits association for every policy sold. Under the terms of the settlement, the company agreed to, among other things, increase the face amount of all in force coverage by 6.5 percent, pay $2.7 million to all service members who canceled their policies during a specific period, and to never again sell another insurance policy or reapply for DOD permission to conduct business on U.S. military installations. According to a state insurance department investigation that was finalized in January 2002, agents from an insurance company that is currently being investigated by other states portrayed themselves as benefit association representatives without disclosing that they were insurance agents. As a result these agents were allowed to conduct military training during which they would solicit insurance to groups of service members. According to the report, the service members believed that the benefit association was part of the military establishment. Another aspect of the operations of the companies that market primarily to military members that state insurance regulators were examining was whether the products comply with applicable state laws and regulations. For example, regulators in several states have been examining whether the saving funds that some of the companies had labeled as annuities may not actually qualify as such under their laws. After concerns arose about the sale of these combined insurance and savings products, insurance regulators in Washington state rescinded approval to sell the products that had previously been approved for sales by one of the companies that targeted the military in June 1997 and for three additional companies in October 2004. In taking these actions, the state’s insurance department noted that it had determined that the savings fund provision of these products the companies were marketing were not properly structured to meet the requirements of this state’s regulations pertaining to annuities. In addition to raising concerns among financial regulators, the companies that target military members also have been accused of violating DOD’s own solicitation policies. For example, DOD personnel conducted an April 2005 proceeding in Georgia to review the practice of one of the companies currently being investigated by state insurance regulators regarding allegations of multiple violations of the DOD directive on insurance solicitation. Among the practices alleged at this hearing were misleading sales presentations to captive audiences and solicitations in unauthorized areas, such as in housing or barracks areas. DOD recently began maintaining an online listing of actions taken against insurance companies or their agents by various DOD installations. Last updated on August 11, 2005, this web site lists 21 agents from some of the 6 companies that are permanently barred--or have had their solicitation privileges temporarily suspended--at 8 different military installations. Concerns over such violations are longstanding. For example, in March 1999, the DOD Inspector General also found that insurance companies were frequently employing improper sales practices as part of marketing to service members. Among the activities prohibited by DOD that the Inspector General report found were occurring included presentations being made by unauthorized personnel, presentations being made to group gatherings of service members, and solicitation of service members during duty hours or in their barracks. Similarly, a May 2000 report commissioned by the Office of the Under Secretary of Defense for Personnel and Readiness also reviewed insurance solicitation practices on DOD installations and identified many of the same concerns and recommendations as those the DOD Inspector General had identified. As result of these two reports, DOD officials began efforts to revise its directive governing commercial solicitation on military installations. A few broker-dealers have marketed a unique securities product, often referred to as a contractual plan, to military service members that has proven to be more costly than other commonly available products. These contractual plans were primarily being sold by one large firm and several smaller firms that generally marketed only to service members. These products involve making periodic investments into a mutual fund under contractual agreements with much of the first year’s investments going to pay a sales load that compensates the selling broker-dealer. Purchasers that make all required payments for the entire term of the contractual mutual fund plan would pay charges slightly less than the amount charged by other load funds. However, regulators found that most military purchasers were not making all required payments, resulting in them paying higher sales charges than would have been paid on other commonly available mutual funds. Regulators indicated that contractual plans are rarely sold to civilians and the products have been associated with sales practice abuses for decades. Regulators recently sanctioned the largest seller of these plans for inaccuracies in its marketing materials. Investigations into the activities of other broker-dealers selling contractual plans are also underway. Although being sold to large numbers of service members, contractual mutual fund plans were being marketed by only a few broker-dealers. SEC and NASD staff told us that their investigations have identified only about five broker-dealer firms that were marketing these plans. According to regulators, one of the broker-dealers accounted for over 90 percent of the $11 billion invested in contractual plans as of year-end 2003. Unlike the insurance companies that targeted junior service members, this broker- dealer generally marketed its products to more experienced military members, including commissioned officers and senior noncommissioned officers. According to its marketing materials, this firm had nearly 300,000 military customers, and indicated that one-third of all commissioned officers and 40 percent of active duty generals or admirals were clients. The firm employs about 1,000 registered representatives in more than 200 branch offices throughout the United States, as well as locations in Europe and in the Pacific region. The great majority of the firm's sales representatives are former commissioned or noncommissioned military officers. From January 1999 through March 2004, the firm received approximately $175 million in front-end load revenue from the sale of contractual plans. Officials with the firm announced in December 2004 that they would be voluntarily discontinuing sales of contractual plans after being sanctioned by SEC and NASD. The other four firms that continue to sell contractual plans were smaller broker-dealers. Of these, regulators told us that three also principally targeted military service members although, unlike the largest broker- dealer, these three firms generally sold contractual plans to junior enlisted personnel. According to regulators, the fourth broker-dealer appeared to be marketing to civilians. However, given the availability of other alternative low-cost mutual fund products in the marketplace that allow investors to make relatively small contributions on a regular basis, regulators indicated that they rarely see contractual plans being sold to civilians by other firms. Under the terms of the contractual plans being sold to military service members, the purchaser enters into a contract to make periodic investments for a set term (such as 10 to 15 years). These payments are invested into funds offered by some of the largest mutual fund companies. Under the contractual plan, the firm deducts a sales load of up to 50 percent from each of the first year’s monthly payments but generally no further sales loads are applied thereafter. In contrast, a conventional mutual fund with a sales load will deduct a certain percentage—currently averaging about 5 percent—from each contribution made into the fund. While sales charges for contractual plans are initially much higher than those of other mutual fund products, the effective sales load—the ratio of the total sales charge paid to the total amount invested—becomes lower as additional investments are made. Over time the effective sales load for a contractual plan will decrease to a level comparable to—or even lower than—other conventional mutual funds with a sales load. As illustrated in Figure 5, if all 180 monthly payments are made under a contractual plan, the effective sales load on the total investment decreases to 3.33 percent by year 15. At one time, contractual plans were the only way for small investors to invest in mutual funds. Regulators told us that in the past, many mutual funds required large initial investments that prevented them from being a viable investment option for many individual investors. However, today, other lower-cost alternatives exist for small investors to begin and maintain investments in mutual funds. For example, many mutual fund companies now allow investors to open a mutual fund account with a small initial investment, such as $1,000, if additional investments—including amounts as low as $50 per month---are made through automatic withdrawals from a bank checking or savings account. According to a recent study by the mutual fund industry association, over 70 percent of the companies offering S&P 500 index mutual funds in 2004 had minimum initial investment amounts of $1,000 or less, with 9 having minimum investment amounts of $250 or less. Securities regulators saw the wide availability of such products as the reason that contractual plans were rarely being offered to most investors. Another alternative investment option available to service members since 2002 is the government-provided TSP. Comparable to 401(k) retirement plans available from private employers, service members can invest up to 10 percent of their gross pay into TSP without paying any sales charge. The various funds offered as part of TSP also have much lower operating expenses than other mutual funds, including those being offered as contractual plans. Service members could also choose to invest as many other investors do in mutual funds offered by companies that do not charge any sales load. Called no-load funds, these are available from some of the largest mutual fund companies through toll- free numbers, the Internet, or by mail. According to industry participants, contractual plans provide their purchasers with the incentive to invest for the long term. Officials from the most active broker-dealer that marketed contractual plans told us that the larger upfront sales load encourages the investor to maintain a long-term investment plan because of the financial penalty that results from halting their payments too early. They also said that the contractual nature of the product helps purchasers make regular investments. In addition, these officials explained that the clients they serve are not high-income individuals with considerable accumulated wealth available for investment. As a result, they said that other broker-dealers do not provide financial services to these individuals. The officials from this firm said that their sales representatives spend many hours explaining the products and preparing and updating financial plans for their military clients. As a result, the higher up-front sales charge compensates their staff for the amount of time spent with clients. Officials from this firm told us that clients who purchased contractual plans and received financial plans from their firm generally benefited as the result of an improved financial condition overall. However, according to data obtained from securities regulators, many service members did not benefit from purchasing contractual plans. Although such plans can prove beneficial to an investor that makes all of the required periodic payments, regulators found that many service members were not investing in their plans for the entire term. For example, SEC and NASD found that only 43 percent of the clients that purchased plans between 1980 and 1987 from the largest broker-dealer had completed the full 15 years required under the contract. Instead, 35 percent of these clients that bought during this period had terminated their plans early. Another 22 percent had not cancelled their plans but were not making regular payments. According to securities regulatory staff, most of the clients that stopped making payments into this broker-dealer’s contractual plans ceased doing so after about 3 years. SEC staff told us that the customers of the other broker-dealers that were marketing contractual plans to military members had the same or even lower success rates of contracts completion. For example, they said that only about 43 percent of the clients of one of these broker dealers had made all required payments for a full 15-year period and, at another firm, just 10 percent of the customers had successfully completed a plan. Because of the manner in which sales charges are assessed, terminating a contractual plan or halting payments early can greatly reduce the benefits to an investor. If the investor does not continue paying into the plan, the effective sales load can be much higher than industry norms. For example, as shown previously in Figure 5, an investor terminating after 3 years pays an effective sales load of 17 percent of the amount invested, which is more than three times the current average sales load in the mutual fund industry. As result, many of the service members that purchased contractual plans from these firms likely paid much higher sales charges than they would have under other alternative investments. Even if an investor makes all required payments under a contractual plan, we found that the amount accumulated on a contractual plan investment earning a 7 percent annual return is lower than that of a conventional mutual fund with a 5 percent sales load earning the same projected return until at least year 16 (this analysis is shown in appendix III). Contractual plans have long been associated with sales practice concerns and recently regulators have taken action against the largest seller of these products. According to an SEC study, contractual plans to sell mutual fund securities were first introduced to the public in 1930. However, concerns over the sale of these products, including excessive sales charges, arose and, as a result, the subsequently-enacted Investment Company Act of 1940 included a provision that limited the sales load that could be charged on contractual plans. After the passage of the Act, sales of contractual plans declined, with most of the companies selling such plans halting their marketing of such products. However, during the 1950s and 1960s sales of contractual plans significantly increased. With researchers finding that many contractual plan purchasers were not continuing to invest in their plans, SEC recommended that the Investment Company Act of 1940 be amended to prohibit future sales of contractual plans. Although Congress chose not to ban contractual plans, it amended the Act in 1970 to increase protections for contractual plan investors. Specifically, Section 27 was revised to allow investors who cancel their plans within the first 18 months of purchase to obtain refunds on that portion of the sales charges which exceeds 15 percent of the gross payments made. In addition, investors terminating their plan within the first 45 days could receive their full investment back with no sales charge deductions. Even with such limitations, sales charges associated with contractual plans can still be much higher than those of other mutual fund products and industry norms. However, regulators again found inappropriate sales practices associated with contractual plans even after this provision was changed. For example, in the early 1990s, federal and state securities regulators took action against a broker-dealer, First Investors Corporation, for improper marketing of contractual plan investments, including its alleged failure to notify investors that they could invest in the same funds without having to pay the high sales charge required under the contractual plan. During this period, other low-cost mutual fund products emerged in the marketplace, allowing investors to make relatively small monthly payments into a mutual fund product with low fees. The contractual plan product generally disappeared from the civilian marketplace but continued to be sold in the military market by a few firms, with one emerging as the dominant player in this niche market. Recently, securities regulators have taken actions against a firm marketing contractual plans to military service members. In December 2004, SEC and NASD sanctioned the broker-dealer firm that was the dominant seller of such plans to service members. According to settlements reached with these regulators, the firm’s marketing materials were alleged to have been misleading and to have inappropriately disparaged other viable investment options available to their clients. For example, according to the regulators, the firm’s marketing materials allegedly included various misleading comparisons of contractual plans to other mutual funds, including characterizing non-contractual funds as attracting only speculators, and erroneously stating that withdrawals by investors in other funds force the managers of those funds to sell stocks. The regulators also alleged that the firm’s materials did not present the low-cost TSP as a viable alternative to their contractual plans. The SEC and NASD settlements also alleged that the firm mischaracterized the contractual plan’s high up-front sales load as the only way to ensure that purchasers remain long-term investors and presented comparisons of contractual plans using a holding periods of more than 14 years despite having data within the firm that showed that many of its customers were not successfully completing their plans. As a result, securities regulators found that the firm’s service member clients paid higher than normal sales charges because they frequently did not continue making enough payments into such plans to reduce the effective sales charges to a level comparable to typical mutual fund sales charges in the industry. The regulators also took action against the firm for inappropriate handling of customer complaints. As part of its investigation into this firm’s practices, NASD sanctioned the firm for the actions of one of its supervisors who made improper statements to a service member who had previously expressed dissatisfaction with the broker-dealer. The regulatory settlement provides a summary of a call made to this customer in which the firm’s supervisor appeared to threaten the service member with adverse consequences from his military superiors, including possible cancellation of his previously approved temporary duty orders. In settling with SEC and NASD, the broker-dealer agreed to pay a total of about $12 million, including restitution to compensate customers who paid an effective sales charge of more than five percent on investments made since January 1999. As of October 6, 2005, $4.3 million has been paid to investors. The remaining money is to be used to fund an educational program for service members that NASD will administer (this program is described later in this report). As previously stated, this broker-dealer announced that it has voluntarily discontinued sales of contractual plan products. SEC and NASD continue to investigate the other smaller broker- dealer firms that are marketing contractual plan products to military members and others. In addition, SEC staff also began conducting reviews of sales to military members in overseas locations and at installations in the United States. Two bills before the U.S. Senate (one of which passed the House of Representatives) would amend Section 27 of the Investment Company Act of 1940 to ban further sales of contractual plans. A lack of routine complaint sharing between financial regulators and DOD was the primary reason that regulators did not identify problematic sales of financial products to military service members before such issues were raised in press accounts, although other limitations among regulators’ practices also contributed. Insurance companies are generally required to submit products for regulatory approval before marketing them but the review processes in most states may not have addressed the appropriateness of their features for service members. Although insurance regulators in some states review sales activities periodically, insurance regulators in most states generally rely on complaints from purchasers to indicate that potentially problematic sales are occurring. One reason that insurance company sales activities are not reviewed more extensively is because most states lack any appropriateness or suitability standards for insurance products. Although some states had taken action, other state insurance regulators were not generally aware of problems involving military members until recent press reports, in part because DOD personnel were not usually sharing complaints or information about other inappropriate practices regarding the companies that targeted service members. However, we found evidence that concerns over inappropriate sales to service members exist widely at various military installations. Similarly, securities regulators also did not identify recent problems involving contractual plan sales to service members until such press accounts appeared. These regulators’ ability to detect problems was also hampered by the lack of information on the extent to which broker-dealer customers purchasing contractual plans were successfully making their payments. In light of the problems surrounding sales of financial products to military members, DOD has efforts underway to revise its policies regarding such sales and has reviewed ways in which it could share additional information. However, DOD has not coordinated these efforts with military installation personnel or with regulators. The product approval processes followed by many insurance regulators did not allow them to identify the products being marketed to military members as potentially problematic. One of the ways that state insurance regulators ensure that the products being sold in their states comply with insurance laws and regulations is through product approval requirements. Although insurance regulators in most states require insurance companies to submit products for approval before marketing them, state insurance officials in the states we contacted explained that the processes for approving products varied. In several of these states, insurance companies must submit products to the state regulators for reviews that are intended to assess whether the provisions and terms of the products comply with existing insurance regulations in those states. Companies sometimes submit additions to existing products, called riders, which change terms or provide additional features to their policies. However, according to some regulators in the states we contacted, the entire product may not be reexamined by their reviewers when such riders are submitted. In at least 2 states we contacted, different components of products sold to military members were filed and approved separately but then marketed and sold as a single product. For example, the savings fund of the insurance product being sold by four of the companies that target military members was submitted as a rider to a previously approved policy. However, regulators found that it was being sold as an integral part of the entire product, not as an optional feature to a life insurance policy. In at least one state we contacted, many insurance products are not reviewed but can be sold immediately upon filing notification with their department of the company’s intent to market the products. Additionally, insurance product approval processes may not necessarily reveal how a product is to be marketed or the target market for the product. According to officials in the state insurance departments we contacted, none of these states required insurance companies to provide descriptions of the target market for a particular product during the form filing process. As part of the investigations that state insurance regulators are conducting of the companies that target military members, some of the regulators are also reexamining the products these companies sell to ensure that they meet existing state requirements. For example, insurance regulators in Virginia issued an order in September 2005 to three companies to cease and desist from selling such products. However, the extent to which this review is occurring in other states is not clear. State insurance regulators may conduct various types of reviews of the insurance companies they oversee. Many of the routine reviews that these regulators conduct focus on insurance companies’ financial soundness. During such examinations, the regulators assess the quality of insurance companies’ assets and whether their income is sufficient to meet present and future financial obligations to their policyholders. Some state insurance regulators also review some aspects of insurance product sales as part of market conduct examinations. Designed to help protect consumers from unfair practices, market conduct reviews are done for a wide range of company practices, including sales, underwriting, and claims processing and payment. For example, a regulator may review a sample of sales by a particular company to ensure that its agents have not misrepresented products or otherwise violated the requirements of their particular state. Although some states routinely perform market conduct reviews of the companies they oversee, most states only conduct such investigations when they receive complaints from customers or otherwise obtain information that raises concerns about the activities of an insurance company. One reason that insurance regulators do not review insurance company sales practices more routinely is that standards requiring that any insurance products sold be appropriate or suitable for the purchaser do not generally exist. As a result, when an insurance regulator receives a complaint or other information indicating that potentially problematic sales have occurred, they can review the marketing practices of any insurance companies involved to assess whether any misrepresentations or other fraudulent activities occurred. However, under most state insurance laws, insurance regulators do not have the authority to evaluate whether the product sold was appropriate or suitable given the customer’s needs. In contrast, broker-dealers selling securities products are required to assess the financial circumstances of their customers to ensure that any products they recommend to these customers are suitable. Specifically, broker- dealers are required to consider such factors as their customer’s income level, investment objectives, risk tolerance, and other relevant information. State regulators and others have tried to establish suitability standards for insurance products, but these efforts have generally not been successful. For example, in 2001, NAIC formed a working group to collect and analyze data, prioritize key issues for examination, and assess interstate cooperation in developing guidelines for market conduct standards. These market conduct standards would be intended to protect consumers from abuses in the insurance market, including those related to the availability and affordability of insurance. Using such standards, state insurance regulators would review the underwriting and marketing practices of insurance companies and their agents. However, after being unable to come to consensus on suitability standards that would apply to all insurance sales, the NAIC working group narrowed its approach. Instead, the group drafted a model law that provided standards for annuity products sold to seniors age 65 and over. This draft model legislation would require that before insurance agents recommend the purchase or exchange of an annuity, they must take into account the purchaser’s financial situation (including other investments or insurance policies owned) and reasonably believe that the recommendation is suitable for the purchaser. As of July 2005, NAIC reported that only nine states had fully or partially adopted this model law, 10 others already had similar or related legislation, and 35 states or territories had yet to take any action. Other organizations have also attempted to develop suitability standards. For example, the Insurance Marketplace Standards Association (IMSA) has developed various standards applicable to insurance companies’ marketing practices. IMSA also provides qualification to companies that comply with its marketing practices standards. After becoming IMSA qualified, a company’s salesforce would be expected to assess a potential buyer’s need for insurance before recommending its purchase. A representative of IMSA told us that insurance companies and agents following IMSA’s guidelines for conducting a needs-based selling analysis would review a customer’s insurable needs and financial objectives to determine the appropriate life insurance product, if any, to be offered. In many cases, junior service members with no dependents may not need additional life insurance beyond that available through the low-cost, government-offered SGLI. However, none of the six companies that were primarily marketing to military members with the combined insurance and savings product were IMSA qualified. Legislation has been proposed that would require insurance regulators and DOD to work together to study ways to improve the quality of--and practices used to sell--life insurance products sold on military installations. For example, one option offered by these bills would be to only allow those companies that have met best practice procedures (such as those developed by IMSA) to sell insurance on military installations. These bills also propose that standards that would apply to the sale of products to military members could be developed. Although concerns or complaints involving insurance sales existed on DOD installations, insurance regulators we contacted mentioned that they generally have not historically received complaints from DOD officials about potentially problematic sales of products to service members. The actual extent to which service members have concerns or complaints involving insurance product sales is not known because, as we reported in June 2005, DOD only recently began systematically collecting information on violations of DOD’s solicitation policy by sellers of financial products. However, the DOD reports described earlier in this report, and work we conducted for this report and several other reports we recently issued, appears to indicate that concerns over inappropriate practices related to product sales among military members was widespread. For example, for our April 2005 report on the financial condition of military members, we surveyed 175 U.S. installation-level managers of DOD’s personal financial management program, which provides service members with financial literacy training, financial counseling, and other assistance to avoid or mitigate the adverse effects associated with personal financial problems. We reported in June 2005 that about 25 percent of the managers surveyed believed that insurance company representatives occasionally made misleading sales presentations at their installations during 2004, and 12 percent believed that such presentations were made routinely. At the two bases visited as part of work for this report, we also found evidence that service members had concerns or complaints about the marketing practices used by sales personnel from some of the companies that targeted military members. After complaints were raised by some service members at these bases, military personnel conducted investigations of the matters. For example, at Fort Benning, Georgia, statements were taken from several service members that were solicited insurance products between 2001 and 2004. Of the 41 statements in the investigative files that we were able to review, more than 70 percent indicated that the sales personnel had described the product as a savings or investment product. Additionally, almost all of these service members indicated that the insurance company sales personnel had taken actions that violated one or more of the restrictions in DOD’s solicitation policy, such as making these sales presentations during group training sessions. At Great Lakes Naval Training Center, base legal advisers told us they do not receive many complaints because service members were often being solicited shortly before they transferred to other installations. However, legal staff at Great Lakes Naval Training Center showed us documentation related to 5 complaints pertaining to insurance products from service members between January and June 2005. In addition, they also indicated that they have also seen complaints arising from other military installations after leaving Great Lakes Naval Training Center. We also spoke with finance office personnel at this base who had become concerned about the sale of insurance to service members occurring there. As a result, these personnel had retained copies of some of the pay deduction allotment forms submitted for processing between June and September 2004. Numbering over 100, the copies represented forms that had been used to initiate pay deductions for products purchased by base service members from three different insurance companies, according to military pay personnel. We attempted to contact a random selection of these service members. We were able to speak with three of the service members and a spouse representing a service member who had purchased these products, and all indicated that the insurance product they had purchased had been generally represented as an investment. However, state insurance regulators we contacted generally were not aware of the potentially problematic sales to military members because they generally were not receiving information about concerns or complaints from military personnel. These state insurance regulators and NAIC officials told us that they had received few complaints involving military members. For example, as part of our June 2005 report, we surveyed insurance regulators in 50 U.S. states and 4 territories and received 48 responses. Of these, regulators in only 8 states indicated that they had received life insurance related complaints from service members or on their behalf between October 2003 and December 2004. According to the director of the DOD office that oversees commercial solicitations on military installations, information about service member concerns or complaints involving financial product sales are not generally shared with state regulators for several reasons. In some cases, service members expressing reservations about purchasing one of these products might have received advice from other members or from superior officers to cancel, rather than complain to a regulator. In other cases, DOD officials told us that base personnel will work directly with the selling company to resolve a matter rather than involving a financial regulator. For example, a service member with concerns about a purchase of a financial product could consult with the installations’ legal advisers from the judge advocate general staff. However, DOD officials stated that interactions between service members and these staff are covered by attorney-client privilege and thus are more difficult to share with external parties, such as financial regulators. Attorneys representing two state insurance departments believed that DOD attorneys should be forwarding such complaints because this would be in the best interest of the service members. They emphasized that complaints related to financial products should be forwarded to the financial regulators that can take action on behalf of the service members. They emphasized that failure to notify regulators that there are service members with concerns about financial product sales deprives regulators of important information necessary for their oversight processes to function properly. In some cases in which military installations have reported concerns or complaints, regulators have been able to take action against insurance companies that conduct business with military service members. For example, regulators in Maryland were notified in the 1990s about potential improprieties involving sales of insurance products to junior enlisted personnel by a concerned official at one military training base in their state. In an examination report issued in January 2002, insurance regulators found that companies (including some of those that are currently being investigated by other states) marketing combined insurance and savings products to military personnel in Aberdeen Proving Grounds and other locations had violated various state laws and regulations and had misled some service members about the nature of the products, including misrepresenting insurance products as investments.As noted previously, regulators in Washington state also became aware of problematic sales at military installations in their state in the 1990s. This state eventually took action to rescind approval of certain insurance products where the side savings fund did not meet the state’s requirements for an annuity, a premium deposit fund, or a universal life product. In addition, regulators in Virginia have also ordered that some companies that target military members to cease selling certain products in their state However, regulators in the other states that are currently conducting investigations of the companies targeting military members were not generally aware of such sales until recent press reports because DOD personnel were not generally sharing information about any service member complaints or concerns they received. Lacking information on complaints and data on the extent to which broker- dealer customers were successfully completing contractual mutual fund plans, securities regulators, similar to insurance regulators, also did not identify problems involving military members until press reports appeared. Although SEC and NASD, which has primary regulatory responsibility over the broker-dealers that were marketing contractual plans to service members, took enforcement actions against the firm that was the largest marketer of these products in late 2004, both regulators had conducted earlier examinations of this firm and did not identify any significant problems. SEC and NASD staff told us that identifying the problems involving the sale of this product was made more difficult because neither of the regulators had previously received any complaints about the firm from service members. However, NASD staff told us that after a DOD online periodical reported in 2003 that securities regulators were reviewing contractual plan sales, DOD staff received several inquiries from service members who had concerns about the products they had purchased. To the securities regulator staff, this provided evidence that concerns or complaints from military members were not being directed to the regulators--either by the service members themselves, or by the DOD personnel aware of such concerns. Securities regulators’ ability to detect problems was also hampered by the lack of standardized data on the extent to which customers were completing contractual plans. For example, in response to an article in The Wall Street Journal in 2002 that raised questions about the appropriateness of the sales of such plans to military members, SEC staff reviewed the operations of the largest seller of contractual plans. According to SEC staff, their review did not raise any major concerns because they found no evidence that military members were complaining about their purchases from this firm. In addition, the firm provided the SEC staff with documents that purported to show that the persistency rate for the contractual plans— which represented the proportion of plans that were still open---was over 80 percent for the previous 3 years. The SEC staff told us that their examiners accepted these statistics as valid because they were also able to obtain data from one of the major mutual fund companies whose funds represented the majority of those in which this broker-dealer’s customers had invested. The data showed that most of this broker-dealer’s customers still had open plans with the company. After an article that raised concerns about contractual plan sales to military members appeared in Kiplingers, a personal financial magazine, in 2003, NASD staff also initiated an examination of this broker-dealer. According to NASD staff, although they had concerns over the sales of the contractual plan product, obtaining data on the extent to which the firm’s customers were continuing to make payments and successfully completing their plans was difficult, particularly since no specific requirement mandates that broker-dealers maintain records or standardized data. According to NASD staff, this firm maintained various sets of data on its contractual plan customers and becoming familiar with the differences in the information and determining what would be most useful for their reviews proved to be difficult and time consuming. They also noted that their existing examination procedures did not address issues such as persistency rates that were found to be relevant to examining contractual plans. However, these regulators were able to identify concerns after they required the firm to provide comprehensive data on all customers that purchased such products. According to SEC and NASD staff, they were able to determine how successful this firm’s customers were being with their contractual plans only after they required the firm to provide specific data on all customers that purchased contractual plans covering a full 15- year period. After obtaining this data, regulators determined that the actual proportion of customers making all required payments for the 15-year term of the plans was only 43 percent. This percentage was about half of the persistency or success rate shown in documents that the firm had previously provided to the regulators during their prior examinations, because the previously supplied data had excluded any customer whose account remained open but had not made any payments in the last year. However, in the view of regulators, investors that were no longer making payments into their plans should be taken into consideration when determining the overall extent to which a firm’s customers were successfully completing their plans. DOD has also taken some actions to address potentially problematic sales of financial products to service members, although it does not currently share all relevant information with financial regulators. The primary way that DOD attempts to protect service members from inappropriate sales is through its directive on commercial solicitation on military installations. This directive, DOD Directive 1344.7, is administered by the Office of the Under Secretary of Defense for Personnel and Readiness. The directive currently places various requirements and restrictions on financial firms seeking to market products on military installations in the United States and overseas. For example, it prohibits sales from occurring as part of group meetings and instead requires financial institution personnel to make an advance appointment and meet with service members individually. In addition, sales personnel that are former military members are also prohibited from using their military identification to gain access to an installation. In the event that a company, its agents, or representatives violate DOD’s solicitation policy, installation commanders can permanently withdraw the company’s or individuals’ solicitation privileges through a ban or can temporarily suspend those privileges for a specified period. Following the DOD reports that detailed issues and concerns associated with insurance sales to military members, staff within the Office of the Undersecretary for Defense for Personnel and Readiness began efforts to revise DOD’s solicitation directive. In April 2005, DOD sought public comments on a revised directive that incorporates new requirements. For example, the revised directive expressly prohibits insurance products from being sold as investments. In addition, it also includes a new evaluation form that is intended to be completed by each service member that has been solicited. The form would allow service members to indicate, with yes or no answers, whether the individual soliciting them violated certain aspects of DOD’s policy, such as contacting them during duty hours. The evaluation form also has questions relating to salespersons’ conduct during any solicitation, such as whether they pressured the service member into making a purchase, failed to provide adequate information, or implied that they were endorsed by the military. In addition to revising its solicitation directive, DOD personnel have also taken enforcement actions against several insurance agents for improper solicitations at several military installations. For instance, at Fort Benning, an insurance company and its agents that operate in the military market segment were banned from conducting sales on the base. Additionally, several military personnel in supervisory positions were also disciplined for allowing improper insurance solicitations to occur and not properly enforcing existing solicitation policies. Although DOD has taken some steps to better protect its service members from inappropriate financial products, DOD does not currently require its personnel to share all relevant information with financial regulators, including complaints from service members. DOD’s current policy regarding financial product solicitation only requires installation commanders to notify the appropriate regulatory authorities if they determine that an agent or company does not possess a valid license or has failed to meet other state or federal regulatory requirements. However, the draft of the revised solicitation directive includes provisions that would require installation personnel to report all instances in which they ban or suspend the solicitation privileges of any companies or individuals selling financial products to the Principal Deputy Under Secretary of Defense for Personnel and Readiness. The legislation being considered in Congress would also require DOD to maintain a list of names, addresses, and other appropriate information of any individuals selling financial products that have been barred, banned, or limited from conducting business on any or all military installations or with service members. DOD has already begun collecting and publishing information on actions taken by individual installations for violations of the solicitation policy. As noted previously, DOD has already consolidated this information from its installations and posted it on a web site. Under the legislation before Congress, DOD would also be required to promptly notify insurance and securities regulators of those individuals included or removed from this list. DOD officials have indicated that financial regulators can access the information about the actions taken against individuals or companies that have violated DOD solicitation policies from the web site and that, if these additional requirements become law, they will provide the information on their listing to financial regulators as it changes. Although DOD is planning to share more information with financial regulators, DOD officials remained reluctant to share all information on violations of DOD policies that do not result in bans or suspensions. We recommended in our June 2005 report that DOD implement a department- wide searchable database to capture all violations of its own solicitation policy and provide this information to financial regulators. However, DOD officials told us that violations of some DOD policies, such as when sales personnel solicit without an appointment or solicit groups of service members, would probably not represent violations of financial regulations and therefore would be of little concern to such regulators. DOD officials also said that being required to report every time even minor violations occur, such as when a retired military member uses military identification to obtain base access for a solicitation visit, would be burdensome to their personnel. However, financial regulators’ staff told us that receiving information related to violations of DOD’s commercial solicitation policies also would be very helpful in determining whether further action, such as revocation of licenses, was warranted. For example, officials from one state insurance department told us that insurance agents have the obligation to be trustworthy and that if such individuals are violating any DOD regulations, this information could help them determine whether the conduct of the agents also violate their state’s requirements. Although DOD personnel had not routinely shared service member complaints with financial regulators in the past, DOD officials have also told us that they intend to require their personnel to report more of that type of information to regulators. Under the current solicitation policy directive, DOD personnel are not required to share information relating to service member concerns or complaints with other parties, and the revised draft that was published for comment also lacked any provisions relating to such information. However, staff in the office that oversees the policy directive told us that, as part of addressing the comments they have received, they intend to specifically require in the new directive that base personnel report to financial regulators any service member concerns or complaints that relate to the quality of the financial products offered to them or regarding the appropriateness of the practices used to market these products. Financial regulators indicated that receiving such information from DOD would greatly improve their ability to recognize and act on potentially problematic financial product sales involving service members. Insurance and securities regulator staff told us that promptly receiving concerns or complaints raised by service members would allow their normal regulatory oversight processes to function properly, which rely on complaints as an important indicator of potential problems involving insurance company or broker-dealer practices. Congress also may be increasing the amount of information that both regulators and DOD have about potentially problematic practices by insurance sellers. Both of the bills currently under consideration in Congress would prohibit insurers from using agents that sell life insurance on military installations unless the insurer has a system to report to the state insurance regulators in its state of domicile and in the state of residence of an agent any disciplinary actions known to have been taken by any government entity and any significant disciplinary action taken by the insurer itself against an agent with regard to the agent’s sales on military installations. Furthermore, the bills would require that state insurance regulators develop a system for receiving such information and the ability to disseminate it to all states and to DOD. However, some barriers appear to make sharing between DOD and financial regulators more difficult. As part of conducting their investigations of contractual plan sales, securities regulator staff told us that personnel at some DOD installations were reluctant to share any information involving specific service members for various reasons. According to these regulators, the installation personnel cited military privacy regulations and the restrictions that arise from attorney-client privilege if the service member was being assisted by military legal counsel. According to the director of the DOD office responsible for administering the solicitation policy, such issues can affect their ability to share information with entities outside the military. However, he explained that they have researched these issues with their legal staff and believe that they can share information that is deemed to be necessary for the official needs of the requesting organization, including financial regulators. This DOD official also acknowledged that more coordination could be done to ensure that both its own military installation personnel and financial regulatory staff understand how additional sharing could appropriately occur. In addition, to improve financial regulators’ ability to obtain information from DOD, officials from NASD told us that the financial regulators could create liaisons on their staff to receive complaints and be the primary person responsible for seeking information from the military as part of examinations. Although increased financial literacy could also help protect military service members from inappropriate financial product sales, concerns exist over the adequacy of such efforts to date. In a report on the extent to which consumers understand and review their credit reports, we noted that individuals’ ability to understand credit matters differed across various demographic characteristics. For example, we found that college-educated individuals with high incomes and credit experience exhibited more expertise than those without such characteristics. Similarly, many military members also tend to lack advanced education or high incomes. As our April 2005 report on the financial condition of military members noted, almost 40 percent of service members reported having some trouble managing their financial affairs and studies by private consultants have found that the overall financial literacy among service members is not high. DOD is attempting to increase financial literacy among military members. As noted previously, DOD has developed personal financial management programs to provide service members with financial literacy training, financial counseling, and other assistance to avoid or mitigate the adverse effects associated with personal financial problems. However, as we reported in April 2005, not all service members were receiving the training required as part of these programs. As a result, our report recommended that DOD implement a monitoring plan to ensure that all junior enlisted members receive the required personal financial management training. Similarly, financial regulators have also begun working with DOD to increase financial literacy and awareness among service members, but these efforts have not been completed. For example, approximately $7 million of the settlement that SEC and NASD reached with the largest broker-dealer selling contractual plans to military members will be used to fund financial education efforts among service members. Using the proceeds of the settlement, NASD staff told us that the staff of the NASD Investor Education Foundation plan to conduct research to determine current levels of service members’ investment knowledge and use this to plan and develop its military education efforts. Among the efforts currently being designed are a military-specific online resource center to provide unbiased information on saving and investing. In addition, they plan to develop training to support the military’s current personal financial management program by establishing a coordinated and uniform financial education program. They also plan to conduct a public outreach campaign to promote saving and investing to members of the military and their families. These efforts are anticipated to be publicly launched in late 2005 with many national and local activities taking place in 2006. To help convey information to service members about insurance regulatory organizations outside the military that can receive and help resolve their complaints, NAIC and DOD staff have also been working together on materials to help educate service members. As of October 2005, their efforts have produced a consumer brochure for military members that contains information to help service members better understand factors to consider when purchasing life insurance and regulatory entities that service members can contact should they have complaints concerning insurance sales. According to NAIC officials, they are also working on information to be presented on a NAIC Web site. Congress has also recognized the need for additional information to better protect military service members from inappropriate product sales. For example, both versions of the bill currently under consideration in Congress would require that, for any sales taking place on a military installation, insurance representatives disclose that subsidized life insurance may be available from the government to the service member and that the government has not sanctioned, recommended, or encouraged the sale of the product being offered. In addition, this legislation also would require that service members be provided with information about where to complain regarding any problems involving an insurance sale on a military installation. Specifically, both bills would generally require that, for any sales taking place on federal land or facilities located outside the United States, insurance sellers provide a disclosure that lists the address and phone number where consumer complaints are received by the applicable state insurance regulator. Although DOD currently has a program to provide financial literacy training to junior personnel, not all levels of the services receive such information. Currently, the personal financial management training that the various branches offer to service members are provided only to junior enlisted members. However, an officer in one branch of the service also told us that she and other more senior members of the military are also solicited by financial firms and thus having such training, including addressing proper procedures for directing concerns or complaints, offered to more than just junior personnel would be helpful. Another concern over whether military members are adequately protected from inappropriate sales stems from uncertainty over financial regulators’ jurisdiction on U.S. military installations. Although most of the insurance and securities regulators we contacted believed they had jurisdiction over the sales of financial products on military installations, some regulators expressed uncertainty over their authority to regulate sales on military installations, where the federal government may have “legislative jurisdiction.” For example, regulators from Maryland conducting work on a market conduct examination mentioned that they had asked an agent from the Federal Bureau of Investigation to accompany them when visiting the military installation in case installation personnel questioned the insurance regulators’ authority to conduct an investigation on the installations. Further, according to a Texas insurance department official, he had trouble getting access to complaints information at a military installation because installation personnel question his authority to request such information. In addition, Georgia officials told us that a military installation in their state had an “exclusive federal jurisdiction” designation that could potentially present a jurisdictional issue. However, regulators in Virginia noted that they have been able to conduct examinations after seeking and obtaining written permission from base commanders. As part of the work on DOD’s oversight of insurance sales that we reported on in June 2005, we surveyed the various state and territorial insurance commissioners. Of those that responded to the question regarding whether they had authority over sales of life insurance on military installations, four commissioners indicated that they did not have such authority. State insurance regulators also noted they lack jurisdiction over sales taking place outside the United States at overseas installations. While securities regulators also generally believed they had jurisdiction over sales on military installations, they too indicated that greater clarity would be beneficial. At least one state securities regulator responded to a North American Securities Administrators Association survey that it did not have adequate authority over sales taking place on military installations. Of the legislation under consideration in the Congress, the bill that passed the House of Representatives includes language stating that any state law, regulation, or order pertaining to the regulation of insurance or securities sales is generally applicable to any such activity conducted on Federal land or facilities in the United States and abroad, including military installations. The version introduced in the U.S. Senate includes similar language but would only apply to insurance sales. Large numbers of military service members are being targeted by a few firms offering products that provide limited benefits unless held for long periods, which most military purchasers were failing to do. Thousands of service members across the United States and around the world are purchasing products from insurance companies that combine insurance and savings. Although some service members and their survivors have benefited from these products, many have not. Most of the purchasers of these products were unmarried individuals with no dependents and thus little need for any more coverage than that already provided by the low- cost government insurance service members receive. Instead, they were likely attracted to these products for their investment features. However, by being tied to expensive life insurance, these products appeared to be a poor investment choice for service members because they include provisions that allow the accumulated savings to be used to keep the life insurance in force if the service member ever stops making payments and does not request a refund of this savings. Given that military members move frequently and often leave the service within a few years, many did not continue their payments and failed to request refunds, and as a result, few likely amassed any savings from their purchase. The few companies that sell these products also have been accused of using inappropriate sales practices in the past, have been sanctioned, and are again being investigated by numerous federal and state regulatory and law enforcement authorities. With concerns over potentially inappropriate insurance sales to military members being longstanding, the need to take definitive actions to better protect service members appears overdue. The legislation that passed the House of Representatives and is being considered in the U.S. Senate includes various provisions that, based on our work, would appear to improve the protections for military members. Some of the provisions of these bills are of particular importance. Currently, both would direct insurance regulators and DOD to work together to develop measures to address sales to military members. Given that many service members were obtaining only limited benefits from purchasing these combined insurance and savings products, we believe that congressional action that results in state regulators undertaking reviews to ensure that only products that comply with state insurance regulations, an area in which regulators in some states now have developed concerns, is warranted to provide protections to military personnel in all U.S. jurisdictions. In addition, having insurance regulators and DOD work cooperatively to develop suitability or appropriateness standards could ensure that companies offer only products that address actual service member needs for insurance and that take into account service members’ itinerant lifestyles, income levels, and likely inability to make payments for extended periods of time. This could also provide protection for service members that are located in overseas installations not directly overseen by state regulators. Similarly, military members were also being widely marketed a securities product—the contractual plan—that has largely disappeared from the civilian marketplace. Although potentially providing returns equivalent to other products if steady investments are made over the required 15-year term, these products were likely less beneficial to the many service members that failed to make payments for that extended length of time. In the many years since contractual plans were first offered, a variety of alternative investments have become widely available for individuals with modest incomes, including other load funds, no-load funds, and TSP, which is now available to service members and likely offers the lowest investment expenses of any product. Given the longstanding history of sales practices abuses associated with the contractual plans and the availability of viable alternative investments, we believe that congressional approval of the legislation currently under consideration, which includes language to ban these products, would remove products that appear to have little need to continue to exist. Although insurance and securities regulators have taken actions since allegations of inappropriate sales to military members have come to light, additional actions could mitigate some of the limitations that hampered regulators’ ability to address these problems. As our work found, state insurance and securities regulators sometimes were uncertain of the adequacy of their authority over sales taking place on military installations. As a result, some of these regulators and officials from associations representing state insurance and securities regulators expressed support for congressional action to clarify that state financial regulators have jurisdiction over sales taking place in such locations. In addition, congressional action could serve to better ensure that financial regulators are made aware of potentially inappropriate sales involving military members. As we found, federal and state insurance regulators’ ability to more promptly identify inappropriate sales of financial products involving military members was hampered by the lack of information sharing by DOD. DOD officials have expressed their willingness to provide financial regulators with information on actions taken against individuals or firms that violate DOD’s solicitation policies. They have also indicated their intention to require their personnel to provide information regarding service member complaints and concerns. However, they note that privacy requirements can pose perceived barriers to such sharing. In addition, they remain reluctant to share information about all instances in which sellers of financial products violate DOD solicitation policies. However, such information could allow financial regulators to determine whether such situations also represent potential violations of federal or state laws. As a result, we believe that congressionally-mandated direction is needed to ensure that DOD identifies ways to overcome these barriers and coordinates with its installation personnel and with financial regulators about ways to share additional information about problematic company behavior and service member concerns. Additional DOD actions also could help protect service members from firms using unscrupulous sales practices. DOD officials have indicated that having their personnel share some information relating to service member concerns and complaints is appropriate. Including such a requirement in the revision of DOD’s solicitation policy would better ensure that financial regulators receive this important information. DOD is also currently attempting to provide personal financial management training to improve financial literacy and competence among military members. Such training would also appear to be a useful forum for informing military personnel about proper procedures for submitting concerns or complaints. Given that more senior officers were customers of some of the financial firms that target military members, periodically providing such training to service members at all levels throughout the military would also likely raise awareness and assist them in making sound financial decisions. Financial regulators also appear to have opportunities to improve their ability to protect military members from inappropriate sales. Because complaint information is a critical input to their regulatory processes, proactively seeking such information from DOD and its installations would likely improve regulators’ oversight efforts. Given the uniqueness of the military environment, having staff or offices within regulators’ own organizations that serve as liaisons with DOD and individual installations could allow both DOD and financial regulators to build trust and gain experience in sharing information and assisting investigations of potentially problematic financial product sales. Ensuring that financial regulators’ staff also make use of any listings compiled by DOD of individuals or firms that have been sanctioned by the military for activities relating to financial product sales to target examination and investigation resources would also likely improve the protections that are afforded to military members. SEC and NASD efforts to oversee broker-dealers marketing contractual plan mutual funds were hampered by a lack of standardized data at these firms on the success of clients in investing in these plans. In the event that such plans continue to be legally sold, having these regulators evaluate how best to ensure they will have such information in the future would improve their ability to oversee these products. Some possible ways to ensure such information is readily available would be to implement a rule requiring broker-dealers to maintain standardized records that show how successfully their customers are completing any contractual plans purchased. Alternatively, SEC and NASD examiners could routinely request such information prior to conducting a review of the broker-dealers selling these products. To better protect military service members from financial products with limited benefits to them, the Congress should consider taking the following five actions: Provide that products being marketed primarily to military members are reviewed by state insurance commissioners to ensure that all such product provisions are in compliance with existing state laws, and provide for reports through NAIC to relevant congressional committees on the results of these reviews within 12 months. Provide that state insurance commissioners work cooperatively with DOD to develop appropriateness or suitability standards for sales to military service members. Ban the sale of contractual mutual fund plans. Specify that state insurance and securities regulators have full access to persons and information necessary to oversee sales taking place on military installations or involving service personnel. Require DOD to work cooperatively with financial regulators to develop mechanisms that overcome existing barriers to sharing information about insurance and securities firm activities and service member concerns and complaints that can allow financial regulators to determine whether violations of existing federal or state laws or regulations are occurring. To better protect service members from unscrupulous sales of financial products, the Secretary of Defense should take the following two actions: Issue a revised DOD solicitation policy requiring that information on service member complaints related to financial product sales be provided to relevant state and federal financial regulators. Include in the personal financial management training for all service members information and materials developed in conjunction with insurance and securities regulators that explains how and to whom service members should raise concerns or complaints about potentially inappropriate sales of financial products, including providing the information necessary for contacting these regulators. Such training should also periodically be offered to service members of all levels. To better ensure that federal, state, and other financial regulators can oversee sales of insurance and securities products to military members, the heads of SEC, NASD, and state insurance and securities regulators should designate staff to receive complaints from DOD and conduct outreach with DOD headquarters and individual installations to proactively learn of issues or concerns regarding product sales. These staff should also make use of any listings that DOD maintains of individuals or firms that have been sanctioned by the military for improper solicitation practices. In the event that contractual mutual funds are not banned, the Chairman of SEC and the Chairman of NASD should consider various means of better assuring that their staff has adequate information to assess the sales of contractual plans. We provided a draft of this report to DOD, NAIC, NASD, and SEC for comments. Each of these organizations provided written comments expressing general agreement with our report and its recommendations (these comments appear in appendixes IV through VII). In concurring with our recommendation that DOD require that information on service member complaints be provided to financial regulators, a letter from DOD’s acting principal deputy for the Undersecretary for Personnel and Readiness indicated that their revised solicitation directive will require installations to report such information to regulators. The principal deputy’s letter also indicates they concur with our recommendation to provide all service members with information during personal financial management training on how to complain to regulators and states that they have developed a strategic plan for programs to assist members with determining appropriate financial products for their needs and how to remedy concerns or complaints. They also intend to approach state regulatory agencies to assist in providing educational information to all service members and provide such information during new comer orientations and through toll- free assistance lines. In SEC’s letter, the director of that agency’s Office of Compliance Inspections and Examinations stated that they shared our concerns that securities products be properly marketed to military members. She also stated that in the event that Congress does not ban the sale of contractual plans they will consider our recommendation that SEC consider ways to ensure that it have adequate information to assess sales of such products. In NASD’s letter, the NASD Chairman and Chief Executive Officer states that men and women of the U.S. armed forces deserve the same protection from inappropriate financial product sales as their civilian counterparts and that our report will help NASD and others to ensure that this is achieved. NASD’s letter also describes the actions the organization has taken against the largest seller of contractual plans, including noting, as our report acknowledged, that they began reviewing this firm in 2003. NASD’s letter also describes their efforts to develop education for military members. In its letter, NAIC’s Executive Vice President and Chief Executive Officer notes that we ask Congress to direct the states to review currently approved products being marketed to military members. In response, she indicates that a number of states are examining companies that have engaged in questionable practices involving these products and that an NAIC committee plans to review life insurance sold with a side fund to recommend a position on products being offered in the marketplace in 2006. Regarding our request that Congress direct DOD and the insurance regulators to work together to improve information sharing, NAIC’s letter indicates that they are in the process of; compiling a list of insurance department contacts to ensure that DOD has the proper contact information for further state assistance; updating NAIC's Complaint Database System form to identify complaints that are submitted by military personnel; and providing DOD with a state-by-state premium volume summary for those companies that state insurance regulators know are soliciting or have solicited insurance products on military bases. Regarding our recommendation that DOD and regulators work together to develop training materials, NAIC’s letter indicates that they have worked with DOD to develop a consumer brochure and a Web site specifically addressing life insurance information for military personnel and remain committed to developing other materials to fill any financial literacy needs that DOD identifies. We also received technical comments from each of these organizations that we incorporated where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Armed Services; Chairman and Ranking Minority Member, House Committee on Armed Services; and Chairman and Ranking Minority Member, House Committee on Financial Services. We will also send copies of this report to the Secretary of Defense, Chairman, SEC; and Chairman, NASD. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. To identify the insurance products being sold and how these were being marketed to military members, we reviewed prior Department of Defense (DOD) reports, spoke to officials at the National Association of Insurance Commissioners (NAIC), and met with regulatory officials from several state regulators that are currently conducting or have previously conducted reviews of insurance companies that market primarily to military members. This work included interviewing regulatory officials and reviewing available documentation from the Georgia Insurance and Safety Fire Commissioner, the Texas Department of Insurance, the Florida Office of Insurance Regulation, and the Illinois Department of Insurance, and the Virginia State Corporation Commission Bureau of Insurance. In addition, we contacted staff from the Maryland Insurance Administration and the Washington Office of the Insurance Commissioner to discuss their past investigations of certain insurance companies targeting junior enlisted service members and reviewed documents pertaining to such investigations. We also visited Fort Benning, Georgia, and Great Lakes Naval Training Center, Illinois, to better understand the insurance solicitation issues present at two large military training installations. During these site visits we interviewed staff judge advocate personnel and reviewed documents pertaining to current and past investigations of sales of insurance products at these locations. Furthermore, we obtained data on the characteristics of military members making allotments to three different insurance companies in this market from DOD’s Defense Finance and Accounting Service (DFAS), which maintains military personnel pay records. In our prior report, we were unable to reliably determine the total number of service members who have allotments for supplemental life insurance products or the number of dollars that service members pay to life insurance companies through the DFAS systems because not all allotments for insurance were identified as such. To provide accurate information for this report, we instead obtained from DFAS the dependent status of service members for allotments that were being routed to specific banks being used by some of the insurance companies that market primarily to military members, which produced results that we did believe were sufficiently reliable to highlight that a significant percentage of service members who had made allotments to specific companies had no dependents. Further, we contacted officials from the six insurance companies identified by the multistate investigation as being those companies that primarily market to service members, and reviewed their marketing materials for the product sold to service members. To illustrate the cost and the possible performance of sample insurance policies offered by these companies we obtained and analyzed sample policies for a junior enlisted service member from six companies. We also compared the cost and performance of these products to other products offered to service members by the government including Servicemembers’ Group Life Insurance (SGLI), Veterans’ Group Life Insurance (VGLI), and the Thrift Savings Plan (TSP), as well as insurance products offered by a private insurance company. We chose the TSP G Fund as the savings component to be coupled with the government-offered insurance because of its low risk and its comparable return rate to the minimum rates claimed by the insurance companies. We assumed a 4 percent rate of return for all of our analysis based on the guarantee rate claimed on the policies typically marketed to service members by the six companies we reviewed. For approximating the projected TSP return, we compounded the 4 percent rate on a monthly basis. To project the return on the insurance products’ savings components, we used the method of crediting interest in the products’ terms, in which interest is credited on the lesser of the average balance during the year or the year-end balance. We also conducted analysis to illustrate the performance of the products after a service member stops making payments at the end of the fourth policy year. Further, the analyses we conducted are for illustrative purposes only and do not necessarily depict actual policy, plan schedules, or are adjusted according to various proprietary risk classes that could apply for a particular individual. To identify the securities products being sold and how these were being marketed to military members, we interviewed staff from NASD (formerly called the National Association of Securities Dealers), Securities and Exchange Commission (SEC), and North American Securities Administrators Association (NASAA). We also interviewed officials from the largest broker-dealer firm that markets to military members, which represents 90 percent of the military market segment, and two of the investment management firms that manage mutual funds underlying the contractual plans sold to service members. To determine the cost and performance of the contractual plan product offered by this broker-dealer firm, we conducted analysis to illustrate a contractual plan product typically marketed to career service members using a $600 front-end load. To illustrate how this product compared to other similar products we analyzed the cost and performance of a typical fund using the Investment Company Institute recommended 5 percent load and TSP C Fund with no load. We chose the TSP C Fund because it invests in common stocks and was therefore comparable to the contractual plan product. We analyzed these products for a 15 year--or “full term”--period. We assumed a 7 percent annual return that we compounded monthly for all products. Further, we reviewed SEC and NASD investigation files of the sales of securities products to military service members. To assess how financial regulators and DOD were overseeing financial product sales to military members, we interviewed state insurance and federal, state, and other securities regulators. We also reviewed available materials pertaining to product approval, investigations, and regulatory activities and actions involving firms marketing to military members. Specifically, to assess how insurance regulators were overseeing sales of insurance products to military service members, we interviewed officials from NAIC, including the staff working on the multistate investigation of insurance sales involving service members. We also spoke with officials and reviewed available documents on activities and actions from several state insurance departments, including those in Florida, Georgia, Illinois, Maryland, Texas, and the state of Washington, that have previously investigated, or are currently investigating, companies targeting military members. Further, we reviewed legal actions taken against certain insurance companies as part of Department of Justice (DOJ) investigations and law suit cases. To determine the extent to which state insurance regulators received complaints from military service members or had any concerns about their jurisdiction on military installations, we relied on an E-mail survey to the insurance commissioners for the 50 states, the District of Columbia, and four territories: American Samoa, Guam, Puerto Rico, and the Virgin Islands administered as part of our June 2005 report. We received completed surveys from 46 states, the District of Columbia, and one U.S. Territory, yielding an overall response rate of 87 percent. Further, to make the same determination in regards to the sales of securities products to military members, we relied on the results of a survey administered by NASAA. Additionally, we contacted DOD officials, conducted fieldwork at Fort Benning, Georgia and Naval Station Great Lakes, Illinois—two large military training installations--and reviewed findings from other recent work concerning supplemental life insurance sales conducted at several other military installations throughout the country. We performed our work from November 2004 to October 2005 in accordance with generally accepted government auditing standards. Table 2 summarizes various actions that we identified during the course of our review that have been taken by regulators or others against companies that were identified as primarily marketing products to military members. As indicated, many of the actions were settlements in which the companies did not admit to any wrongdoing. Because of the structure of their sales charges, contractual plans are not likely to offer superior returns to a long-term investor compared to other alternative products. Table 1 illustrates that investing $100 per month for 15 years in a contractual mutual fund plan that earns a 7 percent return would result in an account worth less than one in a conventional mutual fund with a 5 percent sales load in which the same payments were made and the same projected return was earned. As shown in the table, the amount that would be accumulated in a contractual plan does not exceed that of a conventional mutual fund until after 16 years. The contractual plan’s accumulated value lags behind the conventional fund because its high up- front sales charge reduces the amount of money that is invested and available to earn the return of the underlying mutual fund from the beginning. In contrast, investing $100 monthly in TSP and earning a 7 percent return would result in an account worth $1,600 more than that accumulated in the contractual plan after 15 years. As table 1 also shows, investors that terminate their periodic investments earlier than the full 15 years are even more likely to be better off with a conventional mutual fund or TSP. For example, an investor ceasing payments after 4 years in the contractual plan would have an account worth about $4,785. However, after 4 years, the account of the conventional mutual fund would be worth almost $5,275 and the TSP account would be worth about $5,553. In addition to the individual above, Cody Goebel, Assistant Director; Joseph Applebaum; Gwenetta Blackwell-Greer; Tania Calhoun; Rudy Chatlos; Lawrence Cluff; Barry Kirby; Marc Molino; Josephine Perez; David Pittman; and Amber Yancey-Carroll made key contributions to this report. | In 2004, a series of press articles alleged that financial firms were marketing expensive and potentially unnecessary insurance or other financial products to members of the military. To assess whether military service members were adequately protected from inappropriate product sales, GAO examined (1) features and marketing of certain insurance products being sold to military members, (2) features and marketing of certain securities products being sold to military members, and (3) how financial regulators and the Department of Defense (DOD) were overseeing the sales of insurance and securities products to military members. Thousands of junior enlisted service members have been sold a product that combines life insurance with a savings fund promising high returns. Being marketed by a small number of companies, these products can provide savings to service members that make steady payments and have provided millions in death benefits to the survivors of others. However, these products are much more costly than the $250,000 of life insurance--now $400,000--that military members already receive as part of their government benefits. In addition, the products also allow any savings accumulated on these products to be used to extend the insurance coverage if a service member ever stops making payments and fails to request a refund of the savings. With most military members leaving the service within a few years, many do not continue their payments and, as a result, few likely amassed any savings from their purchase. Several of the companies selling these products have been sanctioned by regulators in the past and new investigations are underway to assess whether these products were being properly represented as insurance and whether their terms were legal under existing state laws. Thousands of military members were also purchasing a mutual fund product that also requires an extended series of payments to provide benefit. Known as contractual plans, they expect the service member to make payments for set periods (such as 15 years), with 50 percent of the first year's payments representing a sales charge paid to the selling broker-dealer. If held for the entire period, these plans can provide lower sales charges and comparable returns as other funds. However, with securities regulators finding that only about 10 to 40 percent of the military members that purchased these products continued to make payments, many paid higher sales charges and received lower returns than had they invested in alternatively available products. Regulators have already taken action against the largest broker-dealer that marketed this product and are investigating the few remaining sellers for using inappropriate sales practices. With the wide availability of much less costly alternative products, regulators also question the need for contractual plans to continue to be sold. Financial regulators were generally unaware of the problematic sales to military members because DOD personnel rarely forwarded service member complaints to them. Insurance products also usually lacked suitability or appropriateness standards that could have prompted regulators to investigate sales to military members sooner. Securities regulators' examinations of contractual plan sales were also hampered by lack of standardized data showing whether customers were benefiting from their purchases. Although recognizing a greater need for sharing information on violations of its solicitation policies and service member complaints, DOD has not revised its policies to require that such information be provided to financial regulators nor has it coordinated with these regulators and its installations on appropriate ways that additional sharing can occur. |
As we described in our July 2014 testimony, the federal Marketplace approved subsidized coverage for 11 of 12 fictitious applicants who initially applied online or by telephone. For the 11 approved applications, we paid the required premiums to put health-insurance policies into force. We obtained the advance premium tax credit (APTC) in all cases, totaling about $2,500 monthly or about $30,000 annually for all 11 applicants. After receiving these premium subsidies, our 11 fictitious applicants paid premiums at a total annual rate of about $12,000. We also obtained eligibility for cost-sharing reduction (CSR) subsidies. The APTC and CSR subsidies are not paid directly to enrolled consumers; instead, the federal government pays them to issuers of health-care policies on consumers’ behalf. However, they represent a benefit to consumers—and a cost to the government—by reducing out-of-pocket costs for medical coverage. To receive advance payment of the premium tax credit, applicants agree they will file a tax return for the coverage year, and must indicate they understand that the premium tax credits paid in advance are subject to reconciliation on their federal tax return. According to CMS, the purpose of identity proofing is to prevent someone from creating an account and applying for health coverage based on someone else’s identity and without their knowledge. Although intended to counter such identity theft involving others, identity proofing thus also serves as an enrollment control for those applying online. only the applicant is believed likely to know. If an applicant’s identity cannot be verified online, applicants are directed to call the credit reporting agency for assistance.cannot verify identity, applicants are typically told to contact the federal Marketplace or their state-based exchange, credit-reporting agency officials told us. If the credit reporting agency then We subsequently were able to obtain coverage for all six of these applications that we began online by completing them by phone. By following instructions to make telephone contact with the Marketplace, we circumvented the initial identity-proofing control that had stopped our online applications. When we later asked CMS officials about this difference between online and telephone applications, they told us that unlike with online applications, the Marketplace allows phone applications to be made on the basis of verbal attestations by applicants, given under penalty of perjury, who are directed to provide supporting documentation. For our 6 phone applications, we successfully completed the application process, with the exception of one applicant who declined to provide a After being Social Security number and was not allowed to proceed.approved for coverage, we received enrollment material from insurers for each of our 11 successful fictitious applicants. Appendix I summarizes outcomes for all 12 of our phone and online applications. The Marketplace is required to seek postapproval documentation in the case of certain application “inconsistencies.” Inconsistencies occur in instances in which information an applicant has provided does not match information contained in data sources that the Marketplace uses for eligibility verification at time of application, or such information is not available. For example, an applicant might state income at a particular amount, but his or her federal tax return lists a different amount, or the applicant has no tax return on file. Likewise, the applicant may provide a Social Security number, but it does not match information on file with the SSA. If there is such an application inconsistency, the Marketplace is to determine eligibility using attestations of the applicant, and ensure that subsidies are provided on behalf of the applicant, if he or she is eligible to receive them, while the inconsistency is being resolved using “back-end” controls. Thus, the Marketplace was required to approve eligibility to enroll in health-care coverage and to receive subsidies for each of our 11 fictitious applicants while the inconsistencies were being addressed. At the time of our July 2014 testimony, we had begun to receive notifications from the Marketplace on the outcomes of our fictitious document submissions. As discussed later in this statement, we continued to receive additional notices about our applicants through 2014 and into 2015. According to CMS officials, the federal Marketplace makes eligibility determinations. Private insurers, also called “issuers,” provide coverage. applicant may be affected by something, and then leaving it to the applicant to parse through details to see if they were indeed affected. Inaccurate guidance. The Marketplace directed 8 of our 11 successful applicants to submit additional documentation to prove citizenship and identity—but an accompanying list of suitable documents that could be sent in response consisted of items for proving income. Lack of Marketplace notice on document submissions. In five cases, we did not receive any indication on whether information sent in response to Marketplace directives was acceptable. As a result, we had to call the Marketplace to obtain status information. According to CMS, after documents are processed, consumers will receive a written notice. Lack of written notice. In one case, the Marketplace did not provide us with any written correspondence directing we submit additional documentation. The Marketplace only requested documentation for the initial enrollment during our phone application for coverage. According to the Marketplace, applicants are to receive written notice of documentation required. CMS officials told us they are working to improve communication with consumers, and will make improvements in consumer notices. According to the officials, they are soliciting feedback from consumer advocates, call-center representatives, and application assisters to improve such communications. According to the officials, CMS has already made significant improvements that include adding a complete list of acceptable documents to resolve citizenship and immigration status inconsistencies, and consolidating warning notices to include all inconsistency issues. CMS is currently working on further improvements in notices, including those for eligibility and instances of insufficient documentation, according to the officials. As part of our testing, and in response to Marketplace directives, we provided follow-up documentation, albeit fictitious. Overall, as shown in appendix II, we varied what we submitted by application—providing all, none, or only some of the material we were told to send—in order to test controls and note any differences in outcomes. Among the 11 applications for which we were directed to send documentation, we submitted all requested documentation for four applications, partial documentation for four applications, and no documentation for the remaining three applications. Although our documentation was fictitious, and in some cases we submitted none, or only some, of the documentation we were directed to send, we retained our coverage for all 11 applicants through the end of the 2014 coverage year. As described earlier, APTC subsidies our applicants received totaled about $30,000 annually, and further financial benefit would have been available through CSR subsidies if we had obtained qualifying medical services. Following our document submissions, the Marketplace told us, either in writing or in response to phone calls, that the required documentation for all our approved applicants had been received and was satisfactory. In one case, when we called the Marketplace to inquire about the status of our documentation submission—but where we had not actually submitted any documents—a representative told our applicant that documents had been reviewed and processed, and, “There is nothing else to do at this time.” Figure 1 shows a portion of a call in which a Marketplace representative said our documentation was complete, even though we did not submit any documents. For one applicant, the Marketplace did subsequently state in a November 2014 letter that we would lose our subsidies, beginning in December 2014. However, there was no follow-up communication regarding the loss of our subsidies, and the subsidies were not terminated in December 2014. On the basis of applicant data we obtained from CMS, the Marketplace cleared inconsistencies for some of our 11 fictitious applications in instances where we submitted bogus documents.a summary of our document requests and submissions. We also noted instances where the Marketplace either did not accurately capture all inconsistencies, or resolved inconsistencies based on suspect documentation, including the following: Did not capture all inconsistencies. For 3 of the 11 applicants, while the Marketplace at the outset directed our applicants to provide documentation of citizenship/immigration status, the CMS applicant data we later received for these applicants do not reflect inconsistencies for the items initially identified. Disqualifying income. For 2 of the 11 applicants, we reported income substantially higher than the amount we initially stated on our applications, and at levels that should have disqualified our applications from receiving subsidies. However, according to the CMS data, the Marketplace resolved our income inconsistencies and, as noted, our APTC and CSR subsidies for both applicants continued. In addition to having fictitious documentation approved, two of our applicants also received notices in early 2015 acknowledging receipt of documents recently submitted, when we had not sent any such documents. We do not know why we received these notices. We found that the CMS document-processing contractor is not required to seek to detect fraud. It is only required to inspect for documents that have obviously been altered. According to contractor executives we spoke with, the contractor personnel involved in the document-verification process are not trained as fraud experts and do not perform antifraud duties. In particular, the executives told us, the contractor does not certify the authenticity of submitted documents, does not engage in fraud detection, and does not undertake investigative activities. In the contractor’s standard operating procedures for its work for CMS, document-review workers are directed to “determine if the document image is legible and appears unaltered by visually inspecting it.” Further, according to the contractor, it is not equipped to attempt to identify fraud, and does not have the means to judge whether documents submitted might be fraudulent. CMS officials told us there have been no cases of fraudulent applications or documentation referred to the U.S. Department of Justice or the HHS Office of Inspector General, because its document-processing contractor has not identified any fraud cases to CMS. However, as noted earlier, the contractor is not required to detect fraud, nor is it equipped to do so. According to the CMS officials, there has been “no indication of a meaningful level of fraud.” According to CMS officials, it would not be practical to have applicants show original documents at time of application. With the HealthCare.gov website, the agency decided to move away from in-person authentication, in order to avoid burden on consumers, the officials told us. They also said in-person presentation of documentation is not possible in the current structure, as there are insufficient resources to establish a system to do so. Overall, according to CMS officials, the agency has limited ability to respond to attempts at fraud. They told us CMS must balance consumers’ ability to “effectively and efficiently” select Marketplace coverage with “program-integrity concerns.” CMS places a strong emphasis on program integrity and builds program integrity features into all aspects of implementation of the law, according to CMS officials. In any case, the CMS officials said the design of the program does not allow for direct consumer profit from fraud, because APTC and CSR subsidies are paid to policy issuers, not consumers. We note, however, that even so, the subsidies nevertheless can produce direct financial benefits to consumers. For example, if consumers elect to receive the premium tax credit in advance, that lowers the cost of monthly coverage. A consumer could also receive the advance premium tax credit and not file a federal tax return, as required to ensure proper treatment of the credit. Likewise, CSR subsidies mean smaller out-of-pocket expenses when obtaining medical services. Accordingly, although subsidies may be paid directly to issuers, they still result in a cost to the government and a benefit to enrollees. CMS officials told us the agency plans to conduct an assessment of the Marketplace’s eligibility determination process, including the application process and the inconsistency resolution process. They did not provide a firm date for completion, saying the review would depend on obtaining IRS information for use as a reference. According to the applicant data we obtained from CMS, most of our applications had unresolved inconsistencies—indicating either that the Marketplace did not receive requested documentation or the documentation was not satisfactory. Specifically, as shown in appendix III, the CMS data indicate that, as of April 2015, 7 of our 11 applications had at least one inconsistency that remained unresolved. Because we did not disclose the specific identities of our fictitious applicants, CMS officials said they could not explain our findings on handling of inconsistencies for our applications. However, in general, they said our subsidized policies may have remained in effect during 2014 because CMS waived certain document filing requirements. Specifically, CMS directed its document contractor not to terminate policies or subsidies if an applicant submitted any documentation to the Marketplace. That is, if an applicant submitted at least one document, whether it resolved an inconsistency or not, that would be deemed sufficient so that the Marketplace would not terminate either the policy or subsidies of the applicant, even if other documentation had initially been required. For example, for one of our applicants, the Marketplace requested citizenship, income, and identity documents, but our applicant submitted only identity information. Under the CMS directive, the applicant’s policy and subsidies continued through 2014 because our applicant submitted at least one document to the Marketplace, but not all documents required. Thus, in the case of our four applicants that submitted partial documentation to the Marketplace, we likely were relieved of the obligation for submitting all documents for the 2014 plan year. For the 2014 plan year, PPACA authorized CMS to extend the period for applicants to resolve inconsistencies unrelated to citizenship or lawful presence. Additionally, regulations state that CMS may extend the period for an applicant to resolve any type of inconsistency when the applicant demonstrates a “good faith effort” to submit documentation. CMS officials told us they relied upon these authorities to make a policy decision to broadly extend the period for resolving all types of inconsistencies in 2014. Under the policy, the officials told us, the submission of a single document served as evidence of a good faith effort by the applicant to resolve all inconsistencies, and therefore extended the resolution period through the end of 2014. As such, CMS did not terminate any applicant who “demonstrated a good faith effort” in 2014. The officials told us that CMS is enforcing the full submission requirement for 2015, and that any good-faith extensions granted in 2015 would be decided on a case-by-case basis and be limited in length. All consumers, regardless of whether they benefitted from the good-faith effort extension in 2014, will still be subject to deadlines for filing sufficient documentation, they said. In particular, according to the officials, those who made a good- faith effort by submitting documentation, but failed to clear their inconsistencies in 2014, were among the first terminations in 2015, which they said took place in February and early March. We are continuing to seek further information from CMS officials on their good-faith effort policy, as well as any 2015 terminations, as part of ongoing work. Although the good-faith effort policy could explain the handling of some of our applications, CMS officials could not provide a general explanation for the three applications for which we submitted no documentation but our subsidized coverage remained. However, based on our examination of applicant files at the CMS document contractor, this could be due to an error in the CMS enrollment system. Specifically, we found instances in which records we reviewed showed that applicants had not enrolled in a plan, when they actually had done so. Contractor officials told us that in such cases, they did not terminate the plans or subsidies because the applicants were shown as not enrolled. We plan to address this issue of tracking of inconsistencies in our ongoing work. Also included among the unresolved inconsistencies for our applicants were four for Social Security numbers. According to CMS officials, inconsistencies for Social Security numbers occur when an applicant’s name, date of birth, and Social Security number cannot be validated in an automated check with SSA. The officials told us that systems capability has not allowed CMS’s document contractor to make terminations for such inconsistencies. They also said the agency has done no analysis of the fiscal effect of not making such terminations. We plan to address this issue in ongoing work. In addition, CMS officials told us that although it checks applicants or enrollees against SSA’s Death Master File, it currently does not have the systems capability to change coverage if a death is indicated. Instead, the officials told us, the Marketplace has established a self-reporting procedure for individuals to report a consumer’s death in order to remove the consumer from coverage. The number of reported deaths from SSA is “very minimal,” according to CMS officials. The coverage we obtained for our 11 fictitious applicants contained an automatic reenrollment feature—both insurers and the Marketplace notified us that if we took no action, we would automatically be enrolled in the new coverage year (2015). In all 11 of our cases, we took no action and our coverage was automatically reenrolled in January 2015. We continued to make premium payments, in order to demonstrate continuation of subsidized coverage, which meant continuing costs for the federal government. Appendix IV summarizes our automatic reenrollments. Although we obtained automatic reenrollments, we found communications from the Marketplace leading up to the end of 2014 to be contradictory or erroneous. Examples include the following: As noted earlier, our applicants were notified they would automatically be reenrolled for the new coverage year. But most of the applicants also received, to varying degrees, notices to reapply or to take some type of action. For example, we received notices stating: “Official Notice: Your 2015 application is ready,” “Action Needed: Your 2015 health coverage,” and “Follow these steps to re-enroll by December 15.” The message and frequency of these notices could create uncertainty among applicants who believed they need not take any action to remain enrolled. In correspondence to our applicants, the Marketplace referred to things that could not have happened. In four cases in the latter part of 2014, Marketplace correspondence referred to the filing of federal tax returns of our applicants, even though our applicants never filed a tax return. In four cases, our enrollees received notices directing them to send additional information in order to continue coverage, saying they could lose coverage if they did not—but the deadline for submission was a date that had passed months earlier. For example, one enrollee received such a notice in December 2014, advising that coverage might be lost six months earlier, in June 2014. As mentioned previously, CMS officials told us they are working to improve communication with consumers, and will make improvements in consumer notices. Under PPACA, an applicant’s filing of a federal income-tax return is a key element of back-end controls. When applicants apply for coverage, they report family size and the amount of projected income. Based, in part, on that information, the Marketplace will calculate the maximum allowable amount of advance premium tax credit. An applicant can then decide if he or she wants all, some, or none of the estimated credit paid in advance, in the form of payment to the applicant’s insurer that reduces the applicant’s monthly premium payment. If an applicant chooses to have all or some of his or her credit paid in advance, the applicant is required to “reconcile” on his or her federal tax return the amount of advance payments the government sent to the applicant’s insurer on the applicant’s behalf with the tax credit for which the applicant qualifies based on actual reported income and family size. To facilitate this reconciliation process, the Marketplace sends enrollees Form 1095-A, which reports, among other things, the amount of advance premium tax credit paid on behalf of the enrollee. This information is necessary for enrollees to complete their tax returns. The accuracy of information reported on this form, then, is important for determining an applicant’s tax liability, and ultimately, government revenues. We found errors with the information reported on 1095-A forms for 3 of our 11 fictitious applicants.containing different information for the same applicant. In all three cases, the forms did not accurately reflect the number of months of coverage, thus misstating the advance premium tax credits received. In one of the cases, for instance, the form did not include a couple of months of advance premium tax credit that was received and, as a result, understated the advance premium tax credit received by more than $600. Appendix V shows complete results for tax forms we received. Because we did not provide CMS with detailed information about the specific cases, CMS officials said they could not conduct research and explain In two cases, we received multiple forms why these errors occurred. In general, CMS officials told us the agency made quality checks on tax information before mailings to consumers. During our testing work, we also identified that unlike advance premium tax credits, CSR subsidies are not subject to a recapture process such as reconciliation on the taxpayer’s federal income-tax return. In discussions with CMS and IRS officials, we found that the federal government has not established a process to identify and recover the value of CSR subsidies that have been provided to our fictitious enrollees improperly. These subsidies increase government costs; and, according to IRS, excess CSR payments, if not recovered by CMS, would be taxable income to the individual for whom the payment was made. We are continuing to seek information from CMS on any efforts to recover costs associated with subsidy reductions or eliminations due to unresolved inconsistencies. In December 2014, the Marketplace sent notifications to 5 of our 11 applicants, indicating that we had filed new applications for subsidized coverage. In four of these notices, the Marketplace stated our subsidies or coverage, or both, would be terminated if we failed to provide supporting documentation. However, we had not filed any such applications, nor, as described earlier, had we sought any redetermination of subsidies. Because each of our fictitious applicants earlier received either written or verbal assurances from the Marketplace that documentation had been received and no further action was necessary, we did not respond to these requests to submit supporting documentation. A few months later, the Marketplace terminated coverage or subsidies for six applicants, including four applicants who had received notice of new applications in December 2014, and two applicants who had not received notice of a new application. The termination notices cited failure to respond to requests to submit documentation in support of what were claimed to be the new applications we submitted. Our remaining five applicants continued receiving subsidized coverage without interruption. Following the termination notices, we elected to pursue continued coverage for the six cases as part of our testing, even though we had not filed the claimed new applications. Each of our six fictitious applicants that lost coverage or subsidies made phone inquiries to the Marketplace for an explanation of the terminations. In three of these inquiries, the Marketplace representatives told our applicants that they were required to file a new application or supporting documentation each year. However, as described earlier, notifications we received earlier from the Marketplace and insurers told us that no actions were needed to automatically reenroll in our plans other than to continue to pay premiums. In addition, as noted, other applicants did not receive notices of new applications being filed. We are continuing to seek from CMS information on this treatment of our applicants. Next, for each of these six fictitious applicants, we requested in Marketplace phone conversations reinstatement of coverage or subsidies. For five of the six applicants, the Marketplace approved reinstatement of subsidized coverage, while in the process also increasing total premium tax credit subsidies for all these applicants combined by a total of more than $1,000 annually. For the sixth applicant, a Marketplace representative said a caseworker must evaluate our situation. We were told we could not speak with the caseworker, and it could take the caseworker up to 30 days to resolve the issue. This applicant’s case was still pending at the time we concluded our undercover activity in April 2015. Appendix VI summarizes outcomes for the unknown applications and terminations that followed for six of our applicants. For three of the five applicants for whom we obtained reinstatement of subsidized coverage, we had open inconsistencies related to citizenship/immigration status remaining from our initial applications for 2014, according to CMS data. For each of these three applications, we had never submitted any citizenship or immigration documentation to the Marketplace for resolution. Nonetheless, we had subsidized coverage restored. We are continuing to seek from CMS any information on whether procedures allow repeated applications as a way to avoid document-filing requirements. As described earlier, CMS has awarded grants for “Navigators,” which are to provide free, impartial health-insurance information to consumers. In addition, such aid is also to be available from other in-person assisters (“non-Navigators”) who generally perform the same functions as Navigators, but are funded through separate grants or contracts. As described in our July 2014 statement, in addition to the 12 online and telephone applications, we also attempted an additional 6 in-person applications, seeking to test income-verification controls only. During our testing, we visited one in-person assister and obtained information on whether our stated income would qualify for subsidy. In that case, as shown in Figure 2, a Navigator correctly told us that our income would not qualify for subsidy. However, for the remaining five in-person applications, we were unable to obtain such assistance. We encountered a variety of situations that prevented us from testing our planned scenarios.later returned to the locations, seeking explanations on why we could not We obtain the advertised assistance, which are also shown in figure 2. Representatives of these organizations generally acknowledged the issues we raised in handling of our application inquiries. We shared these results with CMS officials, who said they could not comment on the specifics of our cases without knowing details of our undercover applications. CMS officials said Navigators are required to accept all applicants, even if an organization’s mission is to work with specific populations. If Navigators cannot provide timely help themselves, they must refer applicants to someone who can give assistance. CMS officials also said that they can terminate grant agreements, among other enforcement actions, if Navigators do not comply with terms of their awards. They cited as an example a corrective action taken in March 2015 against a Navigator grantee operating in several states for not providing the full range of activities it promised. CMS officials stressed to us Navigator training and experience from the first open-enrollment period helped improve training for the second enrollment period ending in February 2015. As noted earlier, our review of in-person assistance was limited to the extent we encountered Navigators and non-Navigators as part of our enrollment control testing. A full examination of in-person assistance was beyond the scope of our work. CMS officials told us there is no formal policy or specific guidance for situations such as the one we encountered in a case described in figure 2, in which an applicant is asked if he or she wishes to perform a service, such as volunteering for union activities, at the time the applicant seeks assistance. Still, CMS officials said Navigators would be discouraged from such activities while applicants seek help. CMS officials told us it is reasonable for consumers to think that if an assister is listed on the federal website as providing help—as were the assisters we selected—that assistance should be available as indicated. CMS officials told us the agency recognizes challenges with its online tool to find local assistance, and has been working to make changes. We are continuing to seek written documentation on these planned improvements. Chairman Hatch, Ranking Member Wyden, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions that you may have. For questions about this statement, please contact Seto J. Bagdoyan 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 statement. Individuals making key contributions to this statement, or our 2014 statement reporting preliminary results, include: Matthew Valenta and Gary Bianchi, Assistant Directors; Maurice Belding; Mariana Calderón; Marcus Corbin; Carrie Davidson; Paul Desaulniers; Colin Fallon; Suellen Foth; Sandra George; Robert Graves; Barbara Lewis; Maria McMullen; James Murphy; George Ogilvie; Shelley Rao; Ramon Rodriguez; Christopher H. Schmitt; Julie Spetz; Helina Wong; and Elizabeth Wood. Figure 3 summarizes outcomes for all 12 of the undercover phone and online applications we made for coverage to the Health Insurance Marketplace (Marketplace) under the Patient Protection and Affordable Care Act, as part of our testing of eligibility and enrollment controls. Figure 4 shows, by application, the documentation we submitted in support of the 11 undercover applications that were successful. As part of our eligibility- and enrollment-controls testing, we varied what we submitted by application—providing all, none, or only some of the material we were told to send. Figure 5 shows, by application, a summary of our document requests and submissions, with Marketplace communications on adequacy of the submissions, for the 11 undercover applications that were successful. Figure 6 summarizes automatic reenrollment activity at the end of the 2014 coverage year for the 11 undercover applications that were successful. Figure 7 summarizes receipt of Forms 1095-A, for reconciliation of advance premium tax credits received, for the 11 undercover applications that were successful. Figure 8 summarizes outcomes for the six applicants for whom the Marketplace terminated subsidies or coverage in early 2015. Prior to termination, four of these applicants had received notices of new applications filed, although we did not file any such applications. Following notice of the terminations, we restored subsidized coverage in five of six cases, with one case pending at the time we concluded our undercover activity. | PPACA provides for the establishment of health-insurance exchanges, or marketplaces, where consumers can compare and select private health-insurance plans. The act also expands the availability of subsidized health-care coverage. The Congressional Budget Office estimates the cost of subsidies and related spending under the act at $28 billion for fiscal year 2015. PPACA requires verification of applicant information to determine eligibility for enrollment or subsidies. GAO was asked to examine controls for application and enrollment for coverage through the federal Marketplace. This testimony describes (1) the results of GAO's undercover testing of the Marketplace's eligibility and enrollment controls, including opportunities for potential enrollment fraud, for the act's first open-enrollment period; and (2) additional undercover testing in which GAO sought in-person application assistance. This statement is based on GAO undercover testing of the Marketplace application, enrollment, and eligibility-verification controls using 18 fictitious identities. GAO submitted or attempted to submit applications through the Marketplace in several states by telephone, online, and in-person. Details of the target areas are not disclosed, to protect GAO's undercover identities. GAO's tests were intended to identify potential control issues and inform possible further work. The results, while illustrative, cannot be generalized to the full population of applicants or enrollees. GAO provided details to CMS for comment, and made technical changes as appropriate. To assess the enrollment controls of the federal Health Insurance Marketplace (Marketplace), GAO performed 18 undercover tests, 12 of which focused on phone or online applications. During these tests, the Marketplace approved subsidized coverage under the Patient Protection and Affordable Care Act (PPACA) for 11 of the 12 fictitious GAO applicants for 2014. The GAO applicants obtained a total of about $30,000 in annual advance premium tax credits, plus eligibility for lower costs due at time of service. For 7 of the 11 successful fictitious applicants, GAO intentionally did not submit all required verification documentation to the Marketplace, but the Marketplace did not cancel subsidized coverage for these applicants. While these subsidies, including those granted to GAO's fictitious applicants, are paid to health-care insurers, and not directly to enrolled consumers, they nevertheless represent a benefit to consumers and a cost to the government. GAO's undercover testing, while illustrative, cannot be generalized to the population of all applicants or enrollees. GAO shared details of its observations with the Centers for Medicare & Medicaid Services (CMS) during the course of its testing, to seek agency responses to the issues raised. Other observations included the following: The Marketplace did not accurately record all inconsistencies. Inconsistencies occur when applicant information does not match information available from Marketplace verification sources. Also, the Marketplace resolved inconsistencies from GAO's fictitious applications based on fictitious documentation that GAO submitted. Overall, according to CMS officials, the Marketplace did not terminate any coverage for several types of inconsistencies, including Social Security data or incarceration status. Under PPACA, filing a federal income-tax return is a key control element, designed to ensure that premium subsidies granted at time of application are appropriate based on reported applicant earnings during the coverage year. GAO, however, found errors in information reported by the Marketplace for tax filing purposes for 3 of its 11 fictitious enrollees, such as incorrect coverage periods and subsidy amounts. The Marketplace automatically reenrolled coverage for all 11 fictitious enrollees for 2015. Later, based on what it said were new applications GAO's fictional enrollees had filed—but which GAO did not itself make—the Marketplace terminated coverage for 6 of the 11 enrollees, saying the fictitious enrollees had not provided necessary documentation. However, for five of the six terminations, GAO subsequently obtained reinstatements, including increases in premium tax-credit subsidies. For an additional six applicants, GAO sought to test the extent to which, if any, in-person assisters would encourage applicants to misstate income in order to qualify for income-based subsidies during coverage year 2014. However, GAO was unable to obtain in-person assistance in 5 of the 6 undercover attempts. For example, an assister told GAO that it only provided help for those applying for Medicaid and not health-care insurance applications. Representatives of these organizations acknowledged the issues GAO raised in handling of the inquiries. CMS officials said that their experience from the first open-enrollment period helped improve training for the 2015 enrollment period. |
HUD’s mission is to create strong, sustainable, inclusive communities and ensure affordable housing. In carrying out its mission, the department relies on IT to support managing financial data for its programs that offer affordable rental housing opportunities for about 12 million residents; work with state and local governments to revitalize over 8,850 localities; help the homeless through community development; and provide mortgage insurance for single-family housing, multifamily housing, and health care facilities. HUD programs are managed by six main offices: Public and Indian Housing: Assistance to low-income families is provided by this office through three programs aimed at offering units for eligible tenants in properties generally owned and administered by state and local public housing agencies; tenant-based rental assistance that eligible households can use to rent houses or apartments in the private housing market; and block grants and loan guarantees to low-income families and tribal entities for housing development and assistance and housing-related services. Using $27 billion annually to subsidize housing for approximately 3.3 million low- income families, this office provides housing assistance and supports block grants and guarantee programs for Native American tribes. This office also manages the Real Estate Assessment Center, which is responsible for providing information on the condition of the department’s housing portfolio and for identifying fraud, waste, and abuse of resources. Housing/Federal Housing Administration: Programs within this office provide insurance on loans made by approved lenders for single-family mortgages and multifamily projects, including manufactured homes and hospitals. The Federal Housing Administration managed an insured portfolio of almost $1.3 trillion, as of the end of fiscal year 2015. The Office of Housing is also tasked with regulating certain aspects of the housing industry and managing project-based rental assistance programs. In addition, this office provides support to a nationwide network of housing counseling agencies and counselors. Community Planning and Development: This office provides financial and technical assistance to states and localities in order to promote community-based efforts to develop housing and economic opportunities. The Community Development Block Grant program is managed by this office and is the federal government’s largest block grant program for community development. This office engages in partnerships with local governments, as well as the private sector and nonprofit organizations; it also leads a number of efforts to combat homelessness. Fair Housing and Equal Opportunity: Complaints of housing discrimination under the Fair Housing Act of 1968 (Title VIII of the Civil Rights Act of 1968, as amended) are managed by this office. In addition, this office administers the Fair Housing Assistance Program, which provides funding annually to state and local agencies to enforce fair housing laws that are substantially equivalent to the Fair Housing Act. Government National Mortgage Association (Ginnie Mae): As a HUD-owned corporation, this office provides support for affordable housing by bringing global capital into the housing finance market while seeking to minimize risk to the taxpayer. While Ginnie Mae does not issue loans or mortgage-backed securities, it guarantees investors timely payment and interest on mortgage-backed securities supported by federally insured or guaranteed loans. Policy Development and Research: Responsibilities of this office include maintaining current information on housing needs, market conditions, and existing programs, and conducting research on priority housing and community development issues. Using in-house staff and contractors, it is the primary office responsible for data analysis, research, program evaluations, and policy studies to inform the development and implementation of programs and policies across HUD. This office is also in charge of sponsoring major surveys to provide information about housing markets. HUD also relies on various support offices. These include the Office of the Chief Financial Officer (CFO) and the Office of the Chief Information Officer (CIO). Specifically, the Office of the CFO is responsible for the execution and oversight of the department’s budget, as well as its financial management systems. The Office of the CIO is responsible for the department’s IT environment, providing project management guidance, and identifying opportunities to replace or retire redundant or inefficient systems. A simplified view of the department’s organizational structure is provided in figure 1. During fiscal year 2015, $44.1 billion (96.8 percent) of the department’s $45.4 billion total gross discretionary budget authority was allocated to programs managed by the six main offices. An additional $1.5 billion (3.2 percent) was dedicated to salaries for HUD’s nearly 8,300 employees and expenses to support the department’s daily operations. The allocation of the department’s fiscal year 2015 budget is shown in figure 2. HUD performs financial management functions for core accounting activities that include maintaining its general and subsidiary ledgers, budget execution and funds control, accounts receivable and collections, and accounts payable. The department records financial transactions and monitors its commitments, obligations, and payment activities. HUD also manages its budget from initial apportionment and allotment through allocation. Such activities support the department’s ability to regularly generate balances of its funds and produce financial statements. Other aspects of the department’s financial management functions include tracking the cost of resources allocated across programs and accounting for assets, including equipment and property. In order to execute these functions, the department relies on IT systems that are used by its program and support offices. Specifically, systems are used for maintaining financial records, processing transactions, making payments, and distributing funds. To ensure the completeness of financial information, HUD uses IT systems to track spending for daily operations, including travel, employee time, and contract support. These financial management systems assist HUD by storing records and providing analytical tools that support financial reporting and decision making by the department’s budget officers, program managers, financial analysts, accountants, and auditors. Toward this end, as of July 2016, HUD reported that its financial management functions were supported by 46 systems. Comprising a mix of legacy and modernized technologies, these systems are operated and maintained by the department and external entities. Notwithstanding the systems that have been modernized, HUD and its Office of Inspector General reported in November 2015 that the department’s IT systems have not been sufficient to effectively support financial management needs. The department attributed this condition to the fact that its financial management systems employ antiquated technology, necessitate manual workarounds, are costly to maintain, and are not fully compliant with federal requirements. Furthermore, as a result of system weaknesses, the department has been unable to reliably track and report the detailed costs of its programs. The financial management systems supporting the department are identified in appendix II. HUD’s Fiscal Year 2015 Financial Management Plan, reports issued by the Office of Inspector General, and other documentation describe the following limitations in the department’s financial management systems: Antiquated technology. Approximately 60 percent of HUD’s financial management systems were deployed before the year 2001. These systems are increasingly at risk of failure due to aging technology and reliance on applications that are no longer supported by vendors. This limits the department’s ability to deploy updates or make adjustments to ensure the systems support mission needs. For example, the HUD Centralized Accounting and Program System (HUDCAPS) supports the processing of financial data for one of the department’s largest programs, but it relies on outdated technology. In March 2016, HUD’s Inspector General stated that, as the volume and complexity of the department’s work continues to grow, it becomes increasingly difficult to respond to market conditions using legacy systems that are 15 to 30 years old. Manual processes. A number of HUD’s financial management functions require manual processing due to gaps in the functionality offered by its legacy systems. For example, in order to distribute program grants for which funding has been appropriated over several years, employees are required to make manual adjustments in HUDCAPS to ensure that funding is available from one year to the next. High Operations and Maintenance Costs. HUD’s continued reliance on aging legacy systems has resulted in costly, labor-intensive, and inefficient operations for performing financial management functions. For fiscal year 2016, the department estimated its annual cost of operating and maintaining financial management systems to be approximately $70 million. According to the department, until these systems are fully modernized, it will be difficult and expensive to support increased workloads. Non-compliance with financial management requirements. For fiscal year 2015, HUD received a disclaimer of opinion on its financial statements, in part due to financial management system weaknesses. Among these weaknesses, the department lacked compliance with the Federal Financial Management Improvement Act of 1996, which is a law designed to improve financial management systems in order for managers to routinely have access to reliable, useful, and timely financial-related information. Highlighted in the auditor’s report on HUD’s financial statements are the weaknesses of Ginnie Mae’s financial management systems, which employ poor accounting and record-keeping practices, and require manual work arounds. In addition, the department and its auditor reported in 2015 that a material weakness first identified in 1993 regarding the lack of data to perform managerial cost accounting had not yet been addressed. Recognizing the need to modernize its financial management systems, HUD has initiated three major efforts since 1991 that were aimed at enabling the department to properly manage its financial resources. These efforts were envisioned to deliver integrated financial management systems that would provide timely and accurate information to managers and comply with federal financial management system requirements. In addition, HUD expected that the modernization efforts would allow for the replacement of costly, unstable legacy systems that did not meet the department’s financial management needs. Figure 3 depicts a timeline of HUD’s financial management systems modernization efforts from November 1991 to April 2016. HUD undertook the Financial Systems Integration project in November 1991, with the intent of delivering integrated financial management systems and replacing costly legacy systems, such as the Line of Credit Control System and the Program Accounting System. By November 2000 and after experiencing significant changes in cost, schedule, and scope, the department had spent approximately $240 million on implementing systems that did not achieve the project’s vision. Specifically, as a part of the Financial Systems Integration project, the department implemented HUDCAPS as its core accounting system, but this system was not used across the department as planned. The system also introduced additional manual processing, could not provide accurate and timely information to managers, was not fully compliant with federal requirements, and did not replace legacy systems as expected. Furthermore, both the Line of Credit Control System and the Program Accounting System remained in use and, as of June 2016, continued to be relied on for financial management functions. Our prior reviews have noted that the Financial Systems Integration project was not fully successful due, in part, to weaknesses in IT management disciplines. Specifically, we reported in 1998 and 2003 that the project had suffered cost increases and schedule delays due to changes in strategy and inadequate project management, including an unreliable schedule and cost estimate and inadequate planning. Accordingly, we recommended that HUD address these deficiencies by preparing complete and reliable cost estimates and finalized detailed project plans. The department agreed with our recommendations and took steps to complete a cost-benefit analysis for the Financial Systems Integration project, as well as pursued actions to finalize a detailed project plan before ending the program in 2000. In January 2003, HUD began work on a second initiative—the HUD Integrated Financial Management Improvement Project—which was expected to integrate the department’s financial management systems by implementing an enterprise resource planning system. The project was also expected to replace HUDCAPS, the Program Accounting System, and portions of the Line of Credit Control System that related to core accounting functions. After initial planning activities, a contract for development was awarded in November 2008. However, this contract award was successfully protested, and due to changes in requirements, the new contract was not awarded until September 2010. The new contract established a completion date of May 2012 for the project. Subsequently, as the completion date drew near, HUD sponsored an operational assessment conducted in February 2012 by subject matter experts from the department and multiple government agencies to evaluate the status of the project. The assessment found that the project was at increased risk of failing to meet its completion date. After determining that a course correction was not a viable option, the department canceled the project in March 2012 after spending $35 million. According to HUD’s assessment and the department’s Office of Inspector General report, the failure of the project was due to management weaknesses, including an unreliable schedule and cost estimate, inadequate planning, inadequate requirements management, and an ineffective governance structure. In April 2013, HUD began work on the New Core program, which was intended to move the department forward with modernizing its financial management systems and processes. Using a phased approach, the program was expected to deliver capabilities that would enable the replacement of 17 legacy systems (including HUDCAPS, the Line of Credit Control System, and the Program Accounting System) with modern, integrated financial management systems that would more effectively support the department’s financial management needs. Further, the department identified expected benefits such as reduced costs associated with operating, maintaining, and upgrading legacy systems; automated processing, reducing the need for manual processing due to gaps in the functionality of its legacy systems; improved timeliness and accuracy of the department’s financial data for enhanced decision making; and the resolution of weaknesses that led to compliance issues with federal financial management system requirements in accordance with the Federal Financial Management Improvement Act of 1996, including the lack of reliable, useful, and timely financial-related information. Toward this end, the New Core program charter identified 14 financial management systems capabilities that would have to be delivered with the program in order to meet HUD’s financial management needs, replace legacy systems, and achieve the expected benefits (these capabilities are summarized in table 1). As a way to obtain these capabilities, HUD planned to pay for financial management services, including the use of systems, from a shared service provider instead of acquiring or developing systems in-house. HUD’s decision to adopt this approach was consistent with an Office of Management and Budget’s (OMB) memorandum that directed federal agencies to consider migrating to federal shared service providers for modernizing their financial systems. In our prior work, we have supported and called for shared service initiatives to standardize and streamline common systems when appropriate, which can reduce costs and, if done correctly, also improve accountability. The charter also outlined responsibilities for the program and identified HUD’s CIO, CFO, Chief Procurement Officer, and Chief Human Capital Officer as business owners with authority to identify and provide subject matter experts from across the department. As business owners, their role was to ensure that, among other things, the program would meet the department’s requirements and support business processes. The CIO also served as the executive sponsor of the program and, at times, shared this responsibility with the department’s CFO. The executive sponsor(s) was charged with ensuring that the program was reviewed by appropriate governance boards and received centralized IT funding and support from staff in the Office of the CIO, including an IT program manager. The New Core program was led by an Executive Director and Deputy Director with the support staff from the Office of the CIO, Office of the CFO, contractors, and staff who were detailed to HUD from the shared service provider. Subject matter experts were also provided from the Office of the Chief Procurement Officer and the Office of the Chief Human Capital Office. In July 2013, HUD signed an interagency agreement with the Administrative Resource Center (ARC), a federal entity designated by OMB and the Department of the Treasury to offer federal agencies financial management shared services. With this agreement, HUD became the first cabinet-level agency to commit to adopting a federal financial shared services solution for its core accounting. According to this agreement, the initial phase of New Core would allow HUD to begin using ARC’s services and systems for four planned New Core capabilities— travel and relocation, time and attendance, core accounting, and procurement—by October 1, 2014. The estimated implementation costs for HUD and ARC were $38 million and the estimated annual operational costs were $32 million. The implementation costs included program management activities, enhancing systems to meet HUD-specific requirements, migrating data to ARC systems, testing features of the system and interfaces, and training HUD employees. Following implementation of the four capabilities, HUD would pay fees to ARC for operation and use of its systems, which could be accessed via Internet-based applications. In addition, the department would begin paying ARC for services including entering financial transactions into the core accounting system, assisting in the preparation of HUD’s financial statements, supporting financial audits, coordinating application upgrades and fixes, and assisting end users through a help desk. Other services for employee travel and relocation and overseeing processing of time and attendance were also expected to be provided by ARC. In April 2014, the implementation approach was revised to incorporate additional HUD-specific requirements, prepare employees for business process changes, and align with OMB guidance, which calls for agencies to reduce costs and risk by dividing programs into smaller segments, such as phases and releases. To this end, the original agreement was modified by HUD and ARC to transition four financial management systems capabilities over a period of three releases. With the revised approach, the expected HUD and ARC implementation cost increased to a total of $68 million, with estimated operational costs decreasing by $1 million. During 2014 and 2015, the four capabilities were delivered on the respective release dates provided in table 2. For each release, HUD and ARC worked in partnership to execute activities in preparation for the delivery of these capabilities. Specifically, they collaborated on developing and executing project plans; gathering, validating, and testing requirements; extracting and preparing department data for migration to ARC’s systems; system and user testing; aligning the department’s business processes to the shared service solutions; and training HUD employees. Following the completion of release 3 in October 2015, HUD’s Deputy Secretary stated that the department would continue to use ARC’s systems and services for the capabilities that had already been delivered, but that the department would continue to evaluate its needs for other financial management capabilities. In late April 2016 the department completed close-out activities for the program. By October 2015, HUD had completed transitioning 4 of the 14 planned financial management systems capabilities to shared service solutions provided by ARC. This enabled the department to fully replace four systems and gain access to seven of ARC’s systems. In addition, ARC became responsible for processing portions of the department’s financial management functions and transactions related to travel and relocation, time and attendance, and core accounting. ARC also began providing system services in support of HUD’s procurement-related transactions. Each of the 4 capabilities was delivered by the scheduled date and provided standard features of the shared service solutions offered by ARC. As of July 2016, the department continued to use these capabilities to support its financial management functions. Notwithstanding the work completed, the 4 implemented capabilities did not fully meet HUD’s requirements and expectations, although the department has begun pursuing other initiatives for remaining capabilities. Travel and relocation. HUD began accessing ARC’s travel and relocation systems via a web page on October 1, 2014. The systems allowed employees to make reservations, authorize travel requests, access relocation forms, request reimbursements, and open travel card accounts. According to New Core officials, with the use of ARC’s systems the department was able to avoid costs that may have been incurred with the legacy travel system, which was not compliant with the General Services Administration’s Federal Travel Regulation. Although the transition to ARC’s travel system allowed HUD to shift to a system that was compliant with the Federal Travel Regulation, one of HUD’s requirements for improving the automation of travel and relocation processing was not completely met. HUD had a requirement for a bi-directional interface between ARC’s travel and core accounting system that would provide real-time automated funds control. The requirement was based on the department’s need to ensure that budgetary resources were available for immediate travel in the event of an emergency. This interface was not part of ARC’s standard solution and, therefore, instead of a system performing an automated check of the availability of travel funds, HUD adopted ARC’s standard business process to perform a manual check to ensure funds availability prior to approving travel requests. According to ARC officials, a technical solution that is intended to provide this functionality is scheduled for implementation in January 2017. Time and attendance. On February 8, 2015, HUD employees began accessing ARC’s time and attendance system via a web page to complete their timecards, submit leave requests for supervisory review and approval, and donate leave. In addition, ARC employees became responsible for managing and updating data entered by HUD employees into the system and ensuring the timely completion of payroll processes. ARC also responds to time and attendance–related information requests from the department and provides appropriate reports and/or data. In addition, the new system includes default codes that link employees’ time and attendance data to their assigned program or support office. According to a June 20, 2016, memorandum from HUD’s Deputy CFO, this has improved the accuracy and timeliness of payroll processing. However, HUD employees do not have the ability to link their time and attendance to specific activities and projects. This was a critical feature that the department identified as needed for better understanding and improving its allocation of resources, forecasting payroll expenditures, and tracking costs by activities and projects. While ARC’s time and attendance system supports the tracking of employee work activities and projects, the department is using this feature on a limited basis because the implementation of requirements for the managerial cost accounting capability was planned for a future New Core phase. The inclusion of this feature was a prerequisite for addressing a material financial management system weakness regarding the lack of a system to perform managerial cost accounting that, according to HUD Office of the Inspector General officials, had been identified as early as 1993. Core accounting. On October 1, 2015, HUD began relying on ARC’s core accounting system and services for the management of its budget and general ledger. To this end, ARC hired 70 new staff to, among other things, manage entries to the general ledger, ensure that a complete set of the department’s financial transaction records is available for generating financial statements, and maintain the core accounting system. An interface—the New Core Interface Solution— was also established to ensure transactions made in legacy systems, such as HUDCAPS, the Line of Credit Control System, and the Program Accounting System, would be recorded in the shared service provider’s core accounting system. HUD employees also gained access to the shared service provider’s reporting tool that allows them to view the department’s financial data and produce reports such as financial statements, trial balances, and transaction histories. According to a June 20, 2016, memorandum from HUD’s Deputy CFO, the tool is also compliant with Department of the Treasury financial reporting requirements. To manage HUD’s budget, department employees send transactions establishing or amending the budget via e-mail to ARC staff, who upload the data to the core accounting system. Synchronizing these budget data with other financial data in HUD’s legacy systems can result in up to a 48-hour delay. Notwithstanding the delay, HUD officials noted that employees can access up-to-date data via the reporting tool implemented and emphasized that the shared service provider’s core accounting system includes controls that decrease the risk of funds being obligated when they are not available. ARC’s system and services also execute transaction processing to the general ledger for HUD’s salaries and expenses funds. This includes making payments to vendors and federal employees, generating bills, and collecting payments. However, HUD is not yet using ARC’s shared services for executing transaction processing for its program funds, as originally expected. This is particularly significant because HUD directed 96.8 percent of its total gross discretionary budget authority toward its programs during fiscal year 2015. As a result, the department continues to execute programmatic transactions using costly and inefficient legacy systems. In June 2016, senior HUD officials, including the Deputy CFO and CIO, stated that the decision to not migrate transaction processing for program funds to ARC was made due to the lack of fully defined requirements and a shift in the department’s priorities. Further, the reporting tool associated with ARC’s core accounting system has yet to produce detailed status of funds reports, which are critical to HUD’s understanding of the current amount of available IT funds at any given time. Specifically, officials from the Office of the CIO stated that a report that provides details on available IT funds and cannot be produced on-demand by the core accounting system to their satisfaction. As a result, HUD employees spend at least 2 days manually creating a report that meets their needs—a product that the department’s legacy reporting tool had produced on-demand—by consolidating, manipulating, and verifying in spreadsheets data that are taken from ARC’s core accounting system as well as the department’s legacy systems. According to New Core officials, this report must be manually created because HUD decided not to migrate relevant historical data to ARC’s system or include the accounting fields needed to produce an automated version of the report. Senior department officials stated that they are revisiting these decisions and may implement changes in fiscal year 2017. Procurement. On October 1, 2015, HUD employees were provided access to ARC’s procurement system for activities including contract writing and procurement tracking; electronic routing, review, and approval of invoices; and the reporting of procurement data to a federal procurement data system. The department also gained access to a system for reconciliation and approval of purchase card transactions, and to a government-wide invoice processing platform of approved federal government suppliers. A notable feature of ARC’s procurement system is that it is integrated with the core accounting system to provide real-time contract processing, which is intended to support the timely recording of commitments and obligations and prevent the department from creating contract obligations when funding is not available. The migration to ARC’s invoice processing platform also allowed the department to adopt new controls and a new electronic payment process for managing contracts and payments to commercial vendors. In addition, the department shifted to ARC- managed processes for purchase cards, including issuing cards to HUD employees, and to an electronic process for receiving, approving, and paying invoices. Nevertheless, the features of ARC’s procurement system did not offer all of the features that existed in the department’s legacy system; and to fill these gaps, employees devised and adopted manual processes. For example, HUD agreed to adopt ARC’s standard procurement system with the understanding that a requirement for processing contracts that are funded by more than one entity within the department would not be met. This agreement was made because of the costly and lengthy system enhancement that would be needed to add the feature. To address the requirement, the department adopted ARC’s standard business process change that, according to HUD and ARC officials, has increased the level of effort and complexity of creating and managing these contracts. Moreover, challenges with converting data from HUD’s legacy procurement system to ARC’s system were encountered. These challenges continue to adversely impact the department’s ability to process and manage contracts. Between October 2015 and January 2016, HUD users of ARC’s procurement system reported instances in which data were missing or inaccurate. According to senior officials, this required procurement actions to be processed manually outside of the system and then entered into the system after data issues were resolved. In June 2016, HUD officials reported that, although progress had been made toward resolving these issues, additional work is needed to ensure that contract data are correct. On November 4, 2015, HUD’s Deputy Secretary stated that the department would not develop additional capabilities as part of the New Core program. According to the New Core Executive Director, this decision allowed the department to refocus its efforts on evaluating options and identifying the optimal solution for modernizing its approach to grants management. The department’s decision to end further implementation of the program was made prior to, but was consistent with, a December 2015 directive to have no other New Core releases in fiscal year 2016. After spending at least $58 million over a period of 3 years, in April 2016 the department officially completed development close-out activities for the New Core program. Although HUD ended further implementation of the New Core program before all of the planned capabilities were implemented, HUD officials, including the Deputy Secretary, stated that the migration to a shared service provider allowed the department to streamline administrative services, promote innovation, and gain efficiencies by transitioning responsibilities to ARC. According to a June 20, 2016, memorandum, HUD’s Deputy CFO reported that the migration also resulted in improved internal controls, such as real-time checks with the documents in the procurement system for recording commitments and obligations; increased discipline in financial activities, including the use of delegated authority for purchases; improved compliance with laws and regulations; better data quality due to ARC’s core accounting system ensuring that budget funds control balances are the same as balances in the general ledger; strengthened funds-control process because of, among other things, improvements in the accuracy of payroll costs and improved procedures for accounts receivable; and increased confidence in controls and configurations employed on systems used for purchase cards, processing invoice payments, procurement management, and employee time and attendance. HUD officials, including the Deputy Secretary, also stated that other new initiatives were under way to deliver financial management systems capabilities and replace legacy systems that were not addressed under New Core. In this regard, the department is seeking $12 million for fiscal year 2017 to support planning, design, and development activities for two efforts referred to as the Voucher Management System/HUDCAPS Decommissioning and the Enterprise Data Warehouse initiatives. Initial documentation for these initiatives discusses delivering 5 of the remaining 10 planned New Core capabilities—data warehousing, grant accounting, grant and loan management, loan accounting, and Public and Indian Housing Section 8 accounting. Related briefings and other early planning documents call for these two initiatives to result in the replacement of the department’s legacy financial reporting system—known as the Financial Data Mart—as well as HUDCAPS, the Line of Credit Control System, New Core Interface Solution, and the Program Accounting System. Specifically, the department expects to replace and decommission the New Core Interface Solution by June 2017 and to begin activities that would enable the decommissioning of the remaining systems by the end of fiscal year 2018. These documents also acknowledge the need for HUD to re- engage with ARC to ensure that its core accounting system will enable the processing of transactions for HUD’s program funds. According to ARC officials, including the Director for the Office of Shared Services, doing so would require a new interagency agreement and additional implementation costs. As of June 2016, the department was still working on developing detailed plans for these two initiatives. Further, in commenting on a draft copy of this report in July 2016, HUD provided updated information regarding the status of the other 5 capabilities that would not be addressed through new initiatives. Specifically, the department stated that the capability for budget formulation would be met through existing systems, with improvements to be considered at a future date. The department also stated that it would no longer pursue modernization for the Housing/Federal Housing Administration accounting, Ginnie Mae accounting, managerial cost accounting, and property management capabilities. In regard to Housing/Federal Housing Administration accounting and Ginnie Mae accounting, the department said it had re-evaluated its legacy systems and concluded that modernized capabilities were not required. For managerial cost accounting, the department reported that it would be focusing on enhancing processes and procedures instead of implementing the capability originally planned. Additionally, HUD stated that the implementation of the Federal Asset Management Enterprise System in 2016 had met its needs for the property management capability. Our experience with IT-related programs has shown that disciplined management practices can help agencies plan, manage, and oversee modernization efforts. The success of such efforts often depends on agencies’ possessing the ability to effectively implement practices for defining programs, developing adequate plans, and managing requirements. As we and others have reported, governance and executive-level oversight are also among the disciplined practices important to the success of IT programs. Since 2009, we have reported on HUD’s capacity to modernize its IT environment and made several recommendations aimed at improving management and governance practices. The New Core program demonstrated weaknesses in HUD’s implementation of key IT management and governance practices. Management practices including program definition, planning, and requirements had deficiencies that were consistent with those we have identified for other departmental modernization efforts. For instance, HUD did not fully define the program, inadequately planned for the program’s cost and schedule, and did not effectively manage requirements—practices that in 2013 we recommended the department improve. We also identified limitations in the department’s governance and executive oversight of the program. Specifically, HUD’s IT governance practices and oversight of New Core were ineffective, in part, due to leadership changes, lack of coordination among key stakeholders, and alignment of the program with other modernization efforts. Until HUD fully addresses these persistent IT management and governance weaknesses, the department will continue to be at an increased risk of jeopardizing future modernization efforts. Effective organizations often begin programs like New Core by defining a long-term direction and activities needed to achieve a modernized future state. Program management disciplines promulgated by the Project Management Institute (PMI) and the Institute of Electrical and Electronics Engineers call for a concept of operations that outlines how users will interact with systems in the future environment, along with a roadmap for executing associated activities. Typically, developing the future operating state helps to provide a high-level description of the IT systems, describe the operations that must be performed and who must perform them, and explain where and how the operations are to be carried out. We have also previously reported on the benefits of developing the concept for future operations. Fully defining a program also involves creating a roadmap that can help justify continuing investments in modernization efforts. An effective program roadmap consists of, among other things, a graphic depiction of the program’s intended future state, a high-level view of milestones, and dependencies that help identify the chronology for work, as well as reveal or explain gaps. HUD policy and guidance call for programs to develop a concept of operations to provide a mechanism for users to describe their expectations of the solution and recommend that one be developed for modernization efforts that are of high mission criticality or cost to the department. Further, the department’s guidance states that when implementing a program that contains multiple projects (i.e., phases or releases), a concept of operations is expected to be produced at the program level to show how the entire system and its parts would operate. To implement New Core financial management systems capabilities, HUD developed planning documents for a series of specific activities including an implementation plan, which partially described the IT systems at a high level. For example, the plan documented the scope of systems affected by the first three planned releases and also explained that, in addition to implementing the shared services provider’s solutions, HUD planned to develop the New Core Interface Solution to crosswalk budget and general ledger data between HUDCAPS and ARC’s core accounting system. For understanding operations at a high level through the first three releases, the department relied upon documentation outlining standard operations for customers using ARC’s services and systems. The New Core program also mapped out how the department’s processes would need to be altered to align with the standard shared service processes. HUD also took action in late September 2015 to develop standard operating procedures focused on the core accounting and procurement capabilities provided through the shared service provider’s systems and services. For instance, the program developed transitional standard operating procedures for budget execution, transition mission support, and payroll review and correction. The procedures outlined, for example, how budget staff in the Office of the CFO and program offices would submit templates via e-mail to the shared service provider’s employees, who would set up the initial budget and allocate it to specific activities and programs. The procedures described how HUD employees could verify that ARC had processed payroll corrections accurately. In addition, the department partially developed a program roadmap for New Core consisting of delivery dates for the first three releases and a graphic of the future modernized IT systems planned through fiscal year 2017. In particular, the roadmap outlined that HUDCAPS and the Program Accounting System would be replaced by shared service systems as a result of implementing the planned capabilities. Although these planning documents and activities assisted with the operations related to transitioning to ARC’s services and systems, documentation that outlined future operations for all of the planned New Core capabilities was not developed. For the documentation that was developed, it was limited because it did not clearly describe, from a HUD user’s perspective, the users’ needs and what operations must be performed, who must perform them, and whether shared service solutions and/or HUD systems would be used to carry out the operations. For instance, while the department developed training materials and job aids prior to the delivery dates, processes and tasks had not been fully determined for the operational changes needed for 54 identified user roles. Similarly, while the department began developing standard operating procedures during the summer of 2015, the procedures were narrow in scope and focused on implementing daily operations to align with ARC’s processes—instead of providing a comprehensive overview of the operations users would perform. In addition, the department acknowledged that activities to align procedures to positions was incomplete and identified additional procedures that need to be developed after implementation that were not originally part of New Core plans. The partial roadmap that HUD developed also did not fully depict a comprehensive view of the planned modernized environment and it did not outline future dates for delivering the remaining 10 planned capabilities. For instance, the roadmap did not account for when or how the department would replace other systems identified to be replaced with the program and fell short of clearly outlining what needed to occur to achieve expected benefits such as reducing the costs of legacy systems. Moreover, New Core program documentation did not provide information regarding dependencies among the 14 capabilities or the priority or chronological order in which the capabilities needed to be implemented. Establishing dependencies would have allowed for HUD to identify and understand gaps in planning or optimize the sequencing of the planned capabilities during implementation. In June 2016, HUD officials, including the New Core program Executive Director, acknowledged that the department had focused on planning activities for the first three releases associated with migrating to ARC’s shared service solutions and did not fully define the program up front because they were taking an iterative approach to planning for future releases. The Deputy Director also noted that HUD’s lack of maturity in effectively planning the level of effort needed to implement all of the intended capabilities was among the reasons the department did not develop a comprehensive concept of operations. ARC Officials, including the Director for the Office of Shared Services, further explained that the time required to complete the work needed was underestimated due to the challenges and resource constraints encountered. In commenting on our draft report, HUD officials acknowledged that they had relied on an OMB definition of a concept of operations from the early 1990s. In doing so, the department determined it was better to leverage ARC’s documentation that described the system from a user’s perspective instead of developing a concept of operations in accordance with its own guidance, which calls for one to be created at the program level. As a result of these early planning decisions and a desire to implement the four capabilities by October 2015, the program went forward without a comprehensive concept of operations and roadmap that defined a long- term direction and activities needed to achieve a modernized future state. As HUD proceeds with new initiatives aimed at financial management systems modernization, it is important that a concept of operations and roadmap, or something similar, be developed to guide its efforts. Without a guide for the long-term direction, the department will be at an increased risk of repeating these program management weaknesses and jeopardizing its continued investment in future modernization efforts. To aid in successful planning, management disciplines promulgated by PMI and described in federal guidance call for organizations to, among other things, plan for the scope of work needed to execute the program, establish and manage a schedule for completing the needed work, and estimate and manage the cost of completing the planned work. Planning a program’s scope involves developing a program-level work breakdown structure that defines in detail the work activities necessary and capturing all the relevant information to support the development of associated schedules or cost estimates. Building upon the planned scope, developing an effective program schedule entails establishing an integrated master schedule that identifies when and how long work will occur. This is a fundamental management tool that, when adequately created, defines a valid critical path to help gauge progress and identify and resolve potential problems. Lastly, planning for and establishing a credible cost estimate is important for determining budget requests and understanding the total monetary value invested in modernization efforts. Such estimates should be based on current data and updated to increase the quality of the estimates and create a means for effective program and cost control. HUD’s project planning and management policy also requires that these program plans be developed for IT investments, including modernization efforts. HUD executed activities aimed at planning the New Core program, including practices to develop its scope, schedule, and cost. To establish the scope, the department developed work breakdown structures with associated dictionaries that outlined the scope of 3 out of 14 planned financial management systems capabilities and used them to manage the planning and implementation of releases. For instance, the April 2015 work breakdown structure for the third New Core release identified tasks within eight high-level categories, including planning, requirements and analysis, and development and testing. Individual schedules were also established and managed for the 4 capabilities delivered through October 2015. The individual schedules outlined specific tasks within the categories that had been defined in the work breakdown structures. For example, planning tasks within the schedule for the third release included time for updates needed to the charter and program plans. Finally, HUD developed a cost estimate for the program in 2013 that was based on the original assumption that the first 4 capabilities would be implemented at a single point in time—October 2014. However, we identified shortcomings in HUD’s management of program planning practices. Regarding scope, the department did not develop a comprehensive program-level work breakdown structure for New Core that encompassed the high-level work activities relative to all 14 capabilities. For example, while work breakdown structures for 3 capabilities had been defined and developed, work activities related to delivering the remaining 11 capabilities, such as managerial cost accounting, were not defined in work breakdown structures or outlined in New Core documentation. While the department created individual schedules, it did not develop a program-level integrated master schedule to define when and how long it would take to deliver the 4 capabilities with identified delivery dates or any of the remaining 10 planned capabilities. The individual New Core schedules that had been developed lacked valid critical paths to identify key activities that, if not completed when planned, could delay the implementation of the capabilities. For example, our assessment of the schedule for capabilities delivered on October 1, 2015, found that the critical path was not continuous, contained both hard and soft constraints, and had long duration activities that did not represent measurable work. In addition to developing individual schedules, briefings were developed to guide senior management and stakeholder review of New Core’s progress. These slides identified certain major program activities including development and testing. However, according to New Core’s Deputy Director, these briefings were used to report on major activities that were of interest to management and stakeholders and were not representative of New Core’s critical path. Moreover, the cost estimate for New Core was based on outdated information that did not accurately reflect the cost of the entire program. Specifically, when the department decided in April 2014 to shift from a single implementation to a phased implementation beyond October 2014, the department did not take action to revise the original estimate or create a new one to reflect the estimated costs of delivering capabilities over a longer duration of time. Although the department continued to identify budgetary resources needed for the program, those costs were not derived from a credible estimate. According to New Core officials, including the Deputy Director, efforts to establish a program-level work breakdown structure and an integrated master schedule were limited because the scope of all planned capabilities had not been defined. In June 2016, the department provided information regarding the reason a comprehensive work breakdown structure had not been developed that encompassed high-level work activities; it stated that this was a lesson learned and that in hindsight the individual schedules should have been integrated for the program. In its comments on our draft report, HUD also stated that because it was the first cabinet-level agency to migrate to a shared service provider, the department had relied on ARC’s experience and processes for program planning practices. Further, the New Core officials stated that, while an updated cost estimate had been drafted in early 2015, the information used for the estimate had not been validated and the estimate was not finalized. By adequately executing program planning practices, including creating comprehensive scope, schedule, and cost documentation, HUD would be better positioned to implement the remaining capabilities and have reasonable assurance that investing in new initiatives would achieve desired benefits. Requirements establish what the system is to do, how well it is to do it, and how it is to interact with other systems. Program management disciplines established by PMI and the Software Engineering Institute outline practices that include documenting “as-is” processes to aid the organization in defining and managing requirements. These disciplines also stress the use of requirements traceability matrixes to ensure that agreed upon requirements can be traced back to business needs, criteria used for evaluating and accepting requirements, and design and testing documentation. Further, clearly identifying the attributes of a requirement on the matrix, such as the disposition of the requirement and any associated testing that was performed, can provide program officials and decision-makers with key information about each requirement. Prior to signing the interagency agreement in September 2013, HUD identified high-level requirements for the New Core program and documented these requirements in traceability matrixes. Following a determination that ARC was the best fit for HUD, more detailed requirements were created. To this end, the shared service provider, in conjunction with the New Core program staff, held requirements working sessions with relevant subject matter experts from program offices and support offices managed by the CFO, CIO, Chief Procurement Officer, and Chief Human Capital Officer. These sessions were intended to define and document detailed requirements specific to each of the 4 planned capabilities. During these sessions, 15 traceability matrixes were created that documented 923 requirements for the program. These matrixes included the identification of requirements that would be met by or require enhancements to the shared service provider’s standard solutions and requirements that would need alternative solutions outside of the shared services provided. According to the department and ARC officials, further definition of the high-level requirements gathered for the remaining 10 planned capabilities was not completed because the capabilities were not part of the April 2014 revised implementation approach or included in the interagency agreement. Nevertheless, limitations existed in HUD’s implementation of these requirements management practices. Efforts to define and trace requirements were limited because the level of detail needed was not fully defined during requirement gathering sessions. For example, the department did not document its “as-is” processes to aid in defining and managing requirements. As a result, the department limited its ability to assess and explain the impact of the New Core requirements on existing processes. While HUD identified new requirements throughout the duration of the program, these requirements were not added to the matrixes or managed by the department. Alternatively, they were documented in various files and not tracked with the originally identified requirements. Furthermore, requirements outlined in the matrixes did not trace back to documentation that described criteria to be used to evaluate and accept these requirements. The matrixes also did not identify the dates of completion for the requirements or indicate the disposition of the requirements. For example, several requirements were listed in testing documentation as “dropped as a requirement,” “untestable,” or “deferred.” Yet this information was not listed on the matrix, nor did the matrix provide an explanation for why a requirement was dropped or deemed untestable or indicate who approved the changes. The absence of such information impeded the traceability of requirements from matrixes through to test cases and results. Moreover, when the decision to move forward with implementing core accounting and procurement capabilities for release 3 was made, the final disposition or status of requirements could not be confirmed by HUD or ARC officials. New Core officials acknowledged that requirements had not been consistently documented early in the program at a detailed level to help ARC understand and appropriately capture the department’s business needs. These officials also stated that a requirements management tool had been planned for use to trace requirements throughout the life cycle of the program; however, the tool was not fully available and was only partially used. According to ARC officials, gathering requirements took more time than anticipated due to the New Core program challenges in identifying and producing knowledgeable staff for requirements sessions, who had the requisite background and understanding of HUD’s financial management functions, processes, and requirements. As HUD moves forward with initiatives to modernize its financial management systems, ensuring that requirements are effectively managed and traced will be essential to ensuring that final solutions effectively support the department’s business needs. GAO’s guide to effective IT investment management emphasizes the importance of applying effective disciplined, repeatable governance processes for selecting and re-selecting, controlling, and evaluating investments to ensure mission needs are met. After IT investments are selected and work on them has been initiated, effective control processes include monitoring and taking corrective actions for approved investments. HUD policy, issued by the Office of the CIO, also calls for similar processes in project planning and management guidance. The guidance outlines the role of a technical review subcommittee to authorize a program to proceed through one control gate to the next if it has met an established set of criteria. These criteria include reviewing requirements and approving planning documents (such as the program management plan), an assessment of the readiness of the system or service, and evaluating closeout activities to end a program. During 2015, HUD also implemented a process for conducting health assessments biweekly or monthly to evaluate the overall scope, schedule, and costs of IT investments. The department’s Office of the CIO applied two governance IT investment control mechanisms for monitoring New Core—technical review control gates and health assessments. In general, both types of control mechanisms focused on assessing whether required program planning documents, such as schedules for each release, were developed and submitted for review. First, technical review control gates of New Core were performed for the 4 capabilities delivered during 2014 and 2015. Specifically, the decision to initiate planning for New Core was made through the first review in July 2013. Subcommittee members specializing in privacy, enterprise architecture, and IT security, among others, approved the requirements and operational readiness for the first and second releases in September 2014 and January 2015, respectively. Continued work on release 3 of the program was approved through four additional reviews in 2015 and 2016. In particular, a baseline review of the plans and requirements, a review of the operational readiness of the release, an additional review of the interface HUD developed to support its use of ARC’s shared service solutions, and a closeout review were performed. For the second governance control mechanism, HUD conducted two health assessment reviews for New Core in June 2015 and March 2016 that, among other things, looked at the scope, schedule, and cost of the core accounting and procurement capabilities. For example, the review in June noted that the schedule was on target overall, but that specific activities on the schedule had been behind their expected completion dates and a “get well” plan had been established. However, New Core received a high score for its schedule and the assessment did not require follow-up to ensure the get well plan yielded the intended results. Neither of these governance control activities was fully effective in monitoring the program and ensuring corrective action was taken when needed. Specifically, although the governing entities reviewed the same New Core program artifacts we assessed, HUD’s reviews did not raise concerns regarding the management weaknesses we identified during the course of our review and did not require improvement plans for known deficiencies. For example, action to ensure New Core developed a schedule with a valid critical path as defined by best practices before moving forward was not taken despite the fact that concerns were raised in reports issued by the department’s Office of Inspector General and an independent validation and verification contractor. Furthermore, decisions made about the timing of control reviews limited the effectiveness of New Core governance. HUD combined the technical reviews for planning and readiness for release 1 and 2 of New Core and delayed control gates until nearly 2 weeks before deployment. This was a deviation from the status quo of conducting sequential control gate reviews that warranted a waiver from the department’s Office of the CIO. Department officials stated that the risk of combining reviews had been knowingly accepted and asserted there was no adverse impact. However, this in effect did not give technical reviewers the opportunity to provide input or recommend corrective action for implementation plans and requirements before the team had already executed activities against them, as the process was intended. In response to our draft report, the department also stated that it did not agree that the technical reviewers’ perspectives were the most fundamental purpose of the control reviews, but that the success of New Core falls on holding program managers accountable. While we agree that holding managers accountable is important, we maintain that the approach taken in combining the reviews for New Core was a deviation from the department’s established processes. Specifically, according to the department’s guidance, the project planning and management process is intended to involve progressive steps that help ensure proper management review and approval. Further, guidance on control reviews calls for approval gates to be held at each stage of a program’s life cycle. By not holding a distinct review at the end of the New Core planning, the department did not effectively ensure program managers received the independent review the guidance was intended to provide. Specifically, the technical reviewers were not positioned to formally validate and baseline the program’s planned cost, scope, schedule, and requirements or identify any deficiencies that needed to be addressed before managers proceeded to act upon those plans. Our prior work also has shown the importance of executive-level oversight and the role CIOs play as critical to the success of IT investments. More directly related to our prior work on financial management systems modernization efforts, we have emphasized that a partnership between executives is critical to ensuring that systems are effectively modernized. Specifically, our work has found the importance of a CFO in leading financial management efforts and the role of a CIO to ensure successful implementation of IT investments. Along with strong leadership, federal and HUD guidance call for coordination among stakeholders and the alignment of programs with other IT investments by identifying subject matter experts and ensuring that IT investments are composed of an efficient mix of programs that best utilized resources. HUD’s Deputy Secretary, CFO, and CIO, as well as the Executive Director and Deputy Director of New Core, provided executive-level oversight for the program and were involved in key decisions for the program. For example, the CFO, CIO, and Executive Director of the program approved the charter that, as of March 2015, confirmed the department’s plans to implement the 14 capabilities. These leaders worked to establish a program sponsor, business lead, and teams to manage each release, as well as identify key subject matter experts to be involved with activities such as testing and training. In addition, HUD’s Deputy Secretary was involved in weekly status meeting and also assisted with reprioritized funding for all IT investments in order to sustain adequate funding for the program. However, the effectiveness of the program’s executive-level oversight was limited in part by challenges HUD faced with sustaining leadership, coordinating among stakeholders, and ensuring alignment with other IT programs. Significant changes to key New Core leadership positions between 2013 and 2014 impacted the approach used in implementing the planned capabilities. After turnover occurred in the key positions of HUD Deputy Secretary, CIO, CFO, and program director, significant changes were made to New Core. For example, the key senior officials who originally assessed and evaluated New Core alternatives and made the decision to move forward with ARC for financial management shared services did not remain in those leadership positions to sustain the effort. As a result, instead of implementing all four capabilities at one time as planned, the new leaders opted to implement the capabilities through a series of releases. According to program documentation, this option had not been selected by the prior Deputy Secretary due to it being more costly and requiring a longer period of time to implement. In commenting on our draft report, HUD noted that after the change in leadership, there was a consensus to change the approach because advantages outweighed the risks. Critical decisions regarding the scope of New Core were not coordinated with important stakeholders in a timely manner. Of particular note, HUD’s acting Chief Procurement Officer reported that his office was not involved in the decision made by the Deputy Secretary at the start of New Core in 2013 to change procurement management system approaches and migrate to ARC’s procurement system. At that time, the acting Chief Procurement Officer was still working to finish customization of the new in-house procurement system the department had implemented during 2012. Additionally, although the need for a data warehouse had been established early in the program, HUD did not take action to ensure this capability was delivered in time to support the first four capabilities implemented. Specifically, New Core officials determined actions were needed to make alternative plans because the data warehouse would not be ready for the October 2015 release date as expected. Toward this end, the Office of the CIO also recognized the need to establish an enterprise data warehouse capability that would satisfy broader needs of the department and took initial steps to start the Enterprise Data Warehouse initiative. Because the department did not deliver that capability when intended, financial data continue to be accessed and stored in a legacy warehouse system that was expected to be replaced by New Core. While the department had other IT modernization efforts aimed at delivering budget formulation tools, it is unclear how or to what extent those efforts would be incorporated into or aligned with the New Core program’s capabilities for budget formulation. Plans were not made to ensure that New Core was aligned with other department IT modernization efforts delivering similar capabilities related to budget formulation. Specifically, at the same time New Core was implemented, budget formulation tools were also being built by other department offices. HUD’s Office of the CIO has also implemented a tool to support formulation of the department’s IT budget. Yet, program officials could not provide evidence that requirements or dependencies among these efforts had been evaluated. HUD’s Deputy CIO acknowledged in March 2016 that IT governance practices needed to be updated to reflect the challenges associated with shared services projects. He noted that lessons learned from New Core would be used to document tailoring guidance for shared service projects in the future. In addition, according to program officials, adequate time was not invested to assess whether New Core had achieved its identified benefits. This was in part due to the program’s focus on implementing the four capabilities by an established deadline. Concerning executive-level oversight, in February 2016 HUD officials noted in describing lessons learned that several leadership transitions at the initiation of the New Core program had resulted in a lack of strategic direction and consensus around decision-making. The department’s CIO also acknowledged that processes needed to improve executive-level oversight and decision-making and allow the department to avoid duplication in modernization efforts had not yet been fully implemented. Until HUD addresses weaknesses in IT governance practices and strengthens executive-level oversight for financial management systems modernization efforts, the department’s capacity to manage and control successor efforts may be limited. Over the past two decades, HUD has undertaken modernization efforts aimed at improving its financial management systems and ensuring that it can accurately and efficiently carry out financial functions. With New Core, the department transitioned 4 of 14 planned capabilities to shared service solutions. In doing so, the department added efficiencies and integrated systems that support the processing of financial management functions. However, the program ended further development efforts before delivering the remaining 10 planned capabilities. As a result, the department has been unable to follow through with its plans to replace a number of its legacy financial management systems through New Core and continues to maintain those systems while seeking other new initiatives to address aspects of the remaining capabilities. HUD’s efforts to modernize its financial management systems have been hindered by weaknesses in implementing key IT management practices. Specifically, the department did not fully define and plan the program by outlining the future operational state, establishing the scope and estimating the schedule and cost for all planned capabilities, or effectively managing requirements. While HUD’s senior leaders, including the CIO, ensured that IT governance processes were applied and the program received executive-level oversight, limitations existed with both. Specifically, the governance process was not fully effective in recognizing and addressing challenges as they arose, including those identified with the scope, schedule and costs of the program. Further, HUD faced challenges with sustaining leadership, coordinating among stakeholders, and aligning New Core with other IT modernization efforts. Going forward, it will be critical for the department to address these management and governance weaknesses in order to help ensure that the success of subsequent modernization efforts is not jeopardized. To address weaknesses in the department’s financial management systems modernization efforts, we recommend that the Secretary of HUD direct the Chief Financial Officer to work with the Chief Information Officer to take the following three actions with regard to managing subsequent initiatives: define a high-level depiction of the IT systems anticipated in the future state, a description of the operations that must be performed and who must perform them, and an explanation of where and how the operations are to be carried out; develop comprehensive plans for scope, schedule and cost; and ensure requirements are fully documented and traceable. We also recommend that the Secretary direct the Deputy Secretary to ensure that the Chief Information Officer takes action to improve IT governance control activities used for monitoring programs and identifying needed corrective actions, and strengthen investment oversight by improving coordination with stakeholders and alignment among IT modernization efforts. We received written comments on a draft of this report from HUD and Treasury. HUD’s comments are reprinted in appendix III. In its comments, HUD neither agreed nor disagreed with our recommendations, but noted that it plans to improve management practices and IT governance for future modernization efforts. Specifically, the department stated that it would continue to improve its practices for project planning, implementation, and monitoring. Related to New Core planned capabilities, HUD stated that all were not expected to be delivered at this time, particularly given funding constraints; instead, new initiatives would address additional capabilities for modernizing its financial management systems. The department stated that it considers the approaches taken for planning, schedule, and cost activities to be aligned with OMB’s guidance on dividing programs into smaller segments, such as phases and releases. The department also noted that New Core provided many lessons learned that are being incorporated into its IT governance and that review processes would be enhanced. The comments elaborated on the external entities that provided governance and leadership for the New Core program beyond the department’s internal structure. For example, HUD explained that it held regular briefings with ARC, the Department of the Treasury’s Office of Financial Innovation and Transformation, and OMB. While we support HUD improving its management practices and enhancing IT governance processes, we continue to stress the importance of taking action to implement our recommendations to ensure the success of subsequent initiatives aimed at modernizing the department’s financial management systems. This is particularly significant for the two initiatives under way that are intended to replace and decommission legacy systems that have been long-identified as at risk of failure, and have contributed to the misstatement of financial information. Furthermore, augmenting oversight through external entities, as noted in HUD’s comments, does not eliminate the need for the department to apply rigor and discipline in its IT management and governance. Treasury’s comments are reprinted in appendix IV. In its comments, the department noted its appreciation for HUD being the first cabinet-level agency to transition to its shared services provider. Further, Treasury stated that HUD had demonstrated a commitment to standardization and working collaboratively through challenges which had hindered previous modernization efforts. Treasury also stated that the migration had resulted in HUD reducing enterprise risks and costs, compliance with federal initiatives and mandates, standardization of information, and improvements in the timeliness of information available for decision- making. HUD and Treasury provided technical comments on the draft report, which we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Housing and Urban Development, the Secretary of the Treasury, 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) 512-6304 or melvinv@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 V. The explanatory statement accompanying the Consolidated and Further Continuing Appropriations Act, 2015 directed GAO to review New Core, the Department of Housing and Urban Development’s (HUD) financial management systems modernization effort. Our specific objectives for this review were to (1) determine the planned financial management systems capabilities implemented through New Core and (2) evaluate HUD’s implementation of key IT management practices applied to the program. To determine what financial management systems capabilities had been implemented through New Core, we reviewed artifacts such as the New Core Program Charter, New Core Implementation Plan, interagency agreements between HUD and ARC, and release scope statements, and identified 14 capabilities that were planned for delivery through the program. After determining that 4 capabilities had been implemented, we identified the features that were delivered and the features that had been planned for these capabilities by reviewing, for example, post- implementation reports and briefings, requirements and training plans, and HUD’s Fiscal Year 2015 Financial Management Systems Plan. More specifically, for each of the 4 capabilities—travel, time and attendance, core accounting, and procurement—we reviewed release-related documentation and compared the result of outcomes to the identified planned features. Further, we reviewed actions under way to address open issues and challenges HUD was managing after the implementation and how those related to planned features. In addition, to identify the systems that support HUD financial management functions, as well as the systems that were targeted for replacement with New Core, we reviewed documentation such as the department’s financial management systems plans for fiscal years 2014 and 2015. We also reviewed documentation regarding the department’s future modernization efforts, including the HUD IT Fund 2017 Summary Statement and Initiatives, preliminary planning documents, and briefings. To evaluate the program, we assessed the department’s implementation of key IT management practices in the areas of program definition, planning, requirements, and governance in order to compare the practices with standards and processes identified by the Project Management Institute (PMI), Institute of Electrical and Electronics Engineers, and federal guidance, including HUD policies and guidance and GAO’s guides for investment management, cost estimating, and schedule assessments. In the area of program definition, we reviewed documentation including the New Core Implementation Plan and the New Core Program Charters, and New Core Program Management Plans for each release, and briefings to determine whether these artifacts were developed in adherence with key practices and elements for fully defining a program as called for in PMI program management standards, concept of operations guidance published by the Institute of Electrical and Electronics Engineers, and our previous reports on IT modernization efforts. We also reviewed briefing slides documenting recommendations and results of a study HUD conducted to plan for a vision and roadmap for New Core to determine the extent to which the department established a comprehensive concept of operations and roadmap for the program. For program planning, we reviewed New Core documentation including work breakdown structures, schedules, and cost estimates to determine the extent to which these artifacts were consistent with key practices identified by federal guidance and industry. Specifically, we assessed whether the work breakdown structures defined in detail all of the work activities and scope necessary to deliver the planned 14 capabilities and compared it to key practices identified by PMI. In addition, using GAO’s Schedule Assessment Guide, we assessed whether schedules identified when and for how long work would occur as well as whether a valid critical path had been defined. Finally, we assessed whether New Core developed reliable cost estimates by using key practices outlined in GAO’s Cost Estimation Guide and assessed whether those estimates were up to date. In regard to requirements management, we reviewed New Core’s process for defining and tracing requirements to determine the extent to which these practices were consistent with practices promulgated by PMI. Specifically, we reviewed and assessed the 15 requirements matrixes developed for New Core to determine if requirements could be traced back to business needs, criteria used for evaluating and accepting requirements, and design and testing documentation. We also ascertained if matrixes identified specific attributes for the established requirements, such as disposition of the requirements or any associated testing that was performed. To assess HUD’s IT governance, we reviewed documentation produced from New Core governance reviews and program artifacts such as the charter, program briefings, and associated governance and program team meeting minutes and compared them to relevant HUD governance policies outlined in its project planning and management framework and health assessment guide as well as to governance practices in our IT investment management guide. Additionally, we compared New Core executive-level oversight with criteria in our previous reports and guidance on oversight. For each objective, we interviewed senior officials from HUD’s headquarters in Washington, D.C., including HUD’s Deputy Secretary, Chief Financial Officer, Chief Information Officer, and Chief Procurement Officer. Specific to the New Core program, we interviewed key officials, including the Executive Director, Deputy Director, and business and IT program managers. Additionally, we conducted a site visit to Treasury’s Administrative Resource Center in Parkersburg, West Virginia, and interviewed cognizant officials, including the Director of the Office of Shared Services, program manager, and employees who had been detailed to work at HUD, such as the release and testing managers. We determined that information provided by the department, such as work breakdown structures, schedules, cost estimates, and requirements traceability matrixes, was sufficiently reliable for the purposes of our review. To arrive at this assessment, we conducted reliability testing by comparing information with other program documentation and statements from relevant department officials to identify discrepancies. Where appropriate, GAO schedule and cost estimation experts also assessed the reliability of the data and artifacts we reviewed. We conducted this performance audit from February 2015 to July 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. As of July 2016, 46 systems were in place to support the Department of Housing and Urban Development’s (HUD) financial management functions, as identified in table 3. Of these systems, 8 were implemented as part of the New Core program. Specifically, HUD gained access to 7 systems operated by ARC. The department also implemented the New Core Interface Solution to ensure that its legacy systems could communicate with the shared service systems. Additionally, 13 of the 46 systems that were targeted for replacement as part of New Core, but have not yet been decommissioned or fully replaced are also identified. In addition to the contact above, Teresa M. Yost (Assistant Director), Donald A. Baca, Kami J. Brown, Christopher G. Businsky, Juana S. Collymore, Amanda C. Gill, Michael S. LaForge, Jason T. Lee, Lee A. McCracken, Sukhjoot Singh, and Carroll M. Warfield, Jr. made key contributions to this report. | HUD is responsible for managing and reporting on the nearly $45 billion it spends annually for housing programs. The department has reported its reliance on outdated and costly-to-maintain systems used for financial management functions. In 2013, HUD initiated a modernization program called New Core, which involved migrating financial management capabilities to a federal shared service provider, with expected benefits to include reducing legacy systems costs, improving the data, and resolving weaknesses in its financial management systems. After spending about $58 million over 3 years, HUD decided to end New Core development in April 2016. Congress included a provision for GAO to review the New Core program. This review (1) determined the financial management systems capabilities implemented through New Core and (2) evaluated HUD's implementation of key IT management practices applied to the program. GAO reviewed New Core plans and documentation to assess the capabilities delivered, compared HUD's implementation to recognized IT practices, and interviewed relevant agency officials. In October 2015, as part of its planned New Core financial management systems modernization efforts, the Department of Housing and Urban Development (HUD) completed transitioning 4 of 14 capabilities to shared service solutions. The implemented capabilities were for managing employee travel and relocation; recording time and attendance; performing core accounting functions such as general ledger accounting, producing financial reports, and processing salaries and expenses transactions; and managing procurements. As a result, the department reported that it fully replaced 4 systems, gained access to 7 shared service solutions, streamlined administrative services, and added efficiencies to the processing of financial management functions. For example, the systems used for core accounting and procurement were integrated to support the timely recording of commitments and obligations. However, while the 4 capabilities were transitioned as scheduled, none fully met the department's requirements or expectations. For instance, the department continues to execute programmatic transactions using costly and inefficient legacy systems that were expected to be replaced with New Core. HUD has begun other initiatives to deliver financial management systems capabilities and replace legacy systems that were not addressed under New Core. Detailed plans for these efforts are in development. HUD's efforts to implement planned capabilities for New Core demonstrated weaknesses in the department's information technology (IT) management and governance practices. Key management practices include fully defining what a program is intended to accomplish; developing the program scope, schedule, and costs; and managing requirements. However, HUD's management of New Core had weaknesses in these areas. For example, the department did not: outline operations for all planned capabilities or create a roadmap for transitioning to the desired modernized environment; create comprehensive scope, schedule, and cost documentation; and manage requirements to ensure they were fully documented and traceable from business needs to system implementation. Effective governance and executive-level oversight also help ensure programs achieve expected results. Specifically, establishing governance control reviews and providing oversight through, among other things, sustained leadership and coordination among stakeholders can strengthen modernization efforts. However, during the effort to implement New Core, HUD's IT governance and oversight were not fully effective. For example, governance reviews did not raise concerns or require improvement plans for management weaknesses identified, such as the lack of a schedule with a valid critical path. Moreover, executive-level oversight did not ensure effective coordination among stakeholders. With any further pursuit of new initiatives to modernize its financial management systems, it is critical that the department consistently apply key IT management practices and effective governance to ensure it does not jeopardize the success of these efforts. GAO is recommending that HUD address weaknesses in key IT management practices for future financial systems modernization efforts and take action to improve its governance and strengthen investment oversight. HUD neither agreed nor disagreed with GAO's recommendations, but stated it would improve management practices and governance for future efforts. |
Passenger screening is a process by which screeners inspect individuals and their property to deter and prevent an act of violence or air piracy, such as the carrying of any unauthorized explosive, incendiary, weapon, or other prohibited item on board an aircraft or into a sterile area. Screeners inspect individuals for prohibited items at designated screening locations. TSA developed standard operating procedures for screening passengers at airport checkpoints. Primary screening is conducted on all airline passengers before they enter the sterile area of an airport and involves passengers walking through a metal detector, and carry-on items being subjected to X-ray screening. Passengers who alarm the walk-through metal detector or are designated as selectees—that is, passengers selected for additional screening—must then undergo secondary screening, as well as passengers whose carry-on items have been identified by the X-ray machine as potentially containing prohibited items. Secondary screening involves additional means for screening passengers, such as by hand wand; physical pat down; or other screening methods such as the AIT. Within DHS, both the Science and Technology Directorate (S&T) and TSA have responsibilities for researching, developing, and testing and evaluating new technologies, including airport checkpoint screening technologies. Specifically, S&T is responsible for the basic and applied research and advanced development of new technologies, while TSA, through its Passenger Screening Program (PSP), identifies the need for new checkpoint screening technologies and provides input to S&T during the research and development of new technologies, which TSA then procures and deploys. Because S&T and TSA share responsibilities related to the research, development, test and evaluation (RDT&E), procurement, and deployment of checkpoint screening technologies, the two organizations must coordinate with each other and external stakeholders, such as airport operators and technology vendors. Air cargo can be shipped in various forms, including unit load devices (ULD) that allow many packages to be consolidated into one container or pallet; wooden crates; or individually wrapped/boxed pieces, known as loose or break-bulk cargo. Participants in the air cargo shipping process include shippers, such as manufacturers; freight forwarders, who consolidate cargo from shippers and take it to air carriers for transport; air cargo handling agents, who process and load cargo onto aircraft on behalf of air carriers; and air carriers that load and transport cargo. TSA’s responsibilities include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo and domestic freight forwarders. Airport perimeter and access control security is intended to prevent unauthorized access into secured airport areas, either from outside the airport complex or from within. Airport operators generally have direct day-to-day responsibility for maintaining and improving perimeter and access control security, as well as implementing measures to reduce worker risk. However, TSA has primary responsibility for establishing and implementing measures to improve security operations at U.S. commercial airports—that is, TSA-regulated airports—including overseeing airport operator efforts to maintain perimeter and access control security. Airport workers may access sterile areas through TSA security checkpoints or through other access points that are secured by the airport operator. The airport operator is also responsible, in accordance with its security program, for securing access to secured airport areas where passengers are not permitted. Airport methods used to control access vary, but all access controls must meet minimum performance standards in accordance with TSA requirements. In response to the December 2009 attempted terrorist attack, TSA has revised its procurement and deployment strategy for the AIT, increasing the number of AITs it plans to procure and deploy. In contrast with its prior strategy, the agency now plans to acquire and deploy 1,800 AITs (instead of the 878 units it had previously planned to acquire) and to use them as a primary screening measure where feasible rather than solely as a secondary screening measure. According to a senior TSA official, the agency is taking these actions in response to the Christmas Day 2009 terrorist incident. These officials stated that they anticipate the AIT will provide enhanced security benefits compared to walk-through metal detectors, such as enhanced detection capabilities for identifying nonmetallic threat objects and liquids. TSA officials also stated that the AIT offers greater efficiencies because it allows TSA to more rigorously screen a greater number of passengers in a shorter amount of time while providing a detection capability equivalent to a pat down. For example, the AIT requires about 20 seconds to produce and interpret a passenger’s image as compared with 2 minutes required for a physical pat down. A senior official also stated that TSA intends to continue to offer an alternative but comparable screening method, such as a physical pat down, for passengers who prefer not to be screened using the AIT. The AIT produces an image of a passenger’s body that a screener interprets. The image identifies objects, or anomalies, on the outside of the physical body but does not reveal items beneath the surface of the skin, such as implants. TSA plans to procure two types of AIT units: one type uses millimeter-wave and the other type uses backscatter X-ray technology. Millimeter-wave technology beams millimeter-wave radio- frequency energy over the body’s surface at high speed from two antennas simultaneously as they rotate around the body. The energy reflected back from the body or other objects on the body is used to construct a three- dimensional image. Millimeter wave technology produces an image that resembles a fuzzy photo negative. Backscatter X-ray technology uses a low-level X-ray to create a two-sided image of the person. Backscatter technology produces an image that resembles a chalk etching. As of February 24, 2010, according to a senior TSA official, the agency has deployed 40 of the millimeter-wave AITs and procured 150 backscatter X- ray units in fiscal year 2009. In early March 2010, TSA initiated the deployment of these backscatter units starting with two airports, Logan International Airport in Boston, Massachusetts, and Chicago O’Hare International Airport in Des Plaines, Illinois. TSA officials stated that they do not expect these units to be fully operational, however, until the second or third week of March due to time needed to hire and train additional personnel. TSA estimates that the remaining backscatter X-ray units will be installed at airports by the end of calendar year 2010. In addition, TSA plans to procure an additional 300 AIT units in fiscal year 2010, some of which it plans to purchase with funds from the American Recovery and Reinvestment Act of 2009. In fiscal year 2011, TSA plans to procure 503 AIT units. TSA projects that a total of about 1,000 AIT systems will be deployed to airports by the end of December 2011. In fiscal year 2014 TSA plans to reach full operating capacity, having procured a total of 1,800 units and deployed them to 60 percent of the checkpoint lanes at Category X, I, and II airports. The current projected full operating capacity of 1,800 machines represents a more than two-fold increase from 878 units that TSA had previously planned. TSA officials stated that the cost of the AIT is about $170,000 per unit, excluding training, installation, and maintenance costs. In addition, in the fiscal year 2011 President’s budget submission, TSA has requested $218.9 million for 3,550 additional full-time equivalents (FTE) to help staff the AITs deployed in that time frame. From 2012 through 2014, as TSA deploys additional units to reach full operating capacity, additional staff will be needed to operate these units; such staffing costs will recur on an annual basis. TSA officials told us that three FTEs are needed to operate each unit. Because the AIT presents a full body image of a person during the screening process, concerns have been expressed that the image is an invasion of privacy. According to TSA, to protect passenger privacy and ensure anonymity, strict privacy safeguards are built into the procedures for use of the AIT. For example, the officer who assists the passenger does not see the image that the technology produces, and the officer who views the image is remotely located in a secure resolution room and does not see the passenger. Officers evaluating images are not permitted to take cameras, cell phones, or photo-enabled devices into the resolution room. To further protect passengers’ privacy, ways have been introduced to blur the passengers’ images. The millimeter-wave technology blurs all facial features, and the backscatter X-ray technology has an algorithm applied to the entire image to protect privacy. Further, TSA has stated that the AIT’s capability to store, print, transmit, or save the image will be disabled at the factory before the machines are delivered to airports, and each image is automatically deleted from the system after it is cleared by the remotely located security officer. Once the remotely located officer determines that threat items are not present, that officer communicates wirelessly to the officer assisting the passenger. The passenger may then continue through the security process. Potential threat items are resolved through a directed physical pat down before the passenger is cleared to enter the sterile area. In addition to privacy concerns, the AITs are large machines, and adding them to the checkpoint areas will require additional space, especially since the operators are physically segregated from the checkpoint to help ensure passenger privacy. Adding a significant number of additional AITs to the existing airport infrastructure could impose additional challenges on airport operators. In October 2009, we reported that TSA had relied on a screening technology in day-to-day airport operations that had not been proven to meet its functional requirements through operational testing and evaluation, contrary to TSA’s acquisition guidance and a knowledge-based acquisition approach. We also reported that TSA had not operationally tested the AITs at the time of our review, and we recommended that TSA operationally test and evaluate technologies prior to deploying them. In commenting on our report, TSA agreed with this recommendation. Although TSA does not yet have a written policy requiring operational testing prior to deployment, a senior TSA official stated that TSA has made efforts to strengthen its operational test and evaluation process and that TSA is now complying with DHS’s current acquisition directive that requires operational testing and evaluation be completed prior to deployment. According to officials, TSA is now requiring that AIT are to successfully complete both laboratory tests and operational tests prior to deployment. As we previously reported, TSA’s experience with the explosives trace portal (ETP), or “puffers,” demonstrates the importance of testing and evaluation in an operational environment. The ETP detects traces of explosives on a passenger by using puffs of air to dislodge particles from the passenger’s body and clothing that the machine analyzes for traces of explosives. TSA procured 207 ETPs and in 2006 deployed 101 ETPs to 36 airports, the first deployment of a checkpoint technology initiated by the agency. TSA deployed the ETPs even though tests conducted during 2004 and 2005 on earlier ETP models suggested that they did not demonstrate reliable performance. Furthermore, the ETP models that were subsequently deployed were not tested to prove their effective performance in an operational environment, contrary to TSA’s acquisition guidance, which recommends such testing. As a result, TSA procured and deployed ETPs without assurance that they would perform as intended in an operational environment. TSA officials stated that they deployed the machines without resolving these issues to respond quickly to the threat of suicide bombers. In June 2006 TSA halted further deployment of the ETP because of performance, maintenance, and installation issues. According to a senior TSA official, as of December 31, 2009, all but 9 ETPs have been withdrawn from airports, and 18 ETPs remain in inventory. Following the completion of our review, TSA officials told us that the AIT successfully completed operational testing at the end of calendar year 2009 before its deployment was fully initiated. The official also stated that the AIT test results were provided and reviewed by DHS’s Acquisition Review Board prior to the board approving the AIT deployment. According to TSA’s threat assessment, terrorists have various techniques for concealing explosives on their persons, as was evident in Mr. Abdulmutallab’s attempted attack on December 25, when he concealed an explosive in his underwear. While TSA officials stated that the laboratory and operational testing of the AIT included placing explosive material in different locations on the body, it remains unclear whether the AIT would have been able to detect the weapon Mr. Abdulmutallab used in his attempted attack based on the preliminary TSA information we have received. We are in the process of reviewing these operational tests to assess the AIT’s detection capabilities and to verify that TSA successfully completed operational testing of the AIT. In addition, while TSA officials stated that the AITs performed as well as physical pat downs in operational testing, TSA officials also reported they have not conducted a cost-benefit analysis of the original or revised AIT deployment strategy. We reported in October 2009 that TSA had not conducted a cost-benefit analysis of checkpoint technologies being researched and developed, procured, and deployed and recommended that it do so. DHS concurred with our recommendation. Cost-benefit analyses are important because they help decision makers determine which protective measures, for instance, investments in technologies or in other security programs, will provide the greatest mitigation of risk for the resources that are available. TSA officials stated that a cost-benefit analysis was not completed for the AIT because one is not required under DHS acquisition guidance. However, these officials reported that they had completed, earlier in the program, a life-cycle cost estimate and an analysis of alternatives for the AIT as required by DHS, which, according to agency officials, provides equivalent information to a cost-benefit analysis. We are in the process of reviewing the alternatives analysis that was completed in 2008 and life-cycle cost estimates which TSA provided to us on March 12, 2010, to determine the extent to which these estimates reflect the additional costs to staff these units. We estimate that, based on TSA’s fiscal year 2011 budget request and current AIT deployment strategy, increases in staffing costs due to doubling the number of AITs that TSA plans to deploy could add up to $2.4 billion over the expected service life of this investment. While we recognize that TSA is taking action to address a vulnerability of the passenger checkpoint exposed by the December 25, 2009, attempted attack, we continue to believe that, given TSA’s expanded deployment strategy, conducting a cost-benefit analysis of TSA’s AIT deployment is important. An updated cost-benefit analysis would help inform TSA’s judgment about the optimal deployment strategy for the AITs, as well as provide information to inform the best path forward, considering all elements of the screening system, for addressing the vulnerability identified by this attempted terrorist attack. As we previously reported in March 2009, based on preliminary observations from ongoing work, TSA has taken several key steps to meet the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010. Among the steps that TSA has taken to address domestic air cargo screening, the agency has revised its security programs to require more cargo to be screened; created the Certified Cargo Screening Program (CCSP), a voluntary program to allow screening to take place earlier in the shipping process and at various points in the air cargo supply chain—including before the cargo is consolidated; issued an interim final rule, effective November 16, 2009, that, among other things, codifies the statutory air cargo screening requirements of the 9/11 Commission Act and establishes requirements for entities participating in the CCSP; established a technology pilot progra to operationally test explosives trace detection (ETD) and X-ray technology; and expanded its explosives detection canine program. m While these steps are encouraging, TSA faces several challenges in meeting the air cargo screening mandate. First, although industry participation in the CCSP is vital to TSA’s approach to move screening responsibilities across the U.S. supply chain, the voluntary nature of the program may make it difficult to attract program participants needed to screen the required levels of domestic cargo. Second, while TSA has taken steps to test technologies for screening and securing air cargo, it has not yet completed assessments of the various technologies it plans to allow air carriers and program participants to use in meeting the August 2010 screening mandate. According to TSA officials, several X-ray and explosives detection systems (EDS) technologies successfully passed laboratory testing, and TSA placed them on a December 2009 list of qualified products that industry can use to screen cargo after August 2010. TSA plans to conduct field testing and evaluation of these technologies in an operational environment. In addition, TSA plans to begin laboratory testing for ETD, Electronic Metal Detection (EMD), and additional X-ray technologies in early 2010, and anticipates including these technologies on the list of qualified products the industry can use by the summer of 2010, before proceeding with operational testing. As we previously reported, based on preliminary observations from ongoing work, X-ray and ETD technologies, which have not yet been fully tested for effectiveness, are currently being used by industry participants to meet air cargo screening requirements. We are examining this issue in more detail as part of our ongoing review of TSA’s air cargo security efforts, to be issued later this year. Third, TSA faces challenges overseeing compliance with the CCSP due to the size of its current Transportation Security Inspector (TSI) workforce. Under the CCSP, in addition to performing inspections of air carriers and freight forwarders, TSIs are to also perform compliance inspections of new regulated entities that voluntarily become certified cargo screening facilities (CCSF), as well as conduct additional CCSF inspections of existing freight forwarders. TSA officials have stated that the agency is evaluating the required number of TSIs to fully implement and oversee the program. Completing its staffing study may help TSA determine whether it has the necessary staffing resources to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure air cargo. As part of our ongoing work, we are exploring to what extent TSA is undertaking a staffing study. Finally, TSA has taken some steps to meet the screening mandate as it applies to inbound cargo but does not expect to achieve 100 percent screening of inbound cargo by the August 2010 deadline. TSA revised its requirements to, in general, require carriers to screen 50 percent of nonexempt inbound cargo. TSA also began harmonization of security standards with other nations through bilateral and quadrilateral discussions. In addition, TSA continues to work with Customs and Border Protection (CBP) to leverage an existing CBP system to identify and target high-risk air cargo. However, TSA does not expect to meet the mandated 100 percent screening level by August 2010. This is due, in part, to challenges TSA faces in harmonizing the agency’s air cargo security standards with those of other nations. Moreover, TSA’s international inspection resources are limited. We will continue to explore these issues as part of our ongoing review of TSA’s air cargo security efforts, to be issued later this year. In our September 2009 report on airport security, we reported that TSA has implemented a variety of programs and protective actions to strengthen the security of commercial airports. For example, in March 2007, TSA implemented a random worker screening program—the Aviation Direct Access Screening Program (ADASP)—nationwide to enforce access procedures, such as ensuring that workers do not possess unauthorized items when entering secured areas. In addition, TSA has expanded requirements for background checks and for the population of individuals who are subject to these checks, and has established a statutorily directed pilot program to assess airport security technology. As we reported in September 2009, while TSA has taken numerous steps to enhance airport security, it continues to face challenges in several areas, such as assessing risk, evaluating worker screening methods, addressing airport technology needs, and developing a unified national strategy for airport security. For example, while TSA has taken steps to assess risk related to airport security, it has not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS’s National Infrastructure Protection Plan. To address these issues, we recommended, among other things, that TSA develop a comprehensive risk assessment of airport security and milestones for its completion, and evaluate whether the current approach to conducting vulnerability assessments appropriately assesses vulnerabilities. DHS concurred with these recommendations and stated that TSA is taking actions to implement them. Our September 2009 report also reported the results of TSA efforts to help identify the potential costs and benefits of 100 percent worker screening and other worker screening methods. In July 2009 TSA issued a final report on the results and concluded that random screening is a more cost- effective approach because it appears “roughly” as effective in identifying contraband items at less cost than 100 percent worker screening. However, the report also identified limitations in the design and evaluation of the program and in the estimation of costs, such as the limited number of participating airports, the limited evaluation of certain screening techniques, the approximate nature of the cost estimates, and the limited amount of information available regarding operational effects and other costs. Given the significance of these limitations, we reported in September 2009 that it is unclear whether random worker screening is more or less cost effective than 100 percent worker screening. In addition, TSA did not document key aspects of the pilot’s design, methodology, and evaluation, such as a data analysis plan, limiting the usefulness of these efforts. To address this, we recommended that TSA ensure that future airport security pilot program evaluation efforts include a well-developed and well-documented evaluation plan, to which DHS concurred. Moreover, although TSA has taken steps to develop biometric worker credentialing, it is unclear to what extent TSA plans to address statutory requirements regarding biometric technology, such as developing or requiring biometric access controls at airports, establishing comprehensive standards, and determining the best way to incorporate these decisions into airports’ existing systems. To address this issue, we have recommended that TSA develop milestones for meeting statutory requirements for, among other things, performance standards for biometric airport access control systems. DHS concurred with this recommendation. Finally, 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 that incorporates key characteristics of effective security strategies, such as measurable goals and priorities, to which DHS concurred and stated that TSA is taking action to implement it. As we discussed in our October 2009 report, TSA and the DHS Science and Technology Directorate (S&T) are pursuing an effort—known as Project Newton—which uses computer modeling to determine the effects of explosives on aircraft and develop new requirements to respond to emerging threats from explosives. Specifically, TSA and S&T are reviewing the scientific basis of their current detection standards for explosives detection technologies to screen passengers, carry-on items, and checked baggage. As part of this work, TSA and S&T are conducting studies to update their understanding of the effects that explosives may have on aircraft, such as the consequences of detonating explosives on board an in-flight aircraft. Senior TSA and DHS S&T officials stated that the two agencies decided to initiate this review because they could not fully identify or validate the scientific support requiring explosives detection technologies to identify increasingly smaller amounts of some explosives over time as required by TSA policy. Officials stated that they used the best available information to originally develop detection standards for explosives detection technologies. According to these officials, TSA’s understanding of how explosives affect aircraft has largely been based on data obtained from live-fire explosive tests on aircraft hulls at ground level. Officials further stated that due to the expense and complexity of live-fire tests, the Federal Aviation Administration, TSA, and DHS collectively have conducted only a limited number of tests on retired aircraft, which limited the amount of data available for analysis. As part of this ongoing review, TSA and S&T are simulating the complex dynamics of explosive blast effects on an in-flight aircraft by using a computer model based on advanced software developed by the national laboratories. TSA believes that the computer model will be able to accurately simulate hundreds of explosives tests by simulating the effects that explosives will have when placed in different locations within various aircraft models. As discussed in our October 2009 report, TSA and S&T officials expect that the results of this work will provide a much fuller understanding of the explosive detection requirements and the threat posed by various amounts of different explosives, and will use this information to determine whether any modifications to existing detection standards should be made moving forward. We are currently reviewing Project Newton and will report on it at a later date. Madame Chairwoman, that concludes my statement and I would be happy to answer any questions. For additional information about this statement, please contact Stephen M. Lord at (202) 512-4379 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. In addition to the contact named above, staff who made key contributions to this statement were E. Anne Laffoon and Steve D. Morris, Assistant Directors; Nabajyoti Barkakati, Carissa Bryant, Frances Cook, Joseph E. Dewechter, Amy Frazier, Barbara Guffy, David K. Hooper, Richard B. Hung, Lori Kmetz, Linda S. Miller, Timothy M. Persons, Yanina Golburt Samuels, Emily Suarez-Harris, and Rebecca Kuhlmann Taylor. 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 highlighted the importance of detecting improvised explosive devices on passengers. This testimony focuses on (1) the Transportation Security Administration's (TSA) efforts to procure and deploy advanced imaging technology (AIT), and related challenges; and (2) TSA's efforts to strengthen screening procedures and technology in other areas of aviation security, and related challenges. This testimony is based on related products GAO issued from March 2009 through January 2010, selected updates conducted from December 2009 through March 2010 on the AIT procurement, and ongoing work on air cargo security. For the ongoing work and updates, GAO obtained information from the Department of Homeland Security (DHS) and TSA and interviewed senior TSA officials regarding air cargo security and the procurement, deployment, operational testing, and assessment of costs and benefits of the AIT. In response to the December 25, 2009, attempted attack on Northwest flight 253, TSA revised the AIT procurement and deployment strategy, increasing the planned deployment of AITs from 878 to 1,800 units and using AITs as a primary--instead of a secondary--screening measure where feasible; however, challenges remain. In October 2009, GAO reported on the challenges TSA faced deploying new technologies such as the explosives trace portal (ETP) without fully testing them in an operational environment, and recommended such testing prior to future deployments. TSA officials concurred and stated that, unlike the ETP, operational testing for the AIT was successfully completed late in 2009 before its deployment was fully initiated. While officials said AITs performed as well as physical pat downs in operational tests, it remains unclear whether the AIT would have detected the weapon used in the December 2009 incident based on the preliminary information GAO has received. GAO is verifying that TSA successfully completed operational testing of the AIT. In October 2009, GAO also recommended that TSA complete cost-benefit analyses for new passenger screening technologies. While TSA conducted a life-cycle cost estimate and an alternatives analysis for the AIT, it reported that it has not conducted a cost-benefit analysis of the original deployment strategy or the revised AIT deployment strategy, which proposes a more than twofold increase in the number of machines to be procured. GAO estimates increases in staffing costs alone due to doubling the number of AITs that TSA plans to deploy could add up to $2.4 billion over its expected service life. While GAO recognizes that TSA is attempting to address a vulnerability exposed by the December 2009 attempted attack, a cost-benefit analysis is important as it would help inform TSA's judgment about the optimal deployment strategy for the AITs, and how best to address this vulnerability considering all elements of the screening system. TSA has also taken actions towards strengthening other areas of aviation security but continues to face challenges. For example, TSA has taken steps to meet the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010, including developing a program to share screening responsibilities across the air cargo supply chain. However, as GAO reported in March 2009, a number of challenges to this effort exist, including attracting participants to the TSA screening program, completing technology assessments, and overseeing additional entities that it expects to participate in the program. GAO is exploring these issues as part of an ongoing review of TSA's air cargo security program which GAO plans to issue later this year. Further, while TSA has taken a variety of actions to strengthen the security of commercial airports, GAO reported in September 2009 that TSA continues to face challenges in several areas, such as assessing risk and evaluating worker screening methods. In September 2009, GAO also recommended that TSA develop a national strategy to guide stakeholder efforts to strengthen airport perimeter and access control security, to which DHS concurred. |
According to the Institute of Medicine, health care delivery in the United States has long-standing problems with medical errors and inefficiencies that increase health care costs. The U.S. health care delivery system is an information-intensive industry that is complex and highly fragmented, with estimated spending of $1.7 trillion in 2003. Hence, the uses of IT—in delivering clinical care, performing administrative functions, and supporting the public health infrastructure—have the potential to yield both cost savings and improvements in the care itself. Information technologies such as electronic health records (EHR) have been shown to save money and reduce medical errors. IT standards, including data standards, enable the interoperability and portability of systems within and across organizations. Many different standards are required to develop interoperable health information systems. This reflects the complex nature of health care delivery in the United States. Vocabulary standards, which provide common definitions and codes for medical terms and determine how information will be documented for diagnoses and procedures, are an important type of data standard. These standards are intended to lead to consistent descriptions of a patient’s medical condition by all practitioners. The use of common terminology helps in the clinical care delivery process, enables consistent data analysis from organization to organization, and facilitates transmission of information. Without such standards, the terms used to describe the same diagnoses and procedures sometimes vary. For example, the condition known as hepatitis may also be described as a liver inflammation. The use of different terms to indicate the same condition or treatment complicates retrieval and reduces the reliability and consistency of data. In addition to vocabulary standards, messaging standards are important because they provide for the uniform and predictable electronic exchange of data by establishing the order and sequence of data during transmission. These standards dictate the segments in a specific medical transmission. For example, they might require the first segment to include the patient’s name, hospital number, and birth date. A series of subsequent segments might transmit the results of a complete blood count, dictating one result (e.g., iron content) per segment. Messaging standards can be adopted to enable intelligible communication between organizations via the Internet or some other communications pathway. Without them, the interoperability of federal agencies’ systems may be limited and may limit the exchange of data that are available for information sharing. In addition to vocabulary and messaging standards, there is also the need for a high degree of security and confidentiality to protect medical information from unauthorized disclosure. The need for heath care standards has been recognized for a number of years. The development, approval, and adoption of standards for health IT is an ongoing, long-term process and includes federally mandated standards requirements and a voluntary consensus process within a market-based health care industry. The use of some standards, such as those defined by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Medicare Prescription Drug and Modernization Act of 2003, is mandated by the federal government, while others are defined by standards development organizations such as the American Association of Medical Instrumentation and the National Council for Prescription Drug Programs. HHS identifies and researches standards defined by the organizations that develop them, and determines which of the approved ones are appropriate for use in federal agencies’ health IT systems. In August 1996, Congress recognized the need for standards to improve the Medicare and Medicaid programs in particular and the efficiency and effectiveness of the health care system in general. It passed HIPAA, which calls for the industry to control the distribution and exchange of health care data and begin to adopt electronic data exchange standards to uniformly and securely exchange patient information. According to the National Committee on Vital and Health Statistics (NCVHS), significant progress has occurred on several HIPAA standards, however, the full economic benefits of administrative simplification will be realized only when all of them are in place. In 2000 and 2001, the NCVHS reported on the need for standards, highlighting the need for uniform standards for patient medical record information, and outlining a strategy that included their development and use. The Institute of Medicine and others had also reported on the lack of national standards for the coding and classification of clinical and other health care data, and for the secure transmission and sharing of such data. In 2001, the Office of Management and Budget created the Consolidated Health Informatics (CHI) initiative as one of its e-government projects to facilitate the adoption of data standards for, among others, health care systems within the federal government. The CHI initiative was an interagency work group led by HHS and composed of representatives from the Departments of Defense and Veterans Affairs, as well as other agencies. Recognizing the need to incorporate standards across federal health care systems, the group announced in March 2003 the adoption of 5, and in May 2004 the adoption of another 15. Once federal agencies adopted the recommended standards, they were expected to incorporate them into their architectures and build systems accordingly. This expectation applied to all new systems acquisition and development projects. In April 2004, the President issued an executive order that called for the establishment of a National Coordinator for Health IT and the issuance of a strategic plan to guide the nationwide implementation of interoperable health information systems. The National Coordinator for Health IT was appointed in May 2004; in July 2004, HHS released a framework for strategic action—the first step toward a national strategy. The framework defines goals and strategies that are to be implemented in three phases. Phase I focuses on the development of market institutions to lower the risk of health IT procurement, phase II involves investment in clinical management tools and capabilities, and phase III supports the transition of the market to robust quality and performance accountability. The framework includes a commitment to standards and reiterates that a key component of progress towards interoperable health information systems is the development of technically sound interoperability standards. In May 2003, we reported that federal agencies recognized the need for health care standards and were making efforts to strengthen and increase their use. However, while they had made progress in defining standards, the identification and implementation of data standards necessary to support interoperability were incomplete across the health care sector. First, agencies lacked mechanisms that could coordinate their various efforts so as to accelerate the completion of standards development and ensure consensus among stakeholders. The process of developing health care data standards involves many diverse entities, such as individual and group practices, software developers, domain-specific professional associations, and allied health services. This fragmentation slowed the dissemination and adoption of standards by making it difficult to convene all of the relevant stakeholders and subject matter experts in standards development meetings and to reach consensus within a reasonable period of time. Second, not all of the federal government’s standard setting initiatives had milestones associated with efforts to define and implement standards. For example, while the CHI initiative—the primary initiative to establish standards for federal health programs—had announced several standards and implementation requirements for health care information exchange, it had not yet established milestones for future announcements. Finally, there was no mechanism to monitor the implementation of standards throughout the health care industry. NCVHS had reported on a need for a mechanism, such as compliance testing, to ensure that health care standards were uniformly adopted as part of a national strategy, but without an implementation mechanism and leadership at the national level, problems associated with systems’ incompatibility and lack of interoperability would persist throughout the different levels of government and the private sector and, consequently, throughout the health care sector. We stated that until these challenges were addressed, agencies risked promulgating piecemeal and disparate systems unable to exchange data with each other when needed, and that this could hinder the prompt and accurate detection of public health threats. We recommended that the Secretary of HHS define activities for ensuring that the various standards-setting organizations coordinate their efforts and reach further consensus on the definition and use of standards; establish milestones for defining and implementing standards; and create a mechanism to monitor the implementation of standards through the health care industry. Following up on our recommendations, we testified in July 2004 on HHS’s efforts to identify applicable standards throughout the health care industry and across federal health care programs. Progress was continuing with the establishment of the National Coordinator for Health IT, who, among other things, assumed federal leadership to expedite the standards development process in order to accelerate the use of EHRs. The Coordinator also assumed responsibility for identifying standards for federal health programs as part of the CHI initiative. While plans for the CHI initiative called for it to be incorporated into HHS’s Federal Health Architecture by September 2004, many issues—such as coordination of the various standards-setting efforts and implementation of the standards that had been identified—were still works in progress. We reiterated our conclusions that unless these standards were more fully implemented, federal agencies and others throughout the health care industry could not ensure that their systems would be capable of exchanging data with other systems when needed. Further, we concluded that as federal health IT initiatives moved forward, it would be essential to have continued leadership, clear direction, measurable goals, and mechanisms to monitor progress. In June of this year, we issued a report to this committee on the challenges faced by federal agencies in implementing the public health infrastructure. We reported that, among others, HHS’s Centers for Disease Control and Prevention and the Department of Homeland Security faced challenges developing and adopting consistent standards to encourage interoperability of public health initiatives. Following up on our recommendations, we reported in May 2005 that HHS was working towards a national strategy for health IT that called for a sustained set of actions to help to further define standards for the health care industry. The Office of the National Coordinator for Health IT is now responsible for the FHA program, which is to provide the structure or “architecture” for collaboration and interoperability among federal health efforts. FHA partners are responsible for improving coordination and collaboration on federal health IT investments and improving efficiency, standardization, reliability, and availability of comprehensive health information solutions. This fall, HHS plans to produce the first release of an information architecture for the federal health enterprise. This release will contain foundational elements to support the development and evolution of the full architecture, which will occur over several years. In addition, the CHI activities are now moving forward under the FHA. HHS, through the CHI initiative, is encouraging the implementation of standards within the federal government to order to catalyze private sector action in this area. Progress towards achieving standards and policies is a key component of progress toward the implementation of a national strategy that provides interoperable health IT systems. The framework also builds upon already existing work in HHS divisions and includes plans to identify and learn from agencies’ experiences. HHS divisions have been and continue to be responsible for selecting and adopting standards. Among other activities: The Agency for Healthcare Research and Quality is working to identify and establish clinical standards and research to help accelerate the adoption of interoperable health IT systems, including industry clinical messaging and terminology standards, national standard nomenclature for drugs and biological products, and standards related to clinical terminology. The Centers for Medicare and Medicaid are responsible for identifying and adopting standards for e-prescribing and for implementing the administrative simplification provisions of HIPAA, including electronic transactions and code sets, security, and identifiers. The National Institutes of Health’s National Library of Medicine is working on the implementation of standard clinical vocabularies, including support for and development of selected standard clinical vocabularies to enable ongoing maintenance and free use within the United States’ health communities, both private and public. In 2003, the National Library of Medicine obtained a perpetual license for the Systematized Nomenclature of Medicine (SNOMED) standard and ongoing updates, making SNOMED available to U.S. users. Other efforts at the National Library of Medicine include the uniform distribution and mapping of HIPAA code sets, standard vocabularies, and Health Level 7 code sets. The Centers for Disease Control and Prevention, through its Public Health Information Network initiative, is working on the development of shared data models, data standards, and controlled vocabularies for electronic laboratory reporting and public health information exchange that are compatible with federal standards activities such as CHI. The Food and Drug Administration and the National Institutes of Health, together with the Clinical Data Interchange Standards Consortium (a group of over 40 pharmaceutical companies and clinical research organizations), have developed a standard for representing observations made in clinical trials—the Study Data Tabulation Model. HHS expects to award a contract to develop and evaluate a process to unify and harmonize industry-wide information standards. In June 2005, HHS issued four requests for proposals (RFPs). The department also expects to award contracts based on these proposals by October 2005. The proposals focus on four areas, including the development of a process to unify and harmonize industry-wide health information standards development, maintenance and refinements over time. The standards-focused RFP states that the current landscape of standards does not ensure interoperability due to many factors such as conflicting and incomplete standards. The other RFPs include (1) the development of a certification process for health IT to assure consistency with standards, (2) the development of prototypes for a nationwide health information network architecture for widespread health information exchange, and (3) an assessment of variations in organization-level business policies and state laws that affect privacy and security practices. In addition, in July of this year, HHS announced plans for a public- private committee—known as the American Health Information Community—to help transition the nation to electronic health records and to provide input and recommendations on standards. Chaired by the Secretary of HHS, it will provide input and recommendations on use of common standards and how interoperability among EHRs can be achieved while assuring that the privacy and security of those records are protected. HHS is also working with other private sector groups to develop standards and certification requirements for EHR functionality in order to reduce the risk of implementation failure. The importance of a national health information network that integrates interoperable databases was just recently highlighted when the Office of the National Coordinator for Health IT facilitated the rapid development of a Web-base portal to access prescription information for Katrina evacuees. This online service is to allow authorized health professionals to access medication and dosage information from anywhere in the country. A broad group of commercial pharmacies, government health insurance programs such as Medicaid, private insurers, and others compiled and made accessible the prescription data. Although the scope of this effort is much smaller than the national network and comprehensive EHRs (which contain much more than prescription information) envisioned, it demonstrates the need called for by the President. In summary, identifying and implementing health IT standards is essential to achieving interoperable systems and data in the health care industry and is critical in the pursuit of effective EHRs and public health systems. Although federal leadership has been established and plans and several actions have positioned HHS to further define and implement relevant standards, consensus on the definition and use of standards still needs to occur. Otherwise, the health care industry will continue to be plagued with incompatible systems that are incapable of exchanging key data that is critical to delivering care and responding to public health emergencies. HHS needs to provide continued leadership, sustained focus and attention, and mechanisms to monitor progress in order to bring about measurable improvements and achieve the President’s goals. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the committee may have at this time. If you should have any questions about this testimony, please contact me at (202) 512-9286 or by e-mail at powderd@gao.gov. Other individuals who made key contributions to this testimony are M. Yvonne Sanchez, Assistant Director, and Amos Tevelow. 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. | Health care delivery in the United States has long-standing problems with medical errors and inefficiencies that increase costs. Hence, health information technology (IT) has great potential to improve the quality of care, bolster preparedness of our public health infrastructure, and save money on administrative costs. The threats of natural disasters and terrorist attacks further underscore the need for interoperable information systems, and the critical importance of defining and implementing standards that would enable such interoperability. GAO has reported on the quality of care benefits derived by using IT, federal agencies' existing and planned information systems to support national preparedness for public health emergencies, and the status of health IT standards settings initiatives. The House Committee on Government Reform asked GAO to summarize (1) its previously issued reports and recommendations on health IT standards and (2) recent actions taken by HHS to facilitate the development of health IT standards. As GAO reported in 2003, health care data, communications, and security standards are necessary to support interoperability between IT systems; however, the identification and implementation of such standards at that time was incomplete across the health care industry. Further, while several standard setting initiatives were underway, GAO raised concerns about coordinating and implementing these initiatives. To address these coordination and implementation challenges, it recommended that the Secretary of Health and Human Services (HHS), among other things, reach further consensus across the health care industry on the definition and use of standards, establish milestones for defining and implementing these standards, and create a mechanism to monitor their implementation throughout the health care industry. Last summer, GAO testified before the House Committee on Government Reform's technology subcommittee, highlighting progress made in announcing additional standards and plans to incorporate standard setting initiatives into the Federal Health Architecture. GAO reported that progress in assuming leadership had occurred with the President's establishment of the National Coordinator for Health IT to guide the nationwide implementation of interoperable health information systems, but noted that as health IT initiatives were pursued, it would be essential to have continued leadership, clear direction, measurable goals, and mechanisms to monitor progress. In following up on these recommendations, GAO determined that HHS has taken several actions that should help to further define standards for the health care industry. First, the coordinator has assumed responsibility for the Federal Health Architecture that is expected to establish standards for interoperability and communication throughout the federal health community. Second, several HHS agencies continue their efforts to define standards as part of the department's Framework for Strategic Action. For example, the Agency for Healthcare Research and Quality is working with the private sector to identify standards for clinical messaging, drugs, and biological products. Third, HHS expects to award a contract to develop and evaluate a process to unify and harmonize industry-wide information standards. Fourth, in July of this year, HHS announced plans for a public-private committee to help transition the nation to electronic health records and to provide input and recommendations on standards. All of these are positive steps, however, much work remains to reach further consensus across the health care sector on the definition and use of standards. Until this occurs, federal agencies and others throughout the health care industry will not be able to ensure that their systems are capable of exchanging data when needed, and consequently will not be able to reap the cost, clinical care, and public health benefits associated with interoperability. |
In February 2014, DOD began mailing notices to TRICARE for Life beneficiaries eligible for the pilot informing them of the pilot requirements for filling covered medications through mail order or MTF pharmacies, rather than retail pharmacies. In its contract with DOD, ESI is responsible for implementing the mail-order component of the pilot, which includes operating a call center through which beneficiaries may ask questions about the pilot and transfer prescriptions from a retail pharmacy to mail order. According to DOD officials, individual MTF pharmacies are responsible for implementing the MTF pharmacy component of the pilot. DOD’s Defense Health Agency’s Pharmacy Operations Division is responsible for monitoring both the mail-order and MTF-pharmacy components of the pilot. After receiving DOD’s notice, beneficiaries are allowed two 30-day supply refills at a retail pharmacy as a courtesy. The courtesy refills give beneficiaries time to transfer their prescriptions to mail order or an MTF pharmacy, according to DOD officials. After each of these two refills, ESI contacts the beneficiary by letter to remind them about the options for obtaining future refills—either through mail order, through an MTF pharmacy, or by paying 100 percent of the cost at a retail network pharmacy. Requests for coverage for a third refill at a retail pharmacy are denied. Eligible beneficiaries may waive participation in the pilot. Specifically, beneficiaries may obtain blanket waivers for medications needed for acute care or covered by other health insurance. Beneficiaries may also qualify for waivers in certain special circumstances, such as living in a nursing home. These waivers are granted on a case-by-case basis. Additionally, under the law and implementing regulations, beneficiaries may opt out of the pilot after participating for 1 year. ESI reported to DOD that there were about 317,000 TRICARE for Life beneficiaries eligible to participate in the pilot from February 15, 2014 through February 28, 2015. Of those beneficiaries who were eligible, about 186,000 (59 percent) transferred their prescriptions from a retail pharmacy to mail order for medications covered for the pilot. DOD did not have data on the number of eligible pilot beneficiaries who transferred their prescriptions from a retail pharmacy to an MTF pharmacy. Beneficiaries who did not participate in the pilot did so for reasons such as obtaining an override, which is an approval to refill a prescription for a covered medication at a network retail pharmacy when not available through mail order. ESI reports these numbers at the end of each month to DOD and updates them as prescriptions are processed for the pilot. The numbers shown were reported as of March 2015. The NDAA for Fiscal Year 2013 included a provision for the pilot to run for 5 years expiring by December 31, 2017. However, the NDAA for Fiscal Year 2015 terminated the pilot effective September 30, 2015 and expanded the requirements for the pilot to all eligible TRICARE beneficiaries beginning October 1, 2015. For the expansion, the requirements for filling prescriptions through mail order and MTF pharmacies are to generally remain the same as for the pilot; however, the option to opt out after participating for 1 year will not be permitted, according to DOD officials. Although the NDAA for Fiscal Year 2015 also increased the copayments for all TRICARE prescriptions filled at retail pharmacies and through mail order, they continue to be less through mail order than at retail pharmacies. Additionally, there continues to be no copayment for prescriptions filled at MTF pharmacies. DOD has monitored the availability of covered medications, but has not separately tracked the timeliness and accuracy of prescriptions filled for the pilot through mail order. DOD also has not systematically tracked any of this information for the pilot across MTF pharmacies. In the contract in effect at the start of the pilot, DOD required ESI to monitor the availability of covered medications for the pilot through mail order. According to DOD officials, there have been some overall issues with availability in mail order due to a medication being out of stock because of a manufacturer shortage. For the pilot, when a covered medication is not available through mail order, the affected beneficiary may receive an override to obtain the medication from a retail pharmacy. ESI officials told us that the affected beneficiary must receive an override for each prescription for a covered medication that is out of stock. From March 2014 through February 2015, these officials told us that 5,069 pilot beneficiaries (approximately 3 percent of those that participated) received 5,611 overrides. This represented less than 1 percent of the prescriptions filled through mail order for the pilot, and was comparable to the availability experience of the entire TRICARE mail-order program. ESI officials said that of the 5,611 total overrides approved, only 1,448 were actually used by beneficiaries to obtain covered medications from a retail pharmacy. DOD officials offered possible explanations for this low use, including that the physician may have changed the medication or that the beneficiary may have decided to fill the prescription at an MTF pharmacy instead of a retail pharmacy. Another potential explanation for not using the override may be the higher copayment to fill a covered medication at a retail pharmacy. In the contract in effect at the start of the pilot, DOD required ESI to report monthly on the timeliness and accuracy of all TRICARE prescriptions filled through mail order, but not separately for the pilot. Prescriptions filled by pilot beneficiaries represented about 3 percent—about 785,000 prescriptions—of the approximately 25 million total prescriptions filled through mail order from February 2014 through February 2015. DOD officials said that since they expected the performance standards and the process for the mail-order program to be the same for the pilot, they did not require separate reports to monitor the timeliness and accuracy of prescriptions filled for the pilot. Absent such separately tracked data for the pilot, however, it may not be clear to what extent any issues identified through DOD’s monitoring efforts may have affected prescriptions filled for the pilot differently than for all TRICARE prescriptions. Federal internal control standards suggest that agencies should monitor performance data to assess the quality of performance over time. Monitoring is particularly important during transitions of care, such as for medications. Without monitoring performance data separately for the pilot, DOD does not know what, if any, problems beneficiaries may have experienced filling their prescriptions. As a result, DOD lacks potentially important information to help inform the upcoming expansion of the pilot requirements, which is slated for October 1, 2015. Because separate reports on the pilot’s performance were not available, we reviewed the monthly timeliness and accuracy reports that ESI provided to DOD for all TRICARE mail-order prescriptions from February 2014 through February 2015. We found that ESI did not meet one of the four timeliness performance standards—shipping 95 percent of prescriptions within 2 calendar days if a clarification or intervention, such as a consultation from a pharmacist, is not required—for June and July 2014. During these 2 months, some pilot beneficiaries may have reached their limit of two courtesy refills at a retail pharmacy and may have been in the process of transferring their prescriptions to mail order. Therefore, to determine if there were any differences in meeting the timeliness performance standards for the pilot compared to all mail-order prescriptions, we requested ESI create separate reports specifically for the pilot. However, the information ESI provided was for all prescriptions filled by pilot beneficiaries, not just those for covered medications. The information ESI provided to us showed that, similar to performance results for all mail-order prescriptions, for 2 months of the pilot ESI did not meet one of the four timeliness standards. As with all mail-order prescriptions, ESI did not meet the standard that 95 percent of prescriptions be shipped within 2 calendar days of receipt if a clarification or intervention is not required. For June and July 2014, ESI shipped 84 percent of all prescriptions filled by pilot beneficiaries within 2 days, compared to 86 percent for the entire mail-order program. DOD reported that in June 2014, ESI experienced a system-wide issue—not specific to the pilot—with an automatic refill process that was operating improperly and was not processing prescriptions, which caused a backlog during June and July 2014. However, because data were not separately tracked for the pilot, DOD does not know whether pilot beneficiaries were disproportionately affected for covered medications. For the accuracy of prescriptions filled, ESI reported meeting the performance standard of 100 percent accuracy each month for all TRICARE prescriptions, including those for the pilot, for the entire period from February 2014 through February 2015. DOD officials said ESI has an internal process to identify potential errors during the prescription- filling process, such as a pharmacist checking after a technician enters prescription information into its data system; or weighing the contents of a prescription to verify that the correct number of units was dispensed. Once a prescription is dispensed to a beneficiary, DOD officials told us that prescription accuracy is measured as the percent of prescriptions dispensed that did not have a validated error, such as a shipping error, having two different medications mixed in a bottle, or incorrect drug, strength, form, patient name, or address. ESI is notified of dispensing errors when a beneficiary contacts them regarding the error and shipping errors are identified when the medication is returned through the mail. For the pilot, DOD has not systematically monitored the availability of covered medications, or the timeliness and accuracy of prescriptions filled across MTF pharmacies. According to the standards for internal control in the federal government, agencies should establish and review performance standards, and then monitor these data to assess the quality of performance over time. DOD has not established performance standards across MTF pharmacies for ensuring that covered medications are available and prescriptions are filled in a timely and accurate manner for pilot beneficiaries. Additionally, while some individual MTF pharmacies may collect and monitor performance data on their own, DOD has not systematically collected and monitored this information for the pilot because the department does not have a central data system for doing so. As a result, DOD is unable to assess the availability of covered medications and whether these prescriptions were filled in a timely and accurate manner across MTF pharmacies. DOD also does not know if beneficiaries encountered difficulties in obtaining covered medications. This information would be beneficial in assisting DOD with the expansion of the pilot requirements. DOD has not monitored the extent to which beneficiaries who participated in the pilot were satisfied with the transfer of prescriptions to mail order or MTF pharmacies. Federal internal control standards suggest that agencies obtain information from external stakeholders who may have a significant impact on the agency achieving its goals. Communications— such as through a survey—with pilot beneficiaries regarding their satisfaction with obtaining medications through mail order and MTF pharmacies are mechanisms that may have assisted DOD in assessing whether it was achieving its goal for beneficiaries to transfer prescriptions from retail to mail order and MTF pharmacies. Additionally, a satisfaction survey of pilot beneficiaries may have provided information about how well the pilot is being implemented, served as a tool for DOD to assess the performance of ESI and individual MTF pharmacies, and provided senior management information to determine what they could do to improve the pilot’s effectiveness. Federal internal control standards also require agencies to monitor and assess the quality of performance over time in order to ensure that findings are promptly resolved. By not separately surveying pilot beneficiaries’ satisfaction with mail order or MTF pharmacies, DOD does not know whether beneficiaries faced any difficulties obtaining their covered medications, which is particularly important to monitor during transitions of care. Consequently, DOD lacks assurance that the pilot is working for participating beneficiaries as intended, and is missing important information that may be useful to help inform the expansion of the pilot’s requirements to all eligible TRICARE beneficiaries. For mail order, DOD officials who monitor the pilot told us they have relied on the results from a quarterly survey of all TRICARE mail-order pharmacy users— the TRICARE Mail-Order Pharmacy Satisfaction Survey—to assess the satisfaction of pilot beneficiaries. DOD has not separately monitored beneficiary satisfaction for the pilot through mail order because DOD officials said the mail-order process is the same for pilot and non-pilot beneficiaries, and therefore the results of the TRICARE Mail-Order Pharmacy Satisfaction Survey would also be applicable to pilot beneficiaries. However, other DOD officials who monitor the survey results said they do not recommend generalizing the survey results to the overall TRICARE mail-order population or to pilot beneficiaries, thus making the use of these data for this purpose questionable. These officials said they do not know how representative the survey respondents are of the TRICARE mail-order population or pilot beneficiaries.beneficiaries may have different characteristics than those of all mail- order beneficiaries. Officials told us that DOD does not collect demographic information of survey respondents (e.g., age, regional information) and has never compared the information on the survey respondents to the overall mail-order population to assess similarities Pilot between the two groups. Moreover, DOD has not compared the characteristics of beneficiaries who responded to the survey to those that did not, and consequently, is therefore unable to determine representativeness and how these characteristics may be related to satisfaction. DOD also has not monitored beneficiary satisfaction with the pilot based on calls to ESI’s call center. DOD officials told us that beneficiaries could use the call center to express complaints with the pilot. ESI reported at least two significant increases in call volume during March and May of 2014, which DOD and ESI officials said they thought was due largely to beneficiaries seeking assistance in transferring prescriptions from a retail pharmacy to mail order. For example, according to DOD and ESI officials, the increase in call volume in March 2014 could have been due to eligible beneficiaries having received their initial letters to transfer their prescriptions for the pilot. In May 2014, beneficiaries who used courtesy refills may have started to reach their two-refill limit at a retail pharmacy and would therefore need to transfer prescriptions to mail order or MTF pharmacies. However, DOD officials told us that ESI is not required to track the details of these calls, including whether beneficiaries expressed any complaints with the pilot. According to these officials, ESI provided general feedback about the pilot during monthly meetings with DOD. Additionally, DOD officials told us they have not monitored beneficiary satisfaction with the pilot across MTF pharmacies. DOD officials said because they do not have a central data system to track pilot beneficiaries that transferred prescriptions from a retail pharmacy to an MTF pharmacy, they are unable to assess beneficiary satisfaction for the pilot. However, DOD officials said that individual MTF pharmacies may assess beneficiary satisfaction. Although DOD did not assess pilot beneficiary satisfaction, two military service organizations—the Military Officers Association of America (MOAA) and The Retired Enlisted Association (TREA)—reported informally collecting information from members about their experience with the pilot. A TREA representative told us that some of their members reported having problems with the initial enrollment, but said that once the pilot started the organization stopped receiving complaint calls and surmised the pilot was working well. Similarly, a MOAA representative reported their members having an issue with the “roll out” of the pilot. This representative also reported contacting members who participated in the pilot, and found that a little more than half of 40 members contacted indicated they were better off having received their medications through the pilot, thus illustrating that while some are satisfied with the pilot, there may be varying levels of satisfaction among participating beneficiaries. As of February 2015, ESI estimated that DOD saved approximately $123 million based on prescriptions processed through mail order for the first year of the pilot. This number was comparable to DOD’s projected cost savings of approximately $120 million that was estimated prior to the start of the pilot (see table 1). The estimated cost savings for the first year of the pilot did not reflect prescriptions transferred to MTF pharmacies because DOD has not tracked these prescriptions for the pilot, according to DOD officials. Rather, these officials said they expected that most beneficiaries participating in the pilot would transfer their prescriptions from retail pharmacies to mail order rather than to MTF pharmacies based on a model the department developed. This model examines workload at retail, mail order, and MTF pharmacies, and shows that most prescriptions have moved from retail to mail order over time. Cost savings may have been greater than the estimated $123 million had prescription transfers from retail pharmacies to MTF pharmacies been included because MTF pharmacies are a lower-cost option than retail pharmacies. As of August 6, 2015, DOD issued an interim final rule implementing the expansion of the pilot requirements to all eligible TRICARE beneficiaries.developing planning documents for the expansion of the pilot requirements to all eligible TRICARE beneficiaries, but have not finalized these documents. Officials explained that they will use planning documents prepared for the pilot (e.g., a plan to communicate the requirements of the program) to guide them in developing these documents for the expansion. Similarly, officials said that they generally plan to follow the same processes used for the pilot. For example, they will mail notices to eligible beneficiaries that they are required to obtain their covered medications through mail order or from an MTF pharmacy. DOD officials told us that they are in the process of DOD officials also stated that they are drafting contractual requirements for the expansion that will be added to the current pharmacy contract with ESI. Officials said these contract requirements will likely model those that were developed for the pilot, including requiring ESI to report monthly cost savings estimates. While not specific to the expansion, DOD also added in new requirements to ESI’s current pharmacy contract including assisting with the transfer of prescriptions from a select number of MTF pharmacies to mail order, a service that ESI previously did not provide. A DOD official told us that the ability to transfer a prescription from a retail pharmacy to mail order has been helpful for beneficiaries and key to expanding TRICARE’s mail-order program. The official added that these new requirements will give ESI the ability to provide the same support to beneficiaries who want to transfer prescriptions from MTF pharmacies to mail order. DOD officials told us that they do not have plans to conduct a systematic evaluation of the pilot to prepare for the expansion. Officials explained that because the NDAA for Fiscal Year 2015 required that the pilot end 2 years earlier than expected, there is not enough time to conduct an evaluation prior to the expansion of the requirements to all eligible TRICARE beneficiaries. They also told us that the NDAA for Fiscal Year 2013, which established the pilot, did not require that they conduct such an evaluation. However, officials said they have performed ongoing assessments during the pilot and identified some lessons learned that will be incorporated during the implementation of the expansion, such as ensuring that beneficiaries have sufficient time to transfer their covered medications so as to not disrupt their medication regimens. Additionally, DOD does not know how the expected increase in the number of beneficiaries with the expansion may affect the capacity of mail order and MTF pharmacies. As of March 2015, ESI estimated that about 416,000 additional beneficiaries will be required to transfer prescriptions from retail to mail order or MTF pharmacies when the expansion is implemented. DOD officials told us that ESI officials verbally assured them that the company has sufficient capacity to handle the increased volume when the expansion is implemented. DOD did not conduct its own assessment of ESI’s ability to handle the additional capacity because DOD officials said they expect ESI to meet the contractual requirements related to availability, timeliness and accuracy for all mail order prescriptions, including the additional prescriptions resulting from the expansion. DOD officials also stated that MTF pharmacies should be able to handle the additional capacity for the expansion because they expect most prescriptions to be transferred to mail order based on the workload model previously discussed. However, according to DOD officials, this model is not specific to the pilot and does not track pilot beneficiaries’ use of MTF pharmacies to predict how the expansion could affect MTF pharmacies’ workload. Additionally, because DOD has not monitored the availability, timeliness or accuracy of prescriptions filled for covered medications, beneficiary satisfaction, or cost savings for the pilot across MTF pharmacies, it does not know how the expansion may impact the capacity of MTF pharmacies. We recognize that NDAA for Fiscal Year 2015 shortened the period of the pilot; however, the lack of systematic monitoring that we identified and discussed earlier in the report suggests that DOD, in planning for the expansion of the pilot requirements, would benefit from enhanced emphasis on the monitoring of the availability of covered medications, the timeliness and accuracy of prescriptions filled through mail order and MTF pharmacies, and beneficiary satisfaction. This would be consistent with federal standards for internal controls, which supports monitoring to be performed continually and ingrained in an agency’s operations. While DOD’s monitoring of the effects of the pilot on participating beneficiaries has been limited, the pilot appears to have yielded substantial cost savings for the government and lower copayments for beneficiaries during its first year. These savings are expected to grow once the requirements of the pilot are expanded to all eligible TRICARE beneficiaries. As DOD implements the expansion of pilot requirements, the agency would benefit from improved monitoring of affected beneficiaries, including the availability of covered medications, the timeliness and accuracy of prescriptions filled, and satisfaction. Particularly in light of the absence of a systematic evaluation of the pilot and its implications for the full expansion, such monitoring is important in identifying and addressing problems that may occur as beneficiaries transition their covered medications from retail to mail order or MTF pharmacies. To be able to identify and address problems that may occur and thus help ensure a smooth transition, we recommend that the Secretary of Defense require the Defense Health Agency ensure that planning documents for the expansion include specific requirements to continuously monitor affected beneficiaries, including whether covered medications are available and filled in a timely and accurate manner through mail order and across MTF pharmacies; and beneficiaries are satisfied with the transition to mail order and MTF pharmacies. In commenting on a draft of this report, DOD concurred with our audit findings and conclusions, as well as our recommendation that planning documents for the expansion should include requirements to monitor affected beneficiaries, including the availability of covered medications, the timeliness and accuracy of prescriptions filled, and the satisfaction of beneficiaries with mail order and MTF pharmacies. DOD’s comments are reprinted in Appendix II. DOD commented that the experience and lessons learned from the pilot were included in developing the pharmacy contract requirements to expand the program. Subsequent to sending the draft report to DOD for comment, the pharmacy contract was modified on September 3, 2015 to include requirements for the expansion. Upon our review of the modified contract, we found that the requirements related to the expansion did not require the separate monitoring of the timeliness and accuracy of prescriptions filled for beneficiaries directly affected by the expansion who are transitioning from retail to mail order. We maintain that DOD would benefit from monitoring performance separately for these affected beneficiaries. This population, which takes maintenance medications for chronic conditions, may represent a different profile of prescriptions than for all mail-order beneficiaries. Therefore, this population may experience timeliness and accuracy differently than do all mail-order beneficiaries. Without monitoring performance data separately, it may not be clear to what extent any issues identified through DOD’s monitoring efforts may be different for this population, especially during the initial transition from retail to mail order. DOD also commented that after the expansion occurs beneficiary satisfaction with mail order will continue to be measured as it was done previously through a survey of all TRICARE mail-order pharmacy users. However, as we reported, the results of this survey of all TRICARE mail- order pharmacy users may not represent well the satisfaction of sub- populations, such as affected beneficiaries. Also, as we reported, DOD officials who monitor this satisfaction survey said they do not recommend generalizing the survey results for multiple reasons, such as being unable to determine representativeness of the survey respondents. We maintain that DOD should separately survey the satisfaction of affected beneficiaries with mail order given that this population may have different characteristics than those of all mail-order beneficiaries generally, and those differences may be associated with satisfaction. Without assessing the satisfaction of affected beneficiaries, DOD will not know whether these beneficiaries faced any difficulties in obtaining their covered medications, which is important to know during transitions of care. Finally, DOD commented, that there is no indication based on workload data, that affected beneficiaries will choose to use MTF pharmacies once the expansion occurs. In addition, DOD commented that MTF pharmacies will continue to individually monitor their own performance and beneficiary satisfaction according to individual performance standards. However, as we discuss in the report, DOD officials told us that the workload model does not specifically track pilot beneficiaries’ use of MTF pharmacies to predict how the expansion could affect MTF pharmacies’ workload. Given that there are 416,000 additional beneficiaries expected to be affected by the expansion and that their use of MTF pharmacies could be different than the use for all TRICARE beneficiaries generally, we maintain that DOD would benefit from systematically monitoring affected beneficiaries, including across MTF pharmacies. Without doing so, DOD will not know if affected beneficiaries encountered difficulties in obtaining covered medications. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The estimated cost savings for the first year of the pilot of $123 million were generally comparable to the projected cost savings of approximately $120 million that the Department of Defense (DOD) reported prior to the start of the pilot. The $120 million estimate represented projected cost savings from the transfer of prescriptions for brand maintenance medications from retail pharmacies to either TRICARE’s mail-order pharmacy program or a military treatment facility (MTF) pharmacy. The $123 million estimate represented cost savings from the transfer of prescriptions for covered brand maintenance medications (hereafter referred to as covered medications) from retail pharmacies to TRICARE’s mail-order program for the period February 15, 2014 through February 28, 2015. DOD’s projected cost savings for the pilot. DOD officials told us that they made some assumptions about the transfer of prescriptions for brand maintenance medications from retail pharmacies to mail order or MTF pharmacies in calculating the projected cost savings of $120 million for a calendar year. DOD assumed that cost savings would be the same if they repriced these retail prescriptions to reflect the cost at mail order or at MTF pharmacies because the average cost of a brand maintenance medication was about the same at both, based on a model that DOD developed. For the purposes of calculating projected cost savings, DOD officials told us that they assumed that 100 percent of the retail prescriptions would transfer to mail order, but told us the projected cost savings would have been about the same if they assumed that less than 100 percent of retail prescriptions were transferred to mail order (e.g., if 90 percent were transferred to mail order and 10 percent were transferred to MTF pharmacies). To develop the projected cost savings of $120 million, DOD officials explained that they used data from the fourth quarter of 2012 to determine that approximately 800,000 prescriptions for brand maintenance medications were filled by beneficiaries aged 65 years and older at retail pharmacies, determined the retail cost for each of these prescriptions, typically filled for a 30-day supply, including ingredient cost, dispensing fees and administrative fees, converted the retail cost of these prescriptions from a 30-day supply to the cost for a 90-day supply (e.g., the ingredient cost for a 30-day supply at a retail pharmacy of $10 would have been $30 for a 90-day supply at a retail pharmacy), determined what the cost would have been for these prescriptions if they had been filled through mail order, typically filled for a 90-day supply, calculated the difference in the copayment that a beneficiary paid at a retail pharmacy to the copayment for mail order, calculated the total cost savings for filling these 800,000 prescriptions at mail order instead of at retail pharmacies: retail cost less mail-order cost and copayment difference. Any manufacturer refunds for brand maintenance medications filled through retail pharmacies also were taken into account. This yielded a savings of about $40 million per quarter. DOD officials explained that after accounting for factors such as beneficiaries using the courtesy refills at retail and receiving waivers to not participate in the pilot, they assumed that about 75 percent of the $40 million quarterly savings would be achieved. Therefore, they projected that the pilot would save about $30 million per quarter, or $120 million for a calendar year. Express Scripts Inc.’s estimate of cost savings for the first year of the pilot. DOD requires Express Scripts, Inc. (ESI)—the pharmacy benefits manager that DOD contracts with to manage its network of retail pharmacies and mail-order program—to calculate and report a monthly cost savings estimate for mail-order prescriptions specific to the pilot. To develop the cost savings estimate of $123 million for the first year of the pilot (February 15, 2014 through February 28, 2015), ESI officials explained that they used data from February 15, 2014 through February 28, 2015 to determine that approximately 785,000 prescriptions for covered medications were filled through mail order for the pilot, determined the mail-order cost of these prescriptions, typically filled for a 90-day supply, including ingredient cost, dispensing fees, and administrative fees, converted the mail-order cost of each of these prescriptions from a 90-day supply to the cost for a 30-day supply (e.g., the ingredient cost for a 90-day supply at mail order of $30 would have been $10 for a 30-day supply at a retail pharmacy), determined what the cost would have been for these prescriptions if they had been filled at a retail pharmacy, typically filled for a 30-day supply, calculated the difference between the copayments at mail order to the copayments that beneficiaries would pay at retail pharmacies, calculated the total cost savings for filling these 785,000 prescriptions through mail order instead of at retail pharmacy: total ingredient cost difference plus dispensing fee difference plus administrative fee difference less copayment difference. Any manufacturer refunds for brand maintenance medications filled through retail pharmacies were also taken into account. This resulted in a savings of about $132 million. subtracted an administrative fee DOD pays ESI to transfer each prescription from retail pharmacy to mail order through its call center. According to a DOD official, the administrative fee to transfer prescriptions from retail pharmacies to mail order is an initial discretionary cost that DOD chose to incur to ensure a smooth transition for beneficiaries. After subtracting the $9 million administrative fee related to the transfer of prescriptions through ESI’s call center, the net cost savings for the pilot through mail order was $123 million. Debra A. Draper, (202) 512-7114 or draperd@gao.gov. In addition to the contact name above, Rashmi Agarwal, Assistant Director; Jennie F. Apter; Jacquelyn Hamilton; Deitra H. Lee; Eric Wedum; and Joanna Wu made key contributions to this report. Compounded Drugs: TRICARE’s Payment Practices Should Be More Consistent with Regulations. GAO-15-64. Washington, D.C.: October 2, 2014. Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices. GAO-14-578. Washington, D.C.: June 30, 2014. Defense Health Care: Evaluation of TRICARE Pharmacy Services Contract Structure Is Warranted. GAO-13-808. Washington. D.C.: September 30, 2013. Prescription Drugs: Overview of Approaches to Control Prescription Drug Spending in Federal Programs. GAO-09-819T. Washington, D.C.: June 24, 2009. DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in Spending at Retail Pharmacies. GAO-08-327. Washington, D.C.: April 4, 2008. DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates. GAO-08-172R. Washington, D.C.: October 31, 2007. TRICARE: Enrollment of the Department of Defense’s TRICARE Beneficiaries in Medicare Part B. GAO-06-489R. Washington, D.C.: June 30, 2006. Mail Order Pharmacies: DOD’s Use of VA’s Mail Pharmacy Could Produce Savings and Other Benefits. GAO-05-555. Washington, D.C.: June 22, 2005. Defense Health Care: Need for Top-to-Bottom Redesign of Pharmacy Programs. GAO/T-HEHS-99-75. Washington, D.C.: March 10, 1999. Defense Health Care: Fully Integrated Pharmacy System Would Improve Service and Cost-Effectiveness. GAO/HEHS-98-176. Washington, D.C.: June 12, 1998. | DOD offers a pharmacy benefit to TRICARE beneficiaries who may obtain prescriptions from TRICARE's mail-order program, MTF pharmacies, or retail pharmacies. In 2013, the DOD Inspector General reported it was more cost efficient to fill prescriptions through mail order than retail pharmacies. To reduce costs, the National Defense Authorization Act (NDAA) for Fiscal Year 2013 required DOD to implement a pilot for certain TRICARE beneficiaries to obtain covered brand maintenance medications through mail order or MTF pharmacies. Under NDAA 2015, the pilot terminates at the end of fiscal year 2015, after which the pilot requirements are to be expanded to all eligible TRICARE beneficiaries. The NDAA 2015 included a provision for GAO to examine the pilot. This report examines the extent to which DOD has (1) monitored whether covered brand maintenance medications were available, and prescriptions were filled on time and accurately, (2) monitored the satisfaction of participating beneficiaries, (3) achieved expected cost savings, and (4) prepared for the expansion. GAO reviewed and analyzed pilot performance and beneficiary satisfaction data, and cost savings estimates, and interviewed DOD officials and other stakeholders. For covered brand maintenance medications—those medications that are taken on a regular and recurring basis—the Department of Defense (DOD) has not fully monitored availability or the timeliness and accuracy of prescriptions filled for the TRICARE for Life Pharmacy Pilot. Specifically, GAO found that for the mail-order program: DOD has monitored the availability of medications. It has also established and monitored performance standards on the timeliness and accuracy of prescriptions filled through mail order for all of TRICARE, but has not separately monitored performance through mail order for the pilot. military-treatment-facility (MTF) pharmacies: DOD has not established or systematically monitored performance standards for the pilot on the availability of covered medications, or the timeliness and accuracy of prescriptions filled across MTF pharmacies. Federal internal control standards suggest that agencies establish and review performance standards and monitor performance data to assess the quality of performance over time. Without fully monitoring the pilot's performance, DOD does not know whether it is working as intended, information that would be beneficial given the upcoming expansion of its requirements to all eligible TRICARE beneficiaries. DOD has not monitored the extent to which beneficiaries were satisfied with the transfer of prescriptions to mail order or MTF pharmacies for the pilot. DOD officials said they relied on the results from a quarterly survey of TRICARE mail-order users to assess the satisfaction of pilot beneficiaries. However, other DOD officials who monitor the survey data said they do not know how representative the respondents are of pilot beneficiaries making the use of these data for this purpose questionable. Moreover, DOD has not monitored satisfaction of pilot beneficiaries across MTF pharmacies. Federal internal control standards require agencies to obtain information from external stakeholders to assess if they are achieving their goals, and to monitor and assess the quality of performance over time to ensure that issues are resolved. Without this stakeholder input, DOD lacks important information as to whether pilot beneficiaries faced any difficulties, including with obtaining their medications. DOD appears to have achieved its expected cost savings based on estimates GAO reviewed. For the first year of the pilot, DOD's estimated cost savings were approximately $123 million based on the prescriptions for covered medications filled through mail order. This was comparable to DOD's projected cost savings of $120 million, an estimate that DOD developed prior to the start of the pilot. DOD has issued regulations, but not finalized planning documents for the expansion of the pilot requirements. Officials said that they are in the process of developing planning documents, which will generally model those that were developed for the pilot. Given the limited monitoring conducted during the pilot, as it finalizes its planning documents for the expansion of the pilot to all eligible TRICARE beneficiaries, DOD would benefit from developing a robust monitoring process of affected beneficiaries, including the availability of medications, the timeliness and accuracy of prescriptions filled, and beneficiary satisfaction. GAO recommends that DOD develop a monitoring plan as part of its expansion planning documents. DOD concurred with GAO's recommendation. |
We, the Bureau, and others have observed that some of the information the Bureau collects during the census has already been gathered by other government agencies in the course of administering their programs. Accessing that information could provide the Bureau with data to help conduct the census and, in some cases, complete census forms that have missing data. Such uses of administrative records have the potential to reduce the cost of the decennial census because, for example, the Bureau would need to hire fewer temporary workers and acquire less office space and equipment to support fieldwork. Moreover, some of the information collected through administrative records could be more accurate than information the Bureau collects through traditional door-to- door follow-up methods, such as when the Bureau’s enumerators need to interview neighbors or other “proxy” respondents because they cannot reach a household member to collect needed information. While the Bureau has made some limited use of administrative records during past decennials, it plans to use them much more extensively in 2020. In its first operational plan for the 2020 Census (released October 6, 2015), the Bureau reported design decisions including the use of administrative records to identify vacant addresses in advance of follow- up field work and to enumerate nonresponding households when possible in order to reduce the need for repeated contact attempts during its nonresponse follow-up operation (NRFU). The Bureau also updated the life-cycle cost estimate for the 2020 Census to $12.5 billion (in constant 2020 dollars). This is slightly lower than the Bureau’s prior life-cycle cost estimate of $12.7 billion. We plan to assess the reliability of the new cost estimate and examine the practices the Bureau used to produce it after the Bureau makes the model and its supporting documentation available. As part of the operational plan, the Bureau also released an update of how much its fundamental redesign of the census would reduce costs in four major design areas compared to the cost of a 2020 Census conducted using the methods of the 2010 Census. Table 1 below compares the cost reduction in those four areas. The operational plan describes over 100 other preliminary design decisions related to the Bureau’s efforts to build an address list and collect census responses. Its release marks a critical turning point in the decade-long countdown to the next decennial, as the Bureau completes its early research and testing plan, and pivots toward developing operations and systems and testing them to refine the census design. Bureau officials have said they hope to use administrative records to reduce the field work involved in the most expensive census operation— NRFU, when Bureau staff traditionally knock on doors across the country at homes of people who did not respond to the census, or who were missed by census mailings. The Bureau has reported that the following three uses are key to potentially saving up to $1.4 billion compared to using traditional census methods. Identify vacant housing units. The Bureau incurs a large part of its census cost while following up at residences that did not return a census questionnaire. However, during the 2010 Census, of the 48 million housing units enumerators visited for follow up, about 14 million were vacant. One of the largest efficiency gains to the census may come simply from using administrative records to remove these vacant units from the follow-up workload. In a test in Arizona earlier this year, this use of administrative records enabled the Bureau to reduce the NRFU workload by 11 percent. Since we completed our audit work, the Bureau announced that it would still send a reminder post card to units it identified as vacant, which will cost more, but will provide any missed household one more opportunity to respond to the census. Identify and enumerate occupied nonresponding housing units. During the 2015 Census Test, the Bureau demonstrated it could use administrative records to accurately count some nonresponding occupied households if the household had administrative records meeting a certain quality threshold, without attempting any visits. In the test, the Bureau used this approach to reduce the NRFU workload by about 20 percent. Since we completed our audit work, the Bureau announced that before using administrative records to enumerate such households in 2020, it will still attempt one visit to the household. Attempting a visit will add costs, but will also provide the household one more opportunity to respond to the census. Predict the best times to complete NRFU. One of the challenges the Bureau faces when knocking on doors is reaching a household when someone is home. In the 2015 Census Test, the Bureau used demographic information, such as age, from administrative records sources in addition to information about how households had responded to other Bureau surveys in order to help determine the contact strategy for deciding if and when to interview a household. The Bureau tested each of these uses during its 2015 Census Test and plans further testing of them to refine the methods, but the Bureau has already decided to use them. In addition to the three uses the Bureau has committed to, the Bureau has identified nine additional uses of administrative records that may help further reduce cost or improve the quality of the census (see figure 1). The Bureau has not separately estimated cost savings for these nine uses, but has begun researching the feasibility of most of them. As shown in the figure, these uses would occur during various points relative to data collection. Before data collection. The Bureau is already using administrative records to validate and update the address list. The Bureau is drawing on address lists and map information from state, local, and tribal governments, in addition to information obtained from commercial sources, to update its own address list continuously throughout the decade, reducing the need for a more costly door-to-door canvassing during the 2 years prior to the census, as was done for the 2010 Census. In addition, Bureau officials reported research is about to begin on how to better use records to identify group quarters, such as dormitories, prisons, nursing homes, and homeless shelters, and to target outreach, that is, encourage cooperation of staff at these locations with the census. The Bureau historically uses special procedures to enumerate at these places, and administrative records could potentially jump start the time and effort spent getting ready for them. During data collection. The Bureau is considering using administrative records in lieu of some follow-up visits for the purpose of quality control of field work. In past decennials, the Bureau has called or sent enumerators to re-interview some respondents. Relying on administrative records could reduce fieldwork and respondent burden, or enable the Bureau to better target re-interviews of respondents. The Bureau is also researching how administrative records can be used to help process responses that do not have a census ID number on them (this activity is called non-ID processing). The Bureau may receive such responses from households that lost or never received mailings or other advance communication with an ID number from the Bureau. A test in 2015 in the Savannah, Georgia, media market area demonstrated that a large collation of administrative records from many sources was effective in helping the Bureau correct or fill in missing address information. This enabled the Bureau to better locate where those responses should be counted. The Bureau is also researching how other records may help it validate responses or the identities of those who submit responses as part of this processing. After data collection. When the Bureau still does not have information on a housing unit after collecting data during field operations, it will attempt to impute the data—as it has done since 1970. According to Bureau officials, in 2020 the Bureau will use administrative records to help improve how it imputes three related types of data: (1) whether or not a unit is occupied, (2) how many people live in the unit, and (3) the residents’ demographic characteristics, such as sex, race, and ethnicity. Finally, the Bureau is considering how administrative records might help it evaluate census accuracy. The Bureau has identified and obtained access to nearly all of the sources that it believes it needs in order to leverage all of the opportunities it has identified (see figure 2). In addition to the records already obtained, the Bureau is working to gain access to the National Directory of New Hires (NDNH), a national database of wage and employment information used for child support enforcement, and KidLink, a database from the Social Security Administration that links parent and child Social Security numbers for children born after 1998 in U.S. hospitals. Both of these databases would help the Bureau improve its ability to find historically “hard-to-count” groups, such as certain minority groups or young children. Bureau officials stated that they are examining ways to quantify the potential effect that their access to these additional sources could have on the 2020 Census. But they point out that there is value in accessing these records for the Bureau’s other statistical surveys as well, and that even if they are unable to obtain the additional records in time for the 2020 Census, they would continue pursuing them for these other purposes, as well as for use in future censuses. While the Bureau is to be commended for its efforts to expand its use of administrative records to control costs and increase accuracy, we identified actions the Bureau could take to increase its chances of success. First, as of August 2015, the Bureau had not set deadlines to determine which of its identified uses of administrative records it will or will not implement for the 2020 Census, nor had it set deadlines for determining exactly which records from which sources it will tap in support of each use it implements. Moreover, the Bureau had no deadlines against which to measure progress for obtaining access to additional sources or scheduled milestones for when key steps may need to be taken in order to integrate them within 2020 preparations. For example, the Bureau will need time to review files in order to ensure their fitness for use before the Bureau can integrate them into the census design. Earlier in October the Bureau announced time frames for several decisions related to uses of administrative records and explained that the decisions are not yet included in its integrated schedule of activities. According to our scheduling guide, assurance of program success can be increased when management relies on credible schedules containing the complete scope of activities necessary to achieve established program objectives. Bureau officials have stated that final decisions on the use of administrative records are needed by the end of fiscal year 2017 in order to be included in the Bureau’s 2018 full end-to-end test. However, these deadlines do not appear in schedule documents. We recommended that the Census Director ensure that resources focus on activities with promise to reduce cost by documenting milestones related to deciding which records to use, particularly for purposes not yet demonstrated as feasible or involving records it does not already have access to, such as NDNH and KidLink. The Department of Commerce—the Bureau’s parent agency—concurred with our recommendation. Deadlines for deciding on all potential uses—either committing to move forward with them or abandoning them as possibilities for 2020—and for deciding how all other records will be used would help to ensure the Bureau is using its resources cost-effectively. The Bureau is taking steps to address challenges it faces in using administrative records to control costs and improve the quality of the 2020 Census. One challenge facing the Bureau is ensuring the quality of the records it receives from other agencies and levels of government. To meet this challenge, the Bureau has processes in place and is conducting research and testing to ensure quality of records. For example, to ensure accuracy, the Bureau routinely screens address and map files provided by state, local, and tribal governments to determine if they satisfy preset minimum quality standards for completeness of address information. This helps to improve the master list of addresses. The Bureau plans comprehensive testing of all records during an end-to-end test of its 2020 Census design (to be conducted in 2018). The Bureau plans additional testing of administrative records for the 2016 Census Test in the Los Angeles and Houston metro areas, a large test of address canvassing for 2016, and an additional site test in 2017 at an undetermined location. The Bureau reported it will review imputation models it used during prior censuses to determine how it can integrate information from administrative records into them in fiscal year 2016. Tests will be included in the 2016 Census Test. A second challenge involves protecting confidential data. We have previously reported that until the Bureau implements a complete and comprehensive security program, it will have limited assurance that its information and systems are being adequately protected against unauthorized access, use, disclosure, modification, disruption, or loss. In January 2013, we made over 100 recommendations aimed at addressing weaknesses in that program. The Bureau agreed and Bureau officials state that the Bureau has taken action on all 115 of our recommendations to improve its security program. In assessing the Bureau’s reported actions, we have reviewed documentation pertaining to 97 of the recommendations—66 of which we have confirmed have been addressed and 31 that require additional actions and/or documentation from the Bureau. We are currently analyzing the extent to which the remaining 18 recommendations have been addressed by the Bureau and expect to complete that review by the end of 2015. My colleague is further addressing the security challenge in her statement. Bureau officials pointed out that the Bureau is well positioned to prevent disclosure of administrative records, as it has long-standing experience in collecting data from other agencies and reporting on them. Furthermore, the Bureau and the agency providing the data agree to data safeguards during negotiations for access. A third challenge concerns public acceptance and attitudes about sharing of personal data across government agencies for the purposes of the census. We have previously reported on the need within the federal statistical system for broader public discussion on balancing trade-offs among competing values, such as quality, cost, timeliness, privacy, and confidentiality. The public has related concerns involving trust in the government and perceptions about the burden on respondents as well the social benefits of agencies sharing data. We recommended in 2012 that the Bureau develop and implement an effective congressional outreach strategy, particularly on new design elements the Bureau is researching and considering as well the cost-quality trade-offs of potential design decisions. The Bureau agreed with the recommendation and, in November 2014, it provided us with a congressional engagement plan. The four-page plan brings together in one place a summary of the Bureau’s ongoing activity in this area, yet, by itself, lacks goals or strategies for attaining them, or accountability for who will work to implement them or when. We will continue monitoring the Bureau’s efforts to address this recommendation, particularly as these efforts may depend on scheduling of activities the Bureau may yet set related to making final decisions about administrative records. As part of our recently released review, we determined that key assumptions in the Bureau’s administrative records cost area made sense. Table 2 shows the results of our analysis. While we were reviewing these cost assumptions, the Bureau did not always have documentation readily available, and Bureau reporting on one of the assumptions needed to be corrected. We were able to identify the needed support, and Bureau staff said that they will change the methodology for future reporting on the cost estimate to involve more factors and variables, such as the ratio of field workers to supervisors they would need in 2020 in addition to the NRFU workload assumption. This change will help demonstrate the reliability of the estimates as well as ensure effective communication with others about them. Since we released our report, the Bureau provided an updated estimate of the total 2020 Census life-cycle cost of $12.5 billion, as well as updated estimates of how much less in four major cost areas its 2020 plan would cost compared to a cost of the a 2020 Census conducted using the 2010 Census approaches and methods. We expect soon to begin reviewing the Bureau’s new cost model and its assumption. Bureau officials have told us that although the model has been updated, the key assumptions within the administrative records cost area are largely the same. Bureau officials told us that the revised life-cycle cost estimate the Bureau released on October 6, 2015 was developed with leading practices from our cost estimating and assessment guide. After the Bureau releases the underlying model, methodology, and supporting documents for the estimate, we anticipate reviewing them to assess their reliability. Continued oversight efforts, such as this hearing, will be helpful to ensure that the Bureau’s efforts remain on track and focused on those most promising to result in a cost-effective 2020 Census. If you have any questions on matters discussed in this statement, please contact Robert Goldenkoff at (202) 512-2757 or by e-mail at goldenkoffr@gao.gov. Other key contributors to this testimony include Ty Mitchell, Assistant Director; Brett Caloia; Robert Gebhart; Richard Hung; Andrea Levine; Donna Miller; Tamara Stenzel; and Timothy Wexler. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | With a life-cycle cost of about $13 billion, the 2010 Census was the most expensive U.S. census in history and was 56 percent more costly than the $8.1 billion 2000 Census (in constant 2010 dollars). The Bureau estimates that its use of administrative records in the 2020 Census will reduce the cost compared to traditional census methods by $1.4 billion. Given the potential cost savings associated with the use of administrative records, this testimony, which is based on a report GAO released last month, focuses on (1) the Bureau's plans for using administrative records, and the opportunities and challenges the Bureau faces going forward; and (2) the key assumptions supporting estimates of expected cost savings. To meet these objectives, GAO reviewed Bureau planning documents and test plans, and interviewed Bureau officials. GAO also relied on its Schedule Assessment Guide. The U.S. Census Bureau (Bureau) estimates that it can save around $1.4 billion using administrative records, compared to relying solely on traditional enumeration methods. While the Bureau has made some limited use of administrative records during past decennials, it plans to use them much more extensively in 2020 to achieve these savings. For example, the Bureau plans to use administrative records to reduce the field work required for its most expensive census operation—nonresponse follow-up—when temporary Bureau employees knock on doors across the country to obtain information from people who did not respond to the census, or who were missed by census mailings. According to the Bureau, using administrative records to (1) identify vacant housing units; (2) identify and enumerate occupied nonresponding housing units when the records meet a certain quality threshold; and (3) predict the best times to visit a household can generate substantial cost savings. The Bureau is also exploring the feasibility of nine additional uses of administrative records that could reduce costs and improve the quality of the census still further. The Bureau already has access to nearly all of the data sources it needs to achieve the desired cost savings. It is also working to gain access to additional databases that could help improve its ability to find historically hard-to-count populations, such as certain minority groups and young children. While the Bureau is to be commended for its efforts to expand its use of administrative records, going forward, it will be important to set deadlines to help ensure it makes timely decisions on these other databases and uses of administrative records. According to Bureau officials, final decisions on the use of administrative records are needed by the end of fiscal year 2017 so the records can be adequately tested in the Bureau's full end-to-end test in 2018. However, these deadlines do not appear in schedule documents. It will also be important for the Bureau to address key challenges to using administrative records, including (1) ensuring the quality of the records it receives from other government agencies; (2) protecting confidential data; and (3) ensuring congressional and public acceptance of the Bureau's plan to share personal data across government agencies. The Bureau's ongoing research and testing efforts can help with the first challenge. Fully implementing our prior recommendations to strengthen the security of its information systems and to develop a congressional outreach strategy could help address the second and third challenges. Key assumptions the Bureau used in estimating potential cost savings from administrative records are logical, and the Bureau plans to provide additional support for them. For example, the Bureau's assumption that it could reduce its follow-up workload follows clearly from the Bureau's use of administrative records to remove vacant units from among those housing units needing follow-up because people did not respond to the census, reducing that workload by 11.6 percent. The Bureau released an updated life-cycle cost estimate in October 2015, and GAO anticipates reviewing its reliability after the Bureau makes support for the estimate available. In its report issued last month GAO recommended that the Census Director set deadlines for making final decisions about which records to use, and for what purpose. This will help ensure the Bureau's resources focus on those activities that show the most promise for reducing enumeration costs. The Department of Commerce—the Bureau's parent agency—concurred with GAO's findings and recommendation. |
The Section 521 rental assistance program, authorized in 1974, is administered by RHS’s Multi-Family Housing Portfolio Management Division and its network of state and local offices. The program provides rental assistance for tenants living in properties created through RHS’s Multi-Family Direct Rural Rental Housing Loans and Multi-Family Housing Farm Labor Loans programs. These programs provide loans subsidized with interest rates as low as 1 percent to help build rental housing for rural residents and farm workers. Under the rental assistance program, eligible tenants pay up to 30 percent of their income toward the rent, and RHS pays the balance to the property owner. In fiscal year 2011, RHS paid $1.08 billion in subsidies to provide rental assistance to more than 270,000 households residing in 13,211 different properties. RHS pays the subsidies monthly to property owners through multiyear, renewable contracts. The Section 521 program is not an entitlement and, therefore, not all eligible households receive assistance. Section 521 rental subsidies are based on tenant households’ adjusted annual income—that is, gross income less any exclusions and deductions. For purposes of determining adjusted income, the Section 521 program follows the same regulations as HUD’s rental assistance programs. These regulations provide for over two dozen types of income exclusions and deductions. For example, income from minors, student financial aid, and qualifying employment training programs are excluded when determining households’ eligibility to receive assistance and calculating rental subsidies. Examples of income deductions include standard deductions for dependents ($480) and elderly and disabled family members ($400) and unreimbursed child care expenses that are necessary for a family member to remain employed. RHS requires property managers to certify the eligibility of assisted tenants at least annually. As shown in figure 1, property managers do so based on information from tenants on income and applicable exclusions and deductions. RHS policy requires property managers to independently verify this information with third parties. To obtain third-party verification, property managers must directly contact employers, welfare offices, health care providers, and others (depending on what information tenants provide) to ensure that the information is accurate and complete. Property managers must maintain documentation of verified information in the tenant’s file and input the information into a Tenant Certification form, which the tenant signs and dates. The property manager then submits the Tenant Certification form to RHS.tenants every year, and whenever a tenant’s income changes by $100 or more per month, or at the tenant’s request whenever the tenant’s income changes by at least $50 per month. RHS’s improper payments audits have identified rental assistance payments that were improper because of incorrectly calculated subsidy amounts and incomplete tenant file documentation. RHS has reported that these types of improper payments have declined since fiscal year 2007; however, RHS’s reported estimated error rate may be understated. Since 2005, RHS has conducted an annual improper payments audit that identifies sources of payment errors and estimates the magnitude of improper payments in RHS’s rental assistance program. To complete the annual audit, staff from RHS’s Centralized Servicing Center (CSC) examine a random sample of all rental assistance payments made in a given fiscal year. For each rental assistance payment in the sample, CSC staff request the associated tenant file from the property manager and review the file documentation to determine the correct amount of rental assistance that the property owner should have received for that tenant. The CSC staff then compare these calculations with the actual payments in RHS’s records to identify any discrepancies and provide RHS’s Multi-Family Housing Portfolio Division with a summary of the types and magnitude of errors found in the sample. RHS statisticians project the results of CSC’s calculations to the entire universe of rental assistance payments to develop a programwide estimate for improper payments. In recent years, RHS’s improper payments audits have identified rental assistance payments that were improper for two reasons: (1) the property manager incorrectly calculated the amount of tenant income on which the subsidy payment is based and (2) the tenant file did not contain sufficient documentation to support the subsidy payment. Incorrect income calculation. Property managers request rental assistance subsidies from RHS after determining tenants’ adjusted monthly incomes. This process involves collecting and verifying income information from tenants and subtracting applicable exclusions and deductions from the tenant’s gross income. The rent subsidy is the difference between 30 percent of the tenant’s adjusted monthly income and the USDA-approved rent for the unit. As previously noted, RHS regulations provide for numerous types of income exclusions and deductions. Due partly to the number and complexity of these exclusions and deductions, property managers sometimes make errors in calculating adjusted monthly incomes, leading to subsidy payments in the wrong amounts. Insufficient documentation. The primary documentation required for a payment to be considered proper is the Tenant Certification form, which should be signed and dated prior to the property manager’s subsidy request. Among other things, the certification documents a tenant’s income, assets, household composition, and disability status. Depending on the tenant’s circumstances, other required documents may include documentation of Social Security benefits and medical bills. If a tenant file does not have complete documentation, RHS auditors consider the entire subsidy payment to be improper. RHS reported a decline in its estimated gross error rate (gross improper payments divided by program outlays) from 3.95 percent in fiscal year 2007 to 1.48 percent in fiscal year 2010, the most recent year for which RHS has an estimate. As shown in table 1, this represented a decrease in the estimated dollar amount of gross improper payments from $35 million to $15 million over a period in which total program outlays increased by more than $130 million. The $15 million in estimated improper payments that RHS reported for fiscal year 2010 consisted of $12 million in overpayments and $3 million in underpayments, for a net estimated overpayment of $9 million. Assuming a monthly subsidy payment of $318—the average amount in RHS’s sample of fiscal year 2010 payments—$9 million is the equivalent of annual subsidy payments to more than 2,300 households. RHS’s estimated error rates of 1.39 percent for fiscal year 2009 and 1.48 percent for fiscal year 2010 are below the current IPIA threshold for programs considered susceptible to significant improper payments, but they are close to the revised threshold that will take effect in fiscal year 2013. As previously noted, IPIA, as amended, currently defines significant improper payments as those that exceed both 2.5 percent of program outlays and $10 million annually, or $100 million regardless of the percentage of program outlays. Agencies must estimate improper payments for susceptible programs using a statistically valid methodology and report these estimates to OMB each fiscal year. OMB implementing guidance for IPIA, as amended, will reduce the percentage threshold for susceptible programs from 2.5 percent to 1.5 percent starting in fiscal year 2013. A program with estimated improper payments below the percentage threshold for 2 consecutive years may request relief from the annual reporting requirement. Although RHS’s rental assistance program has been below the 2.5 percent threshold for the last 3 years, RHS has not requested relief from OMB on the annual reporting requirement. RHS officials told us they did not plan on requesting relief in the future because annually estimating improper payments and reporting the results has produced useful information that has helped RHS hold property managers accountable for compliance with program requirements. RHS’s estimated error rate may be understated because its improper payments audit does not examine some types of errors, excludes improper payments of less than $100 from its error rate estimates, and does not count all payments to tenants with undated certifications as improper. RHS’s annual audits do not examine three additional sources of payment errors and therefore may understate RHS’s error rate (see fig. 2). First, the audits do not check for an improper payment caused by a tenant not reporting all sources of income (intentionally or otherwise). RHS bases its rental subsidies, in part, on income information reported from tenants. RHS policy requires property managers to verify this information with third parties such as employers and welfare offices, but third-party verification may not identify all unreported income (for example, if a tenant discloses income from only one of two part-time jobs). If tenants do not report all of their sources of income, the rental subsidies calculated for the tenants may be too high and result in improper payments. RHS officials told us the improper payments audits do not examine unreported income because RHS does not have access to data that could readily identify unreported amounts. Two sources of such data are the Department of Health and Human Services’s (HHS) National Directory of New Hires (New Hires database) and the Social Security Administration’s (SSA) data on Social Security and Supplemental Security Income benefits as follows: New Hires database. This national database compiles information reported by employers to state workforce agencies and information from federal agencies. It contains information on newly hired employees, quarterly wage information for each job held by an employee, and unemployment insurance information on individuals who have received or applied for unemployment. In a prior report, we said that Congress should consider amending the Social Security Act to grant RHS access to the New Hires database for purposes of detecting unreported income. If such access were granted, RHS would have to develop a specific matching agreement with HHS, in accordance with the Computer Matching and Privacy Protection Act of The President’s budget for fiscal year 2013 contains proposed 1988.legislation that, if enacted, would give RHS this access. RHS currently has agreements with 31 states that give RHS offices in those states access to state wage data. However, these data have limited value for estimating income reporting errors in the rental assistance program because the data do not provide national coverage. Because the New Hires database is national in scope, it would not present this limitation. SSA benefits data. RHS officials stated that RHS does not currently have the statutory authority to access data on Social Security and Supplemental Security Income payments to assisted tenants. If granted this access, RHS would have to develop a matching agreement with SSA (pursuant to the Computer Matching and Privacy Protection Act of 1988) in order to use the information. In 2005, USDA’s Office of the Inspector General (OIG) recommended that RHS draft legislation that would give RHS access to federal income and benefits databases, including those maintained by SSA.However, RHS officials told us they had been focused on getting statutory access to the New Hires database and had not worked on developing legislation for accessing SSA benefits data. Without this access, future RHS efforts to identify unreported tenant income will be limited. The second source of improper payments not examined by RHS’s audits is a payment made on behalf of a deceased tenant. In the case of single- tenant households, rental assistance should be discontinued when the tenant dies. In the case of multimember households, the amount of rental assistance may need to be adjusted to reflect the change in household composition resulting from a tenant’s death. which is available to federal agencies, is a national database of deceased individuals who had Social Security numbers and whose deaths were reported to SSA. It contains information on date of birth, date of death, and state or country of residence for each decedent, and is a tool for identifying deceased individuals in a timely way. RHS officials told us they had not considered using the Death Master File to help identify improper payments. Therefore, if the deceased tenant’s landlord or family does not notify RHS of the tenant’s death in a timely manner, RHS could continue to make rental assistance payments on the deceased tenant’s behalf. A number of factors, including household income and the size of the living unit, determine whether rental assistance payments need to be adjusted following the death of a family member. USDA’s OIG reported on weaknesses in the way RHS was estimating improper payments that may have led RHS to understate its reported error rates in prior years. RHS subsequently changed how it conducts the improper payments audits, such as by using CSC staff (rather than RHS field staff) to help ensure consistency in implementing audit procedures, but it has not reestimated payment processing errors since making these changes. As a result, RHS’s assumption that payment processing errors are negligible may not be accurate. RHS’s estimated error rates may also mask the true extent of improper payments because they exclude improper payments of less than $100. RHS began using the $100 exclusion threshold for its audit of fiscal year 2007 payments. RHS officials said they adopted the threshold for two main reasons. First, RHS officials stated that the $100 exclusion threshold was based on a USDA regulation that lets tenant households wait until their next recertification to report increases in monthly income of less than $100. Second, RHS officials indicated that it was not cost- effective to attempt to recover small improper payments. While the $100 threshold may be appropriate for recertifying tenant income or deciding whether to recover payments, it does not follow that the same threshold is appropriate for conducting the improper payments audit. The purpose of the audit is to measure the magnitude of payments made in error, which IPIA defines as payments that should not have been made or were made in an incorrect amount. In the fiscal year 2010 sample of 666 payments, RHS found 15 improper payments of $100 or more, which represents 11 percent of all over- and underpayments in the sample. One hundred dollars is substantial in the context of monthly rental assistance payments. To illustrate, an improper payment of $100 represents almost one-third of the median RHS monthly rental assistance payment. While setting an exclusion threshold that eliminates small amounts from overall error estimates may be reasonable—such as amounts due to rounding up or down to the nearest dollar—RHS’s fiscal year 2010 sample shows that using the $100 threshold excludes a high percentage of improper payments from RHS’s error estimates, including some larger errors. As shown in figure 3, 89 percent of the improper payments in the sample were less than $100. Fourteen percent of the improper payments (or 19 payments) were from $25 to $99 and likely cannot be attributed to rounding errors. Additionally, HUD—which is the largest provider of federal rental subsidies—includes all improper payments greater than $5 in estimated error rates for its rental assistance programs. In RHS’s payment sample for fiscal year 2010, 51 percent of the improper payments exceeded $5. OMB is required by IPIA to approve the methods used by agencies to estimate improper payments. OMB initially approved RHS’s methodology in 2004, prior to RHS’s first improper payments audit and 4 years before RHS adopted the $100 exclusion threshold. However, OMB has not subsequently reassessed RHS’s methodology and therefore has not examined whether RHS’s $100 exclusion threshold is appropriate. In addition, OMB guidance does not address the use of exclusion thresholds. OMB officials told us they generally do not reassess an agency’s estimation method unless the agency tells OMB it is making a major change and submits the change to OMB for review. OMB officials also noted that more than 70 programs report on improper payments, which makes regular reassessment of each one challenging. Our analysis of the $100 threshold indicates that RHS’s adoption of the threshold did represent a major change. However, RHS did not submit the change to OMB for review. Our analysis of the payment sample that RHS used for its fiscal year 2010 audit found that the $100 exclusion threshold had a demonstrable impact on the incidence and magnitude of RHS’s reported improper payments. If RHS had included all improper payments in its estimates, the estimate of gross dollar errors would have been about $23 million rather than $15 million, and the estimated error rate would have been 2.21 percent rather than 1.48 percent (see fig. 4). RHS’s use of an exclusion threshold could affect whether or not the rental assistance program is subject to annual OMB reporting requirements for programs classified as susceptible to improper payments. As previously discussed, OMB has indicated that programs with error rates of at least 1.5 percent in fiscal year 2013 will be classified as susceptible, and our analysis shows that RHS’s use of the $100 threshold reduced its error rate below that level for fiscal year 2010. Finally, RHS’s reported error rate may be understated because, contrary to its stated audit procedure, RHS does not always count as improper those payments with Tenant Certification forms that were signed but not dated. The sample of payments that RHS used for the fiscal year 2010 audit contained five payments that were not counted as improper even through the Tenant Certification forms were not dated. Had RHS followed its audit procedure strictly and counted the five payments as improper, the number of improper payments included in RHS’s estimate would have increased by one-third, and RHS’s estimated error rate would have been 2.53 percent. RHS officials said they did not count payments associated with undated certifications as improper when the auditors were able impute an acceptable certification date from other documents in the tenant file. For example, if auditors determined that income verification documents in the tenant file were current and dated prior to the first subsidy payment request, auditors considered the sampled payment to be proper even though the Tenant Certification form was not dated. While this practice may be reasonable, it is inconsistent with RHS’s written audit procedure and reduces the transparency of the audit process. In addition, having unwritten procedures may increase the risk of inconsistent implementation across auditors. RHS has complied with requirements for using statistically valid methods to estimate improper payments and has implemented a number of corrective actions to help address the causes of payment errors. However, RHS’s reporting on improper payments has been incomplete, and the agency has not fully utilized techniques cited in statutes and guidance for reducing and recovering improper payments. RHS’s statistical methods for estimating improper rental assistance payments are consistent with OMB requirements. In fiscal year 2011, RHS’s reporting on improper payments complied with most OMB requirements but lacked required detail in some areas, including steps for holding agency managers accountable. Additionally, RHS has generally implemented planned corrective actions to address the causes of improper payments. RHS’s methodology for estimating improper payments in its rental assistance program complies with OMB requirements for implementing IPIA, as amended. OMB Circular A-123 requires agencies to base their estimates of improper payments on a random sample of payments that is large enough to yield an estimate with a margin of error of plus or minus 2.5 percentage points at the 90 percent confidence level. Consistent with these requirements, RHS’s improper payments audit for fiscal year 2010 reviewed a random sample of 666 payments from a universe of approximately 3.4 million payments. Based on this sample, RHS produced an estimate of gross improper payments with a margin of error of plus or minus 0.97 percent at the 99 percent confidence level, exceeding OMB’s standard. Additionally, we found that the techniques and formulas that RHS used to generate the random sample and produce estimates from the payment sample were statistically sound. To comply with requirements in IPIA, as amended, OMB Circulars A-123 and A-136 state that agencies should include specific information on improper payments in their annual PARs or Agency Financial Reports. As shown in table 2, our review of USDA’s fiscal year 2011 PAR found that the information reported for RHS’s rental assistance program complied with four of the seven requirements in OMB guidance but only partially complied with the remaining three. For example, the PAR contains required information on the program’s estimated improper payments, the causes of improper payments, corrective actions to address these causes, and statutory or regulatory barriers to reducing improper payments. However, the PAR lacks required detail on recovery of improper payments because of delays by USDA in implementing a recovery audit program. In addition, the required discussion of internal controls, human capital, and information systems to reduce improper payments is limited. The discussion consists of a high-level statement that USDA is creating information systems and infrastructure to reduce improper payments, that some of these efforts are constrained by limited resources, and that USDA is working with OMB to focus resources on critical needs. Because the discussion is not more specific, it is unclear if RHS has sufficiently assessed whether its internal controls, human capital, and information systems are sufficient to reduce improper payments to targeted levels. A USDA representative told us that USDA may provide a more detailed response to this reporting requirement in future PARs. Finally, the PAR does not contain required information on steps and associated timelines for holding RHS managers accountable for reducing and recovering improper payments. With respect to the accountability issue, OMB guidance requires agencies to describe the steps they have taken and plan to take to hold agency managers accountable for reducing and recovering improper payments. The guidance states that agency managers should be held accountable through annual performance appraisal criteria for meeting applicable improper payments reduction targets and establishing an internal control environment that prevents, detects, and recovers improper payments. However, in response to these requirements, the PAR states only that “ State Offices with improper payment errors develop a corrective action plan. The plan includes procedures to train field staff, borrowers, and property manager in appropriate required documentation and follow-up with tenants and income-verifiers.” While the plans may be key to addressing improper payments, the PAR does not discuss mechanisms for ensuring that agency managers follow through on the plans or how they are held accountable for reducing and recovering improper payments generally. In contrast, the PAR’s descriptions of accountability measures for other USDA agencies are more consistent with the OMB guidance. For example, the descriptions for several agencies discuss how improper payments goals and objectives were incorporated into agency managers’ performance plans and performance appraisals. RHS officials said that RHS state office directors currently have management goals that emphasize efficient and effective use of resources but acknowledged that improper payments are not specifically referenced in the goals. In April 2012, RHS officials told us they were seeking departmental approval of revised management goals for fiscal year 2012 that explicitly address improper payments. By not implementing accountability steps for improper payments, RHS may be limiting the effectiveness of its efforts to reduce improper payments. Additionally, by not reporting on accountability steps, RHS is not providing Congress and OMB information they may need for overseeing implementation of IPIA. OMB Circular A-123 requires agencies to develop and implement corrective actions to address the root causes of improper payments. Our review of USDA’s PARs for fiscal years 2008 through 2011 and documentation from RHS found that RHS developed and generally followed through on corrective actions over that period (see table 3). RHS’s corrective actions included educating property managers about improper payments, enhancing RHS’s reviews of improper payments, and seeking access to data for verifying tenant incomes. For example, in 2011, RHS met with housing industry groups about the results of its most recent improper payments audit. This meeting prompted the groups to develop training for property managers on how to reduce improper payments. In 2010, RHS worked with OMB to develop legislation that would grant RHS access to HHS’s New Hires database for income verification purposes. The legislative proposal, entitled the “Rural Housing Fraud Prevention Act of 2012,” would amend Section 453(j) of the Social Security Act. As previously noted, the proposed legislation was included in the President’s budget for fiscal year 2013. Additionally, in 2008, RHS enhanced its triennial supervisory visits (on-site reviews of assisted properties that cover a number of physical, financial, and management issues) to include reviews of tenant files that assess compliance with income calculation and documentation requirements. RHS subsequently enhanced its Multi-Family Information System (MFIS) to track the number and results of these reviews. RHS uses a number of methods to reduce improper payments but has not used a database cited in a 2010 presidential memorandum that could help RHS identify cases in which rental assistance payments should be discontinued or adjusted. In addition, RHS has experienced delays in implementing a recovery audit program to comply with IPERA requirements. OMB Circular A-123 states that federal agencies should take all necessary steps to ensure the accuracy and integrity of federal payments. OMB cites a number of steps that agencies can take to do so, including prepayment reviews, quality-control checks to detect improper payments that may have occurred, and data matching. Also, in June 2010, the President issued a memorandum entitled Enhancing Payment Accuracy Through a “Do Not Pay List.” The memorandum directs federal agencies to review current prepayment and preaward procedures and ensure that a thorough review of available databases with relevant information on eligibility occurs before the release of any federal funds. The memorandum states that, at a minimum, agencies should check SSA’s Death Master File, the General Services Administration’s Excluded Parties List System, the Department of the Treasury’s (Treasury) Debt Check Database, the HHS OIG’s List of Excluded Individuals/Entities, and HUD’s Credit Alert System or Credit Alert Interactive Voice Response These databases—which constitute the “Do Not Pay List”—can System.help agencies determine if an individual or entity is ineligible for payments or payments made on their behalf. For example, SSA’s Death Master File contains information on deceased individuals who had Social Security numbers and whose deaths were reported to SSA. RHS has used some of the techniques cited by OMB. For example, as part of their triennial supervisory visits to assisted properties, RHS local offices check the accuracy of rental subsidy calculations and the adequacy of supporting documentation for samples of tenant files. Also, as previously noted, RHS has reached agreements with 31 states that give RHS offices in those states the ability to match income information submitted by tenants to state wage data. However, RHS has not used the “Do Not Pay” databases to check tenant eligibility before making rental assistance payments to property owners. RHS officials told us that they had not considered using the “Do Not Pay” databases for the rental assistance program because some of the databases do not contain information relevant to eligibility for rental assistance and because RHS lacks an automated method for checking rental assistance payments against the databases. Nevertheless, RHS officials acknowledged that some of the information was potentially useful. Additionally, a representative from USDA’s Office of the Chief Financial Officer said that USDA agencies currently check some of the “Do Not Pay” databases for some of their programs. The official noted that USDA was in the process of getting access to a Treasury web portal, which was established to meet the requirements of the President’s “Do Not Pay” memorandum. The web portal is intended to provide a single point through which federal agencies can access the “Do Not Pay” databases to help determine eligibility for a benefit, grant, or contract award. Treasury offers agencies three options for using the databases: (1) online access, which allows users to compare individual records against the “Do Not Pay” databases via an Internet browser; (2) batch processing, which allows users to send a file to Treasury to compare a large number of records against the databases at one time; and (3) continuous monitoring, which allows users to store files with Treasury and continuously compare the files against the databases. The USDA representative said his office was in the process of entering into an online processing agreement with Treasury’s Bureau of Public Debt, which he indicated will require legal review by USDA’s Office of General Counsel. He also indicated that USDA was considering pursuing a batch processing agreement, which would require a separate agreement and legal review. Although RHS officials told us they had not considered the benefits of batch processing for the rental assistance program, a batch processing or continuous monitoring agreement would allow RHS to regularly check tenant records against the Death Master File or other applicable “Do Not Pay” databases. As previously discussed, this matching against the Death Master File could help RHS identify instances in which rental assistance should be terminated or adjusted. USDA has not yet instituted a recovery audit program to implement requirements included in IPERA and OMB implementing guidance. As a result, RHS does not currently have a recovery auditing capability. The process of identifying and recapturing overpayments is known as recovery auditing. IPERA placed increased emphasis on this process by requiring agencies to conduct recovery audits for each program and activity that expends more than $1 million, if conducting such audits is determined to be cost-effective. Previously, requirements for recovery audits were focused on payments to contractors and limited to agencies that entered into contracts with a total value in excess of $500 million in a fiscal year. IPERA decreased the threshold for when recovery audits are required to $1 million in annual outlays and expanded the scope of the audits to include grants, loans, benefits, and other assistance. IPERA allows federal agencies to hire private-sector contract auditors who receive a percentage of the overpayments they collect. OMB guidance states that agencies are to establish and report annual recovery targets, beginning with fiscal year 2011. However, as previously noted, USDA said in its fiscal year 2011 PAR that it was unable to report the amounts it expected to recover because it had not yet awarded a recovery audit contract. USDA plans to implement a recovery auditing program by hiring a contractor. According to USDA, the agency previously procured recovery audits of contract payments through FedSource (an interagency contracting service that was run by Treasury), but in fiscal year 2010, FedSource closed out the procurement contract USDA had been using.In March 2011, USDA issued a request for proposals (RFP) to solicit the broader range of recovery auditing services required by IPERA. However, USDA terminated the RFP process after determining the proposals it received did not meet the requirements of its payment recapture/recovery audit plan, which called for an auditing contractor that could cover the breadth of USDA programs and activities. USDA told us that the audit firms that responded to the RFP had experience in contract recovery auditing but lacked sufficient knowledge and experience for IPERA’s expanded focus on programs. As a result, USDA did not conduct any recovery audits in fiscal year 2011 and issued a second RFP in August 2011 that specified the department’s broader needs. A USDA representative said that the department anticipated awarding a contract in fiscal year 2012 but that it was unclear whether the award would occur in time to report any recoveries in USDA’s fiscal year 2012 PAR. HUD’s experience in addressing improper payments through data matching may help inform future RHS efforts. HUD has used data matching to estimate and reduce income reporting errors. HUD has also used this technique to terminate and recover assistance to deceased tenants. HUD took several years to develop and implement a data matching system and provides guidance, training, and technical assistance to system users. HUD uses data matching to help identify and reduce improper rental assistance payments caused by unreported tenant income, also referred to as income reporting error. HUD has used this technique to annually estimate the magnitude of improper payments attributable to income reporting errors. HUD also has developed a web-based data matching tool that gives HUD program administrators (i.e., PHAs and property managers) the ability to determine whether tenants are reporting all sources of earned income. HUD attributes some of the overall decline in its gross improper payments to these efforts. Like RHS, HUD conducts an annual study of improper payments in its rental assistance programs that examines a statistically valid sample of subsidy payments.studies. HUD’s initial quality-control study examined payments in fiscal HUD refers to these studies as quality control year 2000, and its most recent study examined payments made in fiscal year 2010. The quality-control studies provide a national estimate of gross improper payments in HUD’s three rental assistance programs and estimates for specific sources of payment errors, including income reporting errors, program administrator errors (similar to what RHS would call income calculation and insufficient documentation errors), and billing errors (similar to what RHS would call payment processing errors). Like RHS, HUD uses standardized electronic forms to collect information on tenants (e.g., income, family composition) for certifying and recertifying program eligibility and stores this information in databases. policies. Additionally, the study verifies any unreported income sources by mailing and calling employers and contacting an employment verification service. Finally, the study calculates the correct subsidy amount, based on both the reported and unreported sources of income, and computes the difference between the correct amount and the amount HUD actually paid to estimate the impact of unreported income on HUD’s improper payments. HUD has developed and implemented a web-based tool called the EIV system that allows program administrators to compare income information reported by tenants with income information from government agencies through a secure Internet portal. EIV gives HUD program administrators the ability to independently check the accuracy of reported tenant incomes and identify any income source not disclosed by the tenant during mandatory annual and interim certifications of income. HUD had agreements with about two dozen states by the end of 2004. in the Computer Matching and Privacy Protection Act of 1988. After reaching another agreement with HHS in 2007, HUD expanded access to EIV to property managers. HUD initially made the use of EIV voluntary for program administrators but issued a rule in December 2009 that made use of the system mandatory, effective January 31, 2010. EIV produces a number of reports that help program administrators to identify unreported income sources and thus help reduce rent subsidy overpayments. For example, the Income Discrepancy Report lists households whose wages, unemployment, or Social Security benefits income reported in EIV is $2,400 or more than the information reported by tenants to HUD. Program administrators must confirm any discrepancies by obtaining information directly from third parties, such as employers, and notify the tenant of the results of the third-party verification. program administrators determine that a tenant underreported income, they must calculate the difference between the amount of rent the tenant should have paid and the amount the tenant actually paid back to the time the underreporting started. The tenant is obligated to reimburse the program administrator for this difference—potentially through a repayment agreement—and the program administrator is required to send the reimbursed funds to HUD. EIV also produces a New Hires Report that provides employment information on tenants who have started new jobs and, therefore, may have increased their incomes, within the last 6 months. HUD requires tenants to report changes in income when the household’s income increases by $200 or more per month. The report allows program administrators to be proactive in reaching out to tenants to report the income changes so that their rents can be adjusted in a timely manner. Timely adjustments reduce the likelihood that the program administrator will make rent subsidy overpayments. Program administrators are limited to requesting third-party verification on income the tenant may have received during the past 5 years for which the tenant was assisted. rental assistance programs. HUD estimated that it paid $3.4 billion in gross improper rent subsidies in fiscal year 2000 (out of about $19 billion in outlays), prompting a HUD initiative called RHIIP to address the causes of payment errors. Under RHIIP, HUD established a goal of reducing the dollar amount of payment errors by 50 percent from fiscal years 2000 through 2005. HUD estimated that it had reduced the dollar amount of gross improper payments to $1.5 billion in fiscal year 2005 (out of about $27 billion in outlays), a reduction of over 50 percent. For fiscal year 2010, HUD’s most recent estimate, the corresponding amount of gross improper payments was $959 million (out of $33 billion in outlays), which represents a reduction of over 30 percent compared with the fiscal year 2005 estimate. As previously discussed, HUD also estimates improper payments due to specific sources of payment errors, including income reporting errors. From fiscal years 2004 through 2010, HUD’s estimates of improper payments due to income reporting errors ranged from a high of $385 million in fiscal year 2006 (accounting for 1.4 percent of program outlays) to a low of $203 million in fiscal year 2010 (accounting for 0.6 percent of program outlays). unreported income cases in the quality-control study samples, the margins of error around the estimates for income reporting error are too large to know with statistical certainty that income reporting error has declined over time. As we previously reported, HUD’s fiscal year 2000 estimate of income reporting errors is not comparable to estimates for other years because it used a different methodology. In addition, HUD’s subsequent estimate, which covered fiscal year 2003, had a margin of error so large that the estimate was not meaningful. See GAO-05-224. HUD initially created EIV to verify tenant income and identify unreported income, but it has expanded use of EIV to help monitor other aspects of its rental assistance programs. For example, each month HUD uses EIV to match tenant personal identifiers against SSA’s Death Master File. Through this matching process, HUD produces Deceased Tenant Reports, which contain the names of deceased members of tenant households and the dates the deaths occurred, when available. HUD makes these reports available to program administrators through EIV and requires them to access and act upon the reports on a regular basis. Program administrators must first confirm that an individual appearing in the report has died—for example, by contacting the head of household. Program administrators must then terminate assistance on behalf of deceased single-member households, ensure that larger households update information on family composition so the amount of rental assistance can be adjusted, and recover any rental assistance payments made after the tenant died. According to HUD, HUD staff audit program administrators quarterly to confirm that they have stopped making payments on behalf of deceased individuals. Additionally, in fiscal year 2011, HUD indicated that HUD and PHAs recovered $3.5 million in improper payments made to deceased individuals as a result of the Deceased Tenant Reports. HUD also uses EIV to identify tenants for whom HUD’s records do not contain valid or accurate Social Security numbers. According to HUD, correct Social Security numbers are critical to the effective implementation of EIV because the numbers are one of the key personal identifiers used to match tenant information to HHS and SSA data. Through EIV, HUD provides program administrators with Failed Verification Reports that identify tenants whose personal identifying information does not match SSA’s records. Program administrators must follow up with tenants in the report to confirm the tenant’s Social Security number, date of birth, and last name; obtain documentation from the tenant to verify any discrepant personal identifiers; and correct any discrepant information in HUD’s tenant databases. HUD officials told us that these efforts, coupled with 2009 regulations that mandated use of EIV and strengthened HUD’s Social Security number disclosure and verification requirements, have substantially reduced the number of tenants who do not match SSA records.fell from about 100,000 in January 2009 to less than 30,000 in February 2012. Although HUD has seen benefits from EIV, HUD’s experience also shows that developing and implementing such a system poses challenges. These challenges include obtaining data sharing agreements and making information technology investments; implementing regulations, guidance, and training to help ensure effective use of the system; and devoting staff to help ensure effective implementation of the system. HUD devoted significant time and resources to develop EIV. As previously discussed, after receiving legislative authority to negotiate a data matching agreement with HHS, it took HUD 3 years to reach an agreement that provided data access for all HUD program administrators. HUD had to address a number of issues to alleviate HHS’s concerns about data security. For example, HUD had to ensure that (1) only authorized individuals and entities would have access to the HHS data, (2) HUD program administrators were accountable for safeguarding the data, and (3) HUD could track when the data were accessed and by whom. HUD officials estimated that developing EIV, which took place from approximately 2002 through 2007, cost several million dollars. Additionally, HUD estimates that it has spent an average of about $700,000 annually over the last 3 or 4 years for system maintenance and development. HUD has issued regulations and provided substantial guidance and training about implementing EIV. As previously noted, HUD issued regulations in 2009 that require program administrators to use EIV. The regulations allow HUD to impose penalties against program administrators who do not fully utilize EIV. HUD has also issued, and periodically updates, EIV user, administration, and security manuals. For example, the user manual gives program administrators instructions for navigating EIV and using the data available in the system to make rental subsidy determinations. The security manual sets forth policies and procedures for controlling access to EIV and monitoring system use. In addition, HUD periodically issues notices to program administrators that provide detailed guidance on the use of the system and updates on HUD’s requirements. HUD disseminates these notices and other EIV user tips via a Listserv®. Further, HUD provides training and technical assistance to program administrators through in-person discussions, webcasts, and presentations at national and regional industry meetings. For example, HUD provides training by webcast at least once or twice a year and has an EIV help desk that can be reached via phone or e-mail. HUD has staff who are devoted to implementing EIV. HUD’s Office of Public and Indian Housing has six headquarters staff dedicated full-time to reviewing EIV reports, monitoring program administrators’ utilization of EIV, and identifying and recovering improper rental assistance payments. The Office of Public and Indian Housing also has about 100 EIV coordinators in field offices across the country to provide technical assistance to PHAs, approve requests for access to EIV, and certify the designated EIV users on a semiannual basis. Similarly, HUD’s Office of Multifamily Housing (a component of the Office of Housing) has four staff who work part-time on providing EIV technical assistance, program guidance, and training for property managers. In addition, Office of Multifamily Housing staff and entities hired by HUD to administer project- based Section 8 contracts review property owners’ and managers’ compliance with HUD’s EIV requirements as part of annual management and occupancy reviews of assisted properties. Finally, HUD’s experience could potentially inform RHS’s future data matching efforts. As previously discussed, development and implementation of EIV involved numerous steps and has required an ongoing commitment of resources. Knowledge of HUD’s efforts may help RHS identify the critical tasks it will need to perform if it is able to gain access to federal income data. HUD’s experience also highlights the potential benefits to RHS of following through on a data matching program. These benefits include more complete estimates of payment errors and an enhanced ability to reduce and recover improper rental assistance payments. Congress and the administration have taken a number of steps to help ensure the accuracy and integrity of federal payments. These include enacting IPIA and IPERA, developing guidance for implementing these laws, and issuing a directive on the use of payment eligibility databases. RHS’s rental assistance program is one of many federal programs subject to these requirements. RHS’s program serves over a quarter of a million low-income tenants and expended more than $1 billion in fiscal year 2011. Because the program is not an entitlement, not all eligible households receive rental subsidies. As a result, subsidy overpayments effectively reduce the resources available to serve the program’s target population. Additionally, subsidy calculations can be complex and are based partly on information reported by tenants and collected by property managers. These factors underscore the importance of identifying, reducing, and recovering improper rental assistance payments so that the program can operate as efficiently and effectively as possible. As required, RHS has made annual estimates of improper payments in its rental assistance program and has implemented corrective actions to help reduce such payments. However, RHS’s estimates may be understated for several reasons. In addition, RHS could do more to identify improper payments and strengthen accountability for reducing payment errors as follows: RHS is not measuring what may be a significant source of payment errors because it lacks statutory authority to use the New Hires database or SSA benefits data to identify unreported tenant income. Although RHS has drafted legislation that would give the agency access to the New Hires database and has submitted this legislation as part of the President’s most recent budget, it has not taken similar steps to obtain access to the SSA data. While HUD’s experience points to challenges that RHS may face in using these data—such as negotiating data-sharing agreements and developing appropriate systems, training, and guidance—it also demonstrates benefits. By matching tenant information to these data sources, HUD has been able to identify, and take actions to reduce and recover, substantial amounts of improper payments caused by unreported income and payments to deceased tenants. RHS’s exclusion of improper payments of less than $100 from its error estimates masks the full extent of payment errors in the rental assistance program. RHS has not provided a strong rationale for its $100 exclusion threshold. Further, the threshold may artificially keep the program’s error rate below the 1.5 percent level that will be in effect beginning in fiscal year 2013 and used to identify programs susceptible to significant improper payments. Although adopting the $100 threshold was a major change from RHS’s previous method, RHS did not submit the change to OMB, which is responsible for approving agency methodologies for estimation. As a result, RHS lacks assurance that its current approach is appropriate. RHS does not have a current estimate of improper payments caused by payment processing errors. As a result, RHS’s assumption that these errors are negligible may no longer be valid and may contribute to understatement of the overall error rate estimated for the rental assistance program. In RHS’s most recent improper payments audit, auditors classified some payments associated with undated Tenant Certification forms as proper, contrary to a written audit procedure. If the auditors had followed the written procedure, instead of the more flexible, unwritten procedure they did use, RHS’s estimated error rate would have been higher than reported. While the unwritten procedure may be reasonable, using this procedure reduces the transparency of the audit process and may increase the risk of inconsistent implementation across auditors. RHS has not taken advantage of SSA’s Death Master File as a tool for identifying improper payments. In contrast, HUD routinely performs matches against the Death Master File to identify and terminate payments made on behalf of deceased tenants and has used this information to recover several million dollars in improper payments. USDA is taking steps to use the Death Master File and other “Do Not Pay” databases through Treasury’s web portal, which offers a batch- processing capability. Using this capability for the rental assistance program would enhance RHS’s ability to estimate improper payments and allow RHS to regularly check for improper payments made on behalf of deceased tenants. RHS has not fully implemented steps to hold agency managers accountable for reducing and recovering improper payments and has not reported on these accountability steps in USDA’s PAR. In addition, the PAR does not provide an assessment of whether RHS has the internal controls, human capital, and information systems to reduce improper rental assistance payments to targeted levels. As a result, RHS is not fully complying with OMB guidance and may be limiting the effectiveness of its actions to address payment errors. By correcting these shortcomings, RHS could strengthen accountability in the rental assistance program and better inform Congress and OMB of its efforts to ensure the accuracy and integrity of RHS’s payment process. Congress should consider amending Section 453(j) of the Social Security Act to grant RHS access to HHS’s New Hires database for purposes of verifying tenant incomes. If such access were granted, RHS would need to develop specific procedures with HHS to facilitate it. To help estimate, reduce, and recover improper payments in the Section 521 rental assistance program, we recommend that the Secretary of Agriculture take the following actions: Draft proposed legislation for congressional consideration that would grant RHS access to SSA benefits data for purposes of verifying tenant incomes. Submit RHS’s methodology for estimating improper payments, including use of the $100 exclusion threshold, to OMB for review. Consider examining payment processing errors as part of the next improper payments audit to provide more current information on whether these errors are significant. In conducting the annual improper payments audit, either count all payments made on behalf of tenants with signed but undated Tenant Certification forms as improper or revise the audit procedure to classify such payments as proper when an acceptable certification date can be imputed from other documents. Complete steps to use SSA’s Death Master File—potentially utilizing the batch-processing option offered through Treasury’s “Do Not Pay” web portal—to identify improper payments made on behalf of deceased tenants and use this capability in conducting the annual improper payments audit and for ongoing oversight of program payments. Complete steps to ensure that RHS managers are held accountable for reducing and recovering improper payments in the rental assistance program and include a discussion of the accountability steps in USDA’s PAR. Include a discussion in USDA’s PAR of whether RHS has the internal controls, human capital, information systems, and other infrastructure to reduce improper rental assistance payments to targeted levels. We provided a draft of this report to the Acting Director of OMB and the Secretaries of Agriculture and Housing and Urban Development for their review and comment. We received oral comments from OMB on May 18, 2012. We received written comments from USDA’s Under Secretary for Rural Development. We also received technical comments from USDA, which we incorporated where appropriate. HUD did not provide comments on the draft report. In their oral comments, OMB staff said a recommendation in our draft report that was directed to OMB would be better directed to USDA. Our draft report contained a recommendation that OMB review RHS’s methodology for estimating improper payments, including use of the $100 exclusion threshold. Although OMB staff agreed that a reassessment of RHS’s methodology was appropriate, they said their process was to undertake such a reassessment only after an agency submitted its methodology to OMB for review. Therefore, we modified our recommendation to state that USDA submit RHS’s estimation methodology to OMB for review. We provided the modified recommendation to USDA in time for USDA to consider it in preparing written comments on our draft report. In its written comments, USDA said it generally agreed with the recommendations in our report, but it did not comment on specific recommendations. USDA cited various actions RHS had taken, which we described in our draft report, to reduce improper rental assistance payments and secure access to HHS’s New Hires database. USDA also reiterated that RHS had no plans to abandon improper payments audits or seek an audit exemption from OMB even if the rental assistance program’s error rate falls below OMB’s reporting threshold. Additionally, USDA stated that it “appreciated GAO’s notation that the RHS IPIA error rate is lower than that of the U.S. Department of Housing and Urban Development, even including RHS’s errors under $100.” Although our draft report did contain RHS’s estimated error rate for fiscal year 2010 (including and excluding errors less than $100) and a footnote in a separate section showing HUD’s estimated error rate for the same year, our report did not compare the error rates of the two agencies. Such comparisons are inappropriate because RHS’s error rate does not include sources of errors that HUD’s does include, such as income reporting errors and billing errors. In our final report, we added language to the footnote containing HUD’s error rate to emphasize this point. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Agriculture, the Secretary of Housing and Urban Development, the Acting Director of the Office of Management and Budget, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Our objectives were to examine (1) the extent to which the Rural Housing Service (RHS) has examined the sources and magnitude of improper rental assistance payments; (2) the extent to which RHS has complied with applicable requirements and guidance for estimating, reporting, reducing, and recovering improper payments; and (3) potential lessons RHS could learn from the Department of Housing and Development’s (HUD) efforts that have helped to identify and reduce improper rental assistance payments. To determine the extent to which RHS has examined the sources of error for improper rental assistance payments, we reviewed RHS’s annual improper payments audits for fiscal years 2004 through 2010 (the most recent audit available at the time of our review) and the U.S. Department of Agriculture’s (USDA) Performance and Accountability Reports (PAR) for fiscal years 2007 through 2011, which summarize information from the improper payments audits. We reviewed RHS’s policies and procedures for determining and processing rental subsidy payments to identify steps in the subsidy process where improper payments can occur. We also reviewed provisions in the Improper Payments Information Act of 2002 (IPIA), as amended, and Appendix C of Office of Management and Budget (OMB) Circular A-123 to determine the types of payments that should be classified as improper. To supplement our understanding of the sources of improper rental assistance payments, we interviewed RHS officials and representatives from the Council for Affordable Rural Housing and the National Affordable Housing Management Association. To determine the extent to which RHS has examined the magnitude of improper rental assistance payments, we reviewed the improper payments audits and PARs cited previously. We used this information to analyze trends in RHS’s estimated gross improper payments and gross error rates from fiscal years 2007 through 2010. We focused on that time frame because RHS used a somewhat different methodology and had different types of personnel conducting the audits prior to that period. For example, the audit for fiscal year 2007 marked the point at which staff from RHS’s Centralized Servicing Center (CSC), rather than RHS field staff, began performing the audits. We also reviewed Appendix C of OMB Circular A-123 to determine OMB’s thresholds for identifying programs that are susceptible to significant improper payments. We compared RHS’s error estimates with the current OMB thresholds and the thresholds that will take effect in fiscal year 2013. We performed a more detailed analysis of the payment errors found in the improper payments audit for fiscal year 2010 by obtaining and reviewing an RHS database containing the 666 randomly selected payments reviewed by CSC auditors. Among other things, the database included the dollar amount and types of errors, if any, that the auditors identified for each payment. We reviewed CSC’s written audit procedures and examined the extent to which CSC followed them, including criteria for classifying payments as improper. We also interviewed CSC officials about how they conducted the audit and their reasons for any deviations from written audit procedures. Additionally, we interviewed RHS officials about how they used the results of the audit to make programwide error estimates and their rationale for excluding payments of less that $100 from these estimates. Using information in the database, we determined the proportions of improper payments that fell within different ranges, including above and below RHS’s $100 exclusion threshold and above and below HUD’s $5 exclusion threshold. We calculated what the estimated amount of gross improper payments and the gross error rate would have been for the rental assistance program if RHS had included all improper payments in its estimates and compared these figures with the ones RHS reported. We interviewed OMB officials about RHS’s exclusion threshold and the extent to which they had reviewed or provided guidance to RHS on its estimation methodology, including the threshold. We also reviewed IPIA provisions describing OMB’s responsibilities for reviewing agency estimation methodologies. To assess the reliability of the data in the database of 666 sampled payments, we conducted reasonableness checks, including tests for missing data and outliers, on key data elements that RHS used to estimate improper payments. In addition, we reviewed RHS documentation about the database and interviewed RHS staff responsible for maintaining the data. Because RHS drew the payment sample from RHS’s Multi-Family Information System, we also reviewed the processes RHS had in place to safeguard the accuracy and reliability of data in the system. On the basis of this review, we determined that the data in the database of sampled payments were sufficiently reliable for purposes of our analysis. To determine the extent to which RHS complied with applicable requirements and guidance concerning improper payments, we reviewed provisions in IPIA, as amended; associated OMB guidance; and various RHS and USDA documents. To determine whether RHS met requirements for estimating improper payments, we reviewed Appendix C of OMB Circular A-123, which contains specific rules for sampling payments and the level of precision that error estimates must have. We compared these requirements with information presented in RHS’s improper payments audit for fiscal year 2010, the statistical sampling plan underlying the audit, and USDA’s fiscal year 2011 PAR. In addition, we reviewed the techniques and formulas RHS used to generate its fiscal year 2010 payment sample and produce estimates from the sample and found them to be statistically sound. To assess whether RHS met reporting requirements, we examined Appendix C of OMB Circular A-123, as well as OMB Circular A-136, which set forth specific information that agencies should include in their annual PARs about improper payments. We reviewed USDA’s fiscal year 2011 PAR to determine the extent to which it contained the required information. Because the reporting requirements call for agencies to identify corrective actions they have taken or plan to take, we also identified RHS corrective actions described in USDA’s PARs from fiscal years 2008 through 2011 and determined the status of those actions as of March 2012. We reviewed information regarding these corrective actions, including RHS correspondence, draft legislation, and other documents, as well as reporting by USDA’s Office of the Inspector General (OIG). We also interviewed RHS and OMB officials about RHS’s efforts to comply with improper payments requirements and guidance. To assess RHS’s use of required or recommended techniques to reduce and recover improper payments, we reviewed guidance contained in OMB Circular A-123, a 2010 presidential memorandum on ensuring payment accuracy through a “Do Not Pay List,” and provisions in IPIA, as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA). We reviewed documentation—including USDA PARs, RHS improper payments audits, and USDA OIG reporting—describing the methods RHS has used to help reduce improper payments. We also interviewed RHS officials and a representative from USDA’s Office of the Chief Financial Officer about these methods, including the use of databases that constitute the “Do Not Pay List.” With regard to RHS’s recovery of improper payments, we reviewed USDA’s PAR for fiscal year 2011, which contains a summary of USDA’s efforts to implement the recovery audit provisions in IPERA. We also reviewed USDA’s payment capture/recovery audit plan and fiscal year 2011 requests for proposals to solicit the services of a recovery auditing contractor. Finally, we interviewed RHS officials and a representative from USDA’s Office of the Chief Financial Officer about the status of establishing a recovery audit program in response to IPERA. To determine the potential lessons RHS could learn from HUD’s efforts to reduce improper payments, we reviewed HUD’s quality-control studies of improper rental assistance payments (which are comparable to RHS’s improper payments audits) conducted for fiscal years 2000 through 2010. We also reviewed information in HUD’s PARs for fiscal years 2001 through 2011, which summarize the results of these studies and describe HUD’s corrective actions to address the causes of improper payments. We used information from the PARs to examine trends in HUD’s estimated gross improper payments and gross error rate from fiscal years 2000 through 2010. Additionally, we reviewed findings from our prior work on HUD’s efforts to reduce payment errors and interviewed officials from HUD’s Offices of Public and Indian Housing, Multifamily Housing, and Policy Development and Research about their more recent efforts. Our work emphasized the benefits and challenges associated with HUD’s web-based Enterprise Income Verification System (EIV) because RHS lacks a comparable capability for verifying tenant incomes through data matching. To determine the specific benefits of EIV, we reviewed supplements to HUD’s quality-control studies that focus specifically on the data matching component of the studies and provide estimates of improper payments due to income reporting errors. We analyzed changes in HUD’s estimates of income reporting errors from fiscal years 2000 through 2011. However, we could not draw statistically valid conclusions about the changes, because the small number of households in HUD’s samples with unreported income resulted in estimates with large margins of error. We also reviewed information on HUD’s use of EIV to identify and recover payments to deceased tenants and to correct inaccurate tenant identifying information. Additionally, we interviewed the HUD officials cited previously about the benefits they had seen from using the system to annually estimate improper payments and help ensure the integrity of rental assistance payments on an ongoing basis. To determine the challenges associated with developing and implementing EIV, we reviewed information from HUD about how EIV evolved, the agency’s efforts to negotiate data matching agreements with the Department of Health and Human Services, estimated costs for developing and maintaining the system, and staff resources dedicated to implementing EIV and monitoring its use by program administrators. Further, we reviewed HUD regulations, guidance, manuals, and training materials that HUD developed to help implement EIV. Finally, we interviewed HUD officials about these various efforts. We conducted this performance audit from July 2011 to May 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Steve Westley (Assistant Director), Jeremy Conley, Isidro Gomez, John Lord, John McGrail, Marc Molino, Dae Park, Jennifer Schwartz, Verginie Tarpinian, and Heneng Yu made key contributions to this report. | RHS, an agency within USDA, paid property owners about $1 billion in fiscal year 2011 to help more than 270,000 low-income rural tenants afford rental housing. Each year, some of RHSs rental subsidy payments are improperthat is, too high or too low. Federal requirements regarding improper payments are set forth in statute and in OMB guidance. GAO was asked to review (1) the extent to which RHS has examined the sources and magnitude of improper rental assistance payments, (2) RHSs compliance with requirements and guidance concerning improper payments, and (3) potential lessons RHS could learn from HUD efforts to identify and reduce improper rental assistance payments. To do this work, GAO analyzed agency data and documents; reviewed statutes and guidance; and interviewed RHS, HUD, and OMB officials. The Rural Housing Service (RHS) has identified improper rental assistance payments caused by certain sources of errors, but its reported error rate (total amount improperly paid divided by program outlays) may understate the magnitude of the problem. RHS has identified improper payments resulting from inaccurate calculations of tenant subsidies and incomplete supporting documents. From fiscal years 2007 through 2010, RHS reduced its reported error rate from 3.95 percent (representing $35 million in errors) to 1.48 percent (representing $15 million in errors). However, these figures may be understated because RHS has not estimated improper payments due to unreported tenant income, and it lacks the authority to match tenant data to federal income data for this purpose. These data include the Department of Health and Human Services (HHS) New Hires database and the Social Security Administrations (SSA) data on benefits payments. RHS has proposed legislation to gain access to the HHS data but not the SSA data. Additionally, RHS has not recently estimated payment processing errors and has not strictly adhered to procedures for classifying payments as improper. Further, in 2008, RHS began excluding improper payments of less than $100 from its estimated error rates. However, it did not submit this change to the Office of Management and Budget (OMB), which is responsible for approving agency methodologies for estimation. As a result, RHS lacks assurance that its approach is appropriate. RHS uses required statistical methods for estimating improper payments but has not fully met requirements for reporting on, reducing, and recovering such payments. Consistent with the Improper Payments Information Act of 2002, as amended, and OMB guidance, RHS examines a statistically valid sample of payments and generates estimates with an acceptable level of precision. RHS also has reported required information, such as actions to address payment errors. However, RHS did not fully comply with the requirement to implement and report steps for holding agency managers accountable for reducing improper payments. In addition, although OMB cites data matching as a way to reduce payment errors, RHS has not used data already available from SSA to detect payments made on behalf of deceased tenants. Further, RHS has yet to institute a recovery audit program in accordance with the Improper Payments Elimination and Recovery Act of 2010, although it plans to do so sometime in 2012. These shortcomings negatively affect the integrity of RHSs subsidy payments. The Department of Housing and Urban Developments (HUD) use of data matching to reduce improper payments in its rental assistance programs illustrates the potential benefits and challenges of this technique for RHS. HUD developed a web-based system that allows authorized HUD staff and program administrators (e.g., public housing agencies) to match tenant information to HHSs New Hires database and SSA benefits data. According to HUD, the system has helped to reduce income reporting errors and has contributed to a more than threefold decline in total improper payments from fiscal years 2000 through 2010. Negotiating a data-sharing agreement with one agency and fully implementing the data matching system took several years. Additionally, HUD provides extensive guidance, training, and technical assistance to program administrators to help ensure effective use of the system. To help reduce improper payments caused by unreported tenant income, GAO suggests that Congress should consider authorizing RHS access to HHSs New Hires database and recommends that RHS develop proposed legislation to gain access to SSA benefits data. GAO also recommends that USDA submit RHSs method for estimating improper payments to OMB for review and that RHS take steps to consistently apply procedures for classifying payments as improper, examine improper payments made on behalf of deceased tenants or caused by payment processing errors, and hold agency managers accountable for reducing improper payments. USDA said it generally agreed with GAOs recommendations. |
In late 1992, about 13 million workers and retirees participated in state and local government pension plans. Eighty-seven percent of state and local full-time employees participated in defined benefit plans, while 9 percent participated in defined contribution plans. Some employees participated in both; 93 percent participated in one or the other. In a defined benefit plan, benefits are established by a formula that is generally based on such factors as years of employment, age at retirement, and salary level. Employers and employees in most state and local plans contribute to a fund from which these defined benefits will be paid. Actuaries calculate the size of the fund that will be needed to pay these benefits on the basis of projections of fund investment earnings, mortality, and other factors. If the fund’s assets are less than the projected liabilities, the plan is generally considered to be underfunded. Actuaries also calculate the contribution amount needed to cover the liability that accrues each year and to pay an installment on any unfunded liability. Thus, if a plan sponsor is making these actuarially required contributions, the plan can be underfunded yet still on track toward full funding. In contrast, a defined contribution plan, such as a 401(k) or 457 supplemental retirement account, sets the amount contributed to individual worker accounts. The balance in such an account at retirement, reflecting total contributions and investment earnings, determines the worker’s retirement benefit. Thus, by definition, such a plan cannot be underfunded in an actuarial sense. For private-sector pension plans, the Employee Retirement Income Security Act of 1974 (ERISA) ensures that most promised employee benefits will be paid. If a company goes out of business and leaves its defined benefit pension plan without adequate funds, the business no longer has earnings with which to make further contributions to cover its pension obligations. Among other things, ERISA insures pension benefits against insufficient funding; the Pension Benefit Guaranty Corporation (PBGC) assumes the liability and assets of terminated private pension plans and pays the retirement benefits, subject to certain limits. ERISA also requires that plan investments be diversified and funded on a sound actuarial basis and that plan fiduciaries adhere to certain standards of conduct. Further, ERISA establishes a framework for enforcing its provisions involving three federal agencies: the Department of Labor, the Internal Revenue Service, and the PBGC. ERISA does not apply, however, to state and local pension plans, nor does federal law impose funding requirements on them. Instead, state and local pension plans are created and governed by laws of their respective governments, which specify any funding or other requirements. These laws, their administration by state and local government agencies, and ultimately their enforcement by the courts provide any protections the beneficiaries may have. For example, in all 50 states, statutes include provisions for fiduciary standards; in about half of the states, these provisions are similar to ERISA’s. Also, about half restrict the types of investments that can be made. In addition, annual contributions to 56 percent of state and local pension plans are required to be actuarially based; for 40 percent of these plans, statutes set a specific contribution level, which in most cases is periodically adjusted to achieve actuarial balance, according to a state pension official. In addition, the plans are subject to review by state and local governmental audit agencies and legislative oversight committees. Moreover, the Governmental Accounting Standards Board (GASB) sets accounting and reporting standards for state and local governmental entities, including pension plans. Most state and local governments adhere to these standards. GASB will soon require the reporting of a 6-year funding and contribution history for pension plans and, for plan sponsors, the reporting of a measure of the difference between actuarially required and actual contributions. According to a PPCC analyst, such reporting should provide further impetus to improve funding and contributions. At times, perceptions arise that a state or local government is redirecting funds from a pension plan to meet other budgetary needs. For example, since 1992 California has attempted to delay its annual contributions of roughly $500 million by more than a year, costing its Public Employees’ Retirement System as much as $50 million per year in interest. In other states, such as New York and New Jersey, the legislatures have attempted to change certain actuarial assumptions to lower contributions. Also, several state legislatures have encouraged pension managers to invest some portion of plan assets in ways that will promote economic development as long as these investments are sound. Some critics raise concerns that such targeted investments often are not sound, citing certain bad investments that lost millions. For example, in 1990, Connecticut’s pension plan invested about $25 million in Colt Industries, which in 1992 declared bankruptcy; the pension plan lost $21 million. State and local government plans nevertheless operate in public view, and some plan fiduciaries and others have filed suits against plan sponsors. For example, according to pension officials and trade publications, in the California case, a superior court judge ordered the state to make the delayed contribution with accrued interest; the case is pending on appeal. Similarly, New York’s highest court ruled that the New York law changing the actuarial methodology for the public employees’ retirement system violated the New York State Constitution, and the state has agreed to a payment schedule that will make full restitution of missed contributions by 1999. As of this writing, the other cases involving New York and New Jersey are still pending in their respective courts. Regarding targeted pension investments, while some such investments do not earn competitive returns, others do. Although incidents of insolvency or termination of state and local pension plans are rare, underfunding of such plans may present governments with difficult budget decisions in the future. If the actuarial value of a pension plan’s liabilities exceeds its assets, a plan may still have enough funds to pay benefits for many years. If such underfunding persists, however, eventually—perhaps years in the future—the plan may lack enough funds to pay benefits. At that time, the sponsoring government will need to have made additional contributions to the pension fund. Or, a government may change the law to reduce benefits or postpone benefit increases that offset inflation, depending on the law that created the plan and the state constitution or municipal charter that governs lawmaking. Thus, the ability of state and local governments with underfunded plans to meet their pension obligations at some future date will depend on balancing competing budgetary demands and possibly on the willingness of their taxpayers to meet the cost. Moreover, if pension benefits are not fully funded, the fiscal burden of providing for them can grow quickly as a share of the budget under various circumstances. Benefit costs can increase rapidly if the number of retirees surges. Also, government revenues can grow slowly if the tax base decreases or tax rates are cut, even though promised benefits have already been determined for years to come. In fact, the ratio of active workers to retirees is declining in the state and local sector, which means that the cost of paying benefits for previous years’ employees is growing relative to the cost of paying current employees. If benefits are not fully funded, the relative fiscal burden of providing for them will grow as well. Also, the prospect of such budgetary pressures can significantly affect the sponsoring government’s bond ratings. In addition to concerns that full benefits might not be paid as promised or that the fiscal burden of doing so might be excessive, underfunding of state and local plans implies that the cost of government has been partially shifted from one generation of taxpayers to another. This year’s cost of government includes the cost of pension benefits that employees earn with this year’s work. Underfunding can arise when pension contributions do not fully cover the cost of pension benefits that workers earn in a given year. Underfunding can also arise for other reasons, however, such as pension plan investments’ not earning as high a return as projected. Actuarially required contributions include an installment on the amount needed to amortize the underfunded amount. Thus, undercontributing arises when the sponsoring government is not paying enough either to cover the pension liability incurred this year or to amortize this year’s share of the unfunded liability or both. A number of federal pension plans also have unfunded liabilities;however, arrangements have been made to fund the liabilities in the future. More importantly, the funding status of federal pension plans does not have the same implications as that of state and local plans. Unlike state and local pension assets, the vast majority of federal pension assets must by law be invested in nonmarketable U.S. Treasury securities. In effect, federal pension assets largely represent government promises to pay benefits, rather than investments that can be converted to cash. When the Treasury pays benefits now or in the future, it must obtain the money either from tax revenues or borrowing, regardless of the plans’ technical funding status. Although underfunding of state and local pensions has decreased considerably since the mid-1970s, underfunded plans remain. The unfunded liabilities of all state and local government pension funds then totaled $150 to $175 billion, according to the U.S. House of Representatives Pension Task Force; adjusting for inflation, this equals about $400 billion in 1992 dollars. In 1992, unfunded liabilities totaled roughly $200 billion, according to our estimate from the PPCC sample. Thus, the unfunded liability has decreased by about half in constant dollars. Also, in the mid-1970s, the funding ratio was roughly 50 percent. The 1992 funding ratio for plans in the PPCC sample was 82 percent (see table 1). (The funding ratio is the proportion of pension liability covered by the value of plan assets.) Funding ratios vary widely, however. Of the plans that were underfunded in 1992, 38 percent were less than 80-percent funded (see fig. 1). For underfunded plans alone in the PPCC sample, total assets equaled 77 percent of liabilities. In 1992, state and local government contributions to their pension funds fell short of the actuarially required amounts; the contribution ratio was 88 percent for all plans in the sample with complete contribution data.The contribution ratio is the proportion of the actuarially required contribution covered by actual contributions. (See table 2.) Underfunding of state and local government plans will not likely improve if contributions fall short of actuarially required amounts, which are calculated to cover currently accruing liabilities and also to help pay off any existing unfunded liability. Inadequate contributions over the long term could seriously erode the financial status of some plans, especially those underfunded by large amounts. Contribution ratios also varied widely in 1992. While 57 percent of plans received full contributions, the remaining 43 percent had a combined contribution ratio of just 69 percent, or nearly $4 billion less than the actuarially required amount. About 15 percent of plans received less than 60 percent of required amounts. For state plans alone, over half received less than full contributions, with nearly one-fourth below 60 percent of required amounts. Examining only the plans that were underfunded, 44 percent received less than full contributions and 16 percent received less than 60 percent of the required amount. About 55 percent of underfunded state plans received less than full contributions, compared with 40 percent of underfunded local plans. (See table 3.) According to our analysis of the PPCC survey data, the funding status of state and local pension plans improved between 1990 and 1992. The contribution status of these plans worsened slightly, however, and a significant share of plans underfunded in both years also received less than full contributions in both years. Although the survey had complete data for both years for only a subset of all survey respondents, this analysis illustrates the plans’ varied experience and what can happen in the worst cases. For the plans with complete funding data for both years, the funding ratio increased from 80 to 83 percent. For underfunded plans alone, the funding ratio increased from 72 to 78 percent. For plans with complete contribution data for both years, the contribution ratio decreased from 93 to 85 percent. For plans receiving less than full contributions, the contribution ratio decreased from 62 to 60 percent. Examining the distribution of plans by funding and contribution status better reveals the potential for funding problems since each pension fund must meet its own obligations. Of the 156 plans with complete funding data for both years, 97 plans increased their funding ratios, and the number of underfunded plans dropped from 122 to 118. For the 143 plans with complete contribution data for both years, the number of plans receiving less than full contributions increased from 53 to 57. Still, it may be perfectly appropriate for an overfunded plan to undercontribute; underfunded plans that do so are the primary concern. Of the 117 plans that had complete data for both years, 90 were underfunded in both years. Sponsors undercontributed to 28 of these in one of the two years but not both and undercontributed to 25 in both years. (See table 4.) Of the 25, 8 plans had funding ratios that decreased between 1990 and 1992. Another three had level funding ratios. Thus, nearly half of the 25 showed no improvement in their funding status. Even with undercontributing, funding ratios may improve for various reasons, including strong returns on pension fund investments. Also, while most of the underfunded plans without full contributions nevertheless improved their funding status, their sponsors may not have been paying off the unfunded liability exactly on schedule. Conversely, making the full actuarially required contribution, including partial payment of the unfunded liability, may not have been sufficient to improve funding ratios; for example, investments may have returned less than estimated. Of the 37 plans that were underfunded yet fully contributing in both years, 9 nevertheless had decreasing funding ratios. This illustrates the value of full funding in buffering against poor investment returns or other temporary strains on the pension fund. The funding status of state and local government pension funds has improved substantially in the past 15 years. More than half of underfunded plan sponsors are contributing enough to reduce their unfunded liability, while the other plans are not. Most significantly, one-third of state and local pension plans were both underfunded in 1992 and receiving less than the actuarially required sponsor contributions. Sponsors of underfunded plans who consistently undercontribute will leave their plans with little buffer against possible deterioration in the plans’ financial status. Such a deterioration could arise, for example, from an increase in the number of retirees or poor investment performance. As a result, sponsors create the potential for difficult budget choices in the future and may implicitly shift to future taxpayers part of the burden for paying today’s government workers. The Chair of the PPCC’s Survey Committee and the administrator of the PPCC database provided comments on a draft of this report. The PPCC represents associations of finance and retirement officials from state and local government. (See app. I for more detail.) Neither individual disputed the accuracy of the data we presented, but both disagreed with some of our specific conclusions. The Survey Committee Chair commented that the report’s tone is not balanced and would likely lead readers to think that public pension underfunding is a larger problem than it really is. We do not agree that this report is biased in tone or content. We clearly acknowledge that on the whole funding has improved substantially. However, we also attempt to focus attention on those underfunded state and local plans that may face problems if undercontributing persists. The administrator of the PPCC database suggested that only contribution ratios of less than 90 percent be considered significant undercontributing. He feels that relatively small levels of undercontributing often may reflect differences between actual experience and actuarial projections and that sponsors may compensate with overcontributions in other years. We acknowledge that a small level of undercontributing in one year may not significantly erode funding levels for a given plan, but we do not believe we can arbitrarily specify a numerical value at which undercontributing becomes significant in isolation from other factors. Ultimately, the critical question is whether undercontributing for a given plan persists from year to year and whether its funding level improves or worsens. Our 2-year analysis attempts to address this question, but, unfortunately, the PPCC Survey does not yet have complete data for enough plans for enough years to draw firm conclusions. Regarding this analysis, PPCC’s database administrator also commented that it is not appropriate to generalize from the relatively small number of plans that had complete data for both years. We agree and, in fact, were careful not to generalize from this 2-year analysis; we presented this analysis only to illustrate and focus on the implications of persistent undercontributing. In general, both commenters stated their view that the funding status of state and local pensions is improving. One noted that GASB reporting rules may provide further impetus to improve state and local plan funding and contributions. Both commenters also had some technical comments, which we have incorporated where appropriate. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, copies will be made available to others upon request. If you have questions concerning this letter, please call me on (202) 512-7215. Other GAO contacts and staff acknowledgments are listed in appendix II. To analyze the current status of state and local pension plan funding and contributions, we used data from the Public Pension Coordinating Council (PPCC). Members of the PPCC include the Government Finance Officers Association, National Association of State Retirement Administrators, National Conference on Public Employee Retirement Systems, and National Council on Teacher Retirement. The most recently available PPCC data were from their 1993 survey representing the financial status primarily for fiscal year 1992. We compared these data with a similar survey PPCC conducted in 1991, representing the financial status primarily for fiscal year 1990. Despite some limitations, the PPCC data are the best available, and respondents to the 1993 survey represent 83 percent of the assets of all state and local government plans and 76 percent of active plan members. Following are the data limitations: (1) survey responses represent the financial status for the fiscal year with the most recent actuarial valuation and thus do not all represent the same fiscal year’s financial status; (2) the samples are not random and therefore limit any generalization of results to nonrespondents; (3) many responses lack complete funding or contribution information; (4) the 1991 survey had fewer respondents than the 1993 survey; and (5) the data represent the plans’ own estimates using varied actuarial cost methods and assumptions. For the 1991 survey, 73 percent of responses had data from fiscal year 1990, 18 percent from 1989, and the remainder from other years. For the 1993 survey, 68 percent of responses had data from fiscal year 1992, 19 percent from 1991, 8 percent from 1993, and the remainder from other years. PPCC sent its survey to all members of two of its member associations and to a representative sample of members of the other two associations. PPCC reported that one of its associations was especially helpful in ensuring responses. Due to the nonrandom nature of this sample and the resulting potential for bias, no analysis can offer any generalizations about nonrespondents. Nor can confidence intervals be calculated. Nevertheless, the survey covered a substantial majority of pension plan members and assets. Thus the analysis describes the funding status of a large and important portion of all plans and members. As noted in footnotes throughout the report, many respondents did not provide complete funding data or contribution data or both. We can calculate the number of employees represented by plans with complete data, but we cannot generalize anything about the plans with incomplete answers or assess any resulting bias in the results. Still, as the footnotes detail, the plans with complete data generally represented a substantial share of the employees in responding plans. The limitations of incomplete data were greatest for comparisons between 1990 and 1992. Therefore, we present this analysis primarily for illustration. We did not adjust the PPCC data to standardize actuarial cost methods and assumptions. State and local governments may have many legitimate reasons for choosing various cost methods and assumptions, and we did not evaluate their choices. For example, among various investment restrictions, some plans are not allowed to invest in stocks while others are; therefore, plans’ assumed rate of return on investments should differ. In our previous analysis of this database, we used a measure called projected benefit obligation (PBO) for the pension plans’ liabilities. At the time, the Governmental Accounting Standards Board (GASB) required that state and local plans report this measure. In 1994, GASB changed its policy to require a measure called actuarial accrued liability (AAL), primarily responding to many requests from plans that did not use the PBO measure. Also, many officials felt that the PBO underestimates plan liabilities. In accordance with GASB’s change in policy, our current analysis also used the AAL measure; the PPCC database includes both PBO and AAL data, when reported. Our analysis confirmed that PBO generally yields higher funding ratios and therefore suggests a lower degree of underfunding. Since our previous analysis used the PBO measure and our current analysis used the AAL measure, funding ratios and related statistics should not be compared between the two reports. The trend analysis in this report, however, does make a valid comparison over time, using AAL for both the 1990 and 1992 data. The following individuals made major contributions to this report: Dea M. Crittenden, Evaluator-in-Charge; Kenneth C. Stockbridge, Evaluator; Lawrence Charron, Evaluator; and Sharon Fucinari, Computer Specialist. 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 status of public pension plan funding, focusing on the basic pension plans of state and local governments. GAO found that: (1) states and localities with underfunded pension plans run the risk of reducing future pension benefits to taxpayers or raising revenues; (2) unfunded liabilities for all state and local pension plans totalled $200 billion in 1992; (3) contributions to pension funds in 1992 fell short of the actuarially required amounts by 60 percent; (4) 75 percent of state and local pension plans involved in a Public Pension Coordinating Council (PPCC) survey were underfunded; (5) more than half of the pension plan sponsors surveyed continued to make payments to pay off their unfunded liabilities; (6) between 1990 and 1992, 20 percent of the plans were both underfunded and not receiving required sponsor contributions; and (7) of 117 plans with complete data in 1990 and 1992, 90 were underfunded. |
Apprenticeship is an employee training approach that combines on-the-job training and formal instruction to teach workers the practical and theoretical aspects of a skilled occupation. It is appropriate for many occupations that require at least 1 year of hands-on training and formal instruction. Apprentices work under the auspices of a mentor who is a fully trained worker, often called a journey worker. The content and length of the apprenticeship training and instruction are determined by the needs of the specific occupation. For employers, apprenticeship helps ensure that workers learn consistent skills, practices, and safety procedures. It also can be a way to retain employees because it indicates an employer’s willingness to invest in the worker and ensures regular wage increases if skills are attained. Additionally, employers are permitted to pay apprentices in a registered program less than prevailing wages while they are working on a federal construction project. At least two states and municipalities have similar requirements or mandate that contractors employ apprentices on projects. Employees benefit from registered apprenticeship by advancing their skills and obtaining a credential recognized throughout an industry. Apprenticed occupations have historically been concentrated in the building trades, metalworking trades, and various repair occupations, as we described in an earlier report.Figure 1 shows the apprentices as of September 30, 2000, for 36 states that provided data on apprentices by industry. Construction and manufacturing apprentices continue to make up the vast majority—82 percent—of apprentices. The National Apprenticeship Act of 1937, commonly known as the Fitzgerald Act (29 U.S.C. 50), authorized and directed the Secretary of Labor to formulate and promote labor standards safeguarding the welfare of apprentices and to bring employers and labor together to establish programs of apprenticeship. The Secretary issued regulations implementing the act which provide for registration of apprenticeship programs. In order to be registered, Labor requires that an apprenticeship program be in an apprenticeable occupation as defined in the regulation and meet certain standards. Programs are administered by the Department of Labor Office of Apprenticeship Training, Employer and Labor Services (ATELS) or by State Apprenticeship Agencies or Councils recognized by the Secretary of Labor. The standards prescribed by Labor require that federal registered apprenticeships must include at least 1 year or 2,000 hours of on-the-job training and a recommended 144 hours of formal instruction. In general, most programs last 3 to 4 years. Each program must meet 20 additional requirements, which include a specified minimum age for an apprentice, a specified term of apprenticeship, a progressively increasing wage schedule based on skills acquired, safety training, and a minimum ratio of apprentices to skilled workers. States can impose additional requirements on programs. Program sponsors may also identify additional minimum qualifications that apprentices must possess—for example, a certain level of education or specific physical abilities needed to perform essential functions of the occupation. In addition to meeting the prescribed labor standards, an apprenticeship program must be in an apprenticeable occupation to be eligible for registration. Labor makes this determination based on criteria outlined in the regulations. Labor can make this determination when a program is presented for registration or before apprenticeship programs are developed. In the latter situation, for example, an employer may submit a list of the skills needed to complete various tasks in an occupation and the necessary training to complete these tasks. Typically, Labor then distributes this list to appropriate industry representatives for feedback on the occupation’s apprenticeability. Once Labor has determined that an occupation is apprenticeable, it notifies federal and state apprenticeship representatives who can begin to promote programs within that occupation. If an employer decides to establish an apprenticeship program, he or she can work with an apprenticeship representative, either from Labor or a state council, to ensure that the program complies with Labor’s standards and state laws. Frequently, the apprenticeship representative will help the employer by suggesting various program practices, providing examples of programs that have been successful, or modifying the requirements to meet the needs of individual employers. Employers can sponsor registered apprenticeship programs independently, with a group of employers, or with organized labor. Despite having an important presence in industry, the federally registered apprenticeship program operates using relatively little federal money. In fiscal year 2001, ATELS has an appropriation of about $22 million to administer the program, while state councils run the program with an additional $20 million. The employers and apprentices themselves contribute at least $1 billion for the training. According to Labor, more than 37,000 apprenticeship programs in about 850 occupations employed about 360,500 registered apprentices in fiscal year 2000. Progress in expanding apprenticeships to address skill needs in occupations not traditionally apprenticed has been hampered because Labor’s efforts to identify new apprenticeable occupations are not systematic, nor has Labor been able to alleviate some employers’ apprehension about program requirements. Instead of proactively identifying occupations in which apprenticeship could help provide needed skills, Labor has reacted to employers’ requests to have their occupations recognized as apprenticeable. While some employers take the initiative to make this request, others are deterred from doing so by their apprehension about apprenticeship. Employer concerns that have impeded the establishment of apprenticeship programs ranged from stringent program requirements to the increased government scrutiny they may invite. Apprenticeship representatives working one-on-one with employers try to allay these concerns; however, Labor does not have a centralized effort to reach out to industry representatives and explain how apprenticeship could be implemented in their industry. Further, Labor cannot identify and share its successes because it cannot fully assess its progress in establishing new programs. Its apprenticeship database is incompatible with states’ systems, resulting in data that are incomplete and too general to provide information on specific occupations’ expansion. Labor does not have a formal process to determine how the apprenticeship program could be expanded to meet an increasing demand for skilled labor or to respond to the technological advances of today’s economy. Labor has primarily reacted to employers’ requests for apprenticeships in new occupations and has allowed industry to take the lead in requesting new occupations. Further, Labor has not made a comprehensive effort to locate funding for all new apprenticeable occupations; however, it has recently recognized several occupations that respond to evolving labor market needs. In March 2000, at the request of a union, it approved internetworking technician as an apprenticeable occupation to respond to the increased need for skilled workers to install, maintain, and operate advanced data networks and their components. In October 1999, Labor approved Hotel Associate as an apprenticeable occupation to respond to increased labor needs in the tourism industry and to help retain workers in a competitive labor market. In a few cases, Labor has been proactive in identifying specific occupations, providing funding for their development, and encouraging their implementation. For example, in the late 1990s, Labor initiated (and approved in 2000) the youth development practitioner apprenticeship to provide quality training for workers who deliver comprehensive services to young people and provided grants for its implementation. In the last 5 years, 19 occupations have been recognized by Labor as apprenticeable and a substantial number of these have been in less traditional occupations. Table 1 lists the occupations and approval dates for these occupations. Labor officials recognize the need for Labor to become more proactive in identifying new occupations as apprenticeable and providing funds for the development of new apprenticeship programs but, according to the officials, Labor’s efforts in this area have been hindered by resource limitations. Specifically, Labor officials commented that staff and funding shortages have prevented the agency from fully addressing all its responsibilities, including marketing apprenticeship programs, coordinating with other partners in the job training arena, and providing technical assistance to employers. However, despite their funding limitations, Labor has been able to make some progress in developing and expanding the apprenticeship program. Further, information to help them identify additional occupations in which more skilled workers are needed and apprenticeship can effectively be used to train workers is readily available. Future plans call for taking a more systematic approach, especially in assessing the labor needs of occupations and determining the possibility of apprenticeships helping to address these needs. Some employers’ perceptions and concerns about the apprenticeship program have presented challenges to expanding the program. In our discussions with apprenticeship representatives and employers from the states we visited, we were told that employers were apprehensive about agreeing to a progressive wage schedule for an apprentice without first receiving feedback on how the apprentice was performing both on the job and during formal instruction. Employers were reluctant to commit to a program lasting several years, especially in view of uncertain economic conditions and rapidly changing technology. Employers were concerned with what they considered strict training requirements, such as the 144 hours of formal instruction, recommended by federal regulation but required by some states. Employers were also concerned about getting involved in a program that they thought would lead to increased government oversight or scrutiny of their business. Additionally, employers regarded apprenticeship as a “blue collar” approach to training that is inappropriate to their industry. Employers in some industries, such as high technology and biotechnology, have difficulty envisioning how apprenticeship would benefit them. Apprenticeship officials in several states commented that they have tried to reach out to these industries but have not been successful because employers see difficulty incorporating the apprenticeship structure within their industry. The computer-generated imaging industry in California is an example of an unsuccessful attempt to reach out to an industry by the state apprenticeship representatives. The need for animators to create computer-generated graphics has greatly increased, but is largely project- driven. Workers are needed for a short period of time and then are laid off when the project ends, which is not conducive to long-term apprenticeships. State officials suggested that studios adopt the construction trade model, where workers are essentially pooled and employers draw from the pool as needed. Employer reaction was strongly against this model because the motion picture industry did not want to share workers; the proprietary nature of the work, with companies operating in very competitive fields with new technology, made them uneasy. Labor has efforts under way to reach out to individual employers as well as to inform the general public about apprenticeship. In developing individual apprenticeship programs, Labor deals with employers on a one- on-one basis. Although costly, time-consuming, and labor intensive, Labor officials commented that this approach is very effective at allaying the fears and concerns of employers regarding apprenticeship and was instrumental in gaining their support. Many apprenticeship representatives from Labor are former apprentices who are knowledgeable about the program and can relate to employer concerns. Their approach is to meet with employers to explain the details of the program and resolve any concerns the employer raises. For example, in response to concerns about wage progression, apprenticeship representatives might explain the need to increase workers’ pay over time, noting that this is not automatic but rather based on a demonstrated increase in skills. To allay concerns about the long-term nature of apprenticeship training, they might describe how the program provides flexibility in determining the length of the program. Some programs such as the cable television installer apprenticeship are 1- year programs whereas more complex apprenticeships would be longer, for example, 4 years for a carpenter or electrician apprenticeship. When an employer expresses concern about increased governmental scrutiny, the representative might explain that oversight would not include reviewing other aspects of the operations. Officials commented that once employers fully understand the reasons for apprenticeship requirements, they are often supportive of apprenticeship and can see the benefit to both themselves and the employee. Additionally, Labor has begun an initiative using its current resources to better market apprenticeship. In October 2000 Labor started the Registered Apprenticeship Awareness Initiative, which consisted of a variety of efforts aimed at increasing awareness of and support for registered apprenticeship beyond the employers. For example, Labor produced a compact disc to help spread information about apprenticeships to employers and potential apprentices. It includes information on how to contact apprenticeship representatives, what resources are available to help set up a program, and the benefits of a program. Labor has found this to be a way to conduct outreach, within their present resources, to a broad segment of employers and potential apprentices. The Apprenticeship Information Management System (AIMS), Labor’s current apprenticeship information system, cannot provide a complete, detailed picture of progress in implementing apprenticeships in new fields and cannot be used to assess progress or program development. Apprenticeship officials in 36 states enter data directly into AIMS but the remaining 14 states—which have a labor force of 49 million, or 35 percent of the total U.S. labor force—have chosen not to directly report data to the system, do not have access to it, and in some cases provide only summary data. Detailed information is not included in AIMS for these states, and some information, such as programs being developed, is not included for any states. The system was developed to provide Labor with capabilities to report statistical information and track apprenticeship registration, not to manage the program. Labor hopes that a new system under development will be used by all states so that it can provide information with which to measure progress in expanding apprenticeships to new occupations. Labor has developed specifications for a state-of-the-art AIMS system that can be used by headquarters, regions, and all states. The new system is expected to provide detailed information, such as data on apprentices who start, complete, or leave the program. The new system is expected to be designed by February 2002 and to be operational by June 2002. Labor lacks a mechanism to share information among all states, which could be helpful as Labor tries to expand apprenticeships to less- traditionally apprenticed occupations. Labor does not maintain a national information-sharing system that provides information on lessons learned and experiences with these apprenticeships. This lack precludes states from quickly learning of and benefiting from the experiences of others. For example, two states we visited were each working independently to develop potential apprenticeships within the information technology (IT) industry. They were unaware of similar efforts by the other or by Labor nationally. Both were unable to benefit from the other’s experiences, and neither was successful in getting an IT-related apprenticeship started. Neither could readily access national information on other states’ progress or success at similar efforts. According to Labor officials, such information is not readily available. Labor officials believe that their system should have more capabilities, such as on-line queries, that would enable this information to be obtained readily. The data gaps and insufficient capability of the AIMS system further reduce the value of information that is obtainable on the system. We identified a diverse group of programs for which apprenticeship was chosen as an approach to developing skills needed by an industry. The people involved in establishing these programs overcame difficulties in order to set up apprenticeship programs. While the programs were at various stages of maturity at the time of our study, none had developed quickly; they required much discussion and negotiation among different parties, and in a few cases their development is still under way. Generally, the start-up effort required additional resources, sometimes provided by employers and sometimes by Labor. Program sponsors frequently used innovative practices, such as on-line training, to respond to the special characteristics of individual programs. As shown in table 2, the programs we studied represent a variety of industries and meet particular labor skill needs. Most of these programs were started in the last decade, and a few are still being established. More recent efforts to establish apprenticeships in new occupations have involved reaching out to industries in which apprenticeship is not a familiar concept and developing a comfort level among potential sponsors and apprentices. (See app. II for detailed descriptions of the development and status of each program.) Open communication among employers, employee groups, and the approving agencies has helped speed up and ensure the establishment of these apprenticeship programs. For example, the production technologist apprenticeship was the result of a joint meeting of union and employer representatives. Because the apprenticeship would cross several job classifications, such as engineer, machinist, and electrician, some workers and Labor were not enthusiastic about its potential. This concept was not immediately accepted by some local union workers, who were concerned that allowing these workers to perform tasks that were part of other occupations would jeopardize the other occupations. However, discussions involving all parties allayed their fears. Program planners explained that the quick availability of production technologists who could make small repairs would reduce the production line’s lost time, yet machinists would still be called when more expertise was needed. The youth development practitioner apprenticeship also required good communication. Labor officials worked with staff from its Office of Youth Services to hold several forums across the nation to discuss the apprenticeability of the occupation. The exact nature of the position was defined based on information from these forums. Apprenticeship was initially an unfamiliar concept to the people involved in establishing some of these programs. However, discussion with apprenticeship representatives helped them to understand its value to the employers. The responsibility for educating program sponsors— sometimes one-on-one—typically fell to the Labor or state apprenticeship council representatives who marketed the concept. The expansion of the childcare development apprenticeship from a one-state program to a national one required this type of effort. As part of a national initiative to strengthen childcare workers’ skills, Labor sponsored a nationwide videoconference to discuss the value of childcare worker apprenticeships. Representatives from various state agencies, industry representatives, and apprenticeship representatives participated in the conference, which led to further meetings to discuss the possible implementation of the program in their states. In the three states whose childcare programs we reviewed, training was developed at the state level, which eliminated the need for individual employers to develop their own training plans. Apprenticeship representatives explained the formal training and helped employers understand how it would integrate with the apprenticeship’s structure. Similarly, the pharmacy technician apprenticeship required education outreach. Representatives from the apprenticeship councils in Maine and the District of Columbia contacted hospitals and pharmacies to convince them of the value of apprenticeship, particularly in retaining pharmacy technicians. In Maine, the apprenticeship representative explained how the progressive wage schedule would be helpful in overcoming the problem a hospital was having with retaining workers. Typically, the programs we reviewed required significant resources to develop and deliver formal training. For example, the development of technical courses for the production technologist apprenticeship has cost about $160,000. The employer who provided this money viewed it as an investment in high quality training. For the northern California sound and communication workers, whose apprenticeship training has been provided by a joint employer/union council, two sources have provided funding for training. The employers themselves have contributed $0.30 for each hour that union employees worked, and the state provided more than $4 per hour from a training fund for each apprentice’s classroom time. For some of the programs, particularly those in industries where apprenticeship is not common, government funding was provided to pay for program design, as Labor took on responsibility for helping to identify such funding. Although Labor’s ATELS unit does not have regular appropriations for program design, in some cases Workforce Investment Act discretionary funds have been used. The Congress also appropriated $12 million to bolster Labor’s childcare development worker apprenticeship initiative. To date, 20 states and the District of Columbia have received grants from this appropriation, which they have used for various purposes, including subsidizing formal instruction and funding apprenticeship representatives who “market” apprenticeship to childcare centers and monitor the on-the-job training. Officials we spoke with in three states emphasized the important role that these funds played in marketing and implementing apprenticeship within the industry. For the new youth development practitioner apprenticeships that Labor spearheaded, Labor requested grant proposals in April 2001 from entities that wished to receive funds to establish individual programs. About $1.45 million will be available for local organizations and institutions, national organizations, and an organization that can provide technical assistance as programs develop their procedures and curriculum. In May 2001, Labor provided $550,000 to the Computing Technology Industry Association (CompTIA), an IT trade association, to design an IT technical support specialist apprenticeship program. The association will use the funds to convene industry representatives to identify which jobs and skill sets within the IT career clusters would fit the apprenticeship model. Several sponsors of the apprenticeship programs we studied used innovative approaches to meet apprenticeship requirements while accommodating unique characteristics of the occupation or industry. In four of the programs, distance learning—formal instruction over the Internet or by videoconferencing—was used or is being developed to accommodate workers who could not meet with instructors personally. The production technologist position’s formal instruction, designed and taught by university personnel in Illinois, was provided via videoconferencing to workers at the two participating manufacturing facilities in Shreveport, Louisiana, and Denver, Colorado. New Hampshire sponsored on-line training for the childcare development specialist apprentice mentors (the supervisors of the apprentices) and lent them laptop computers to enable them to participate in the courses and network with others who were mentoring childcare apprentices. Some of the programs adapted their apprenticeships to accommodate unique characteristics of their occupation or industry. For example, the childcare industry typically has low wages relative to other industries. Vermont officials decided to use some of their childcare grant funds to subsidize the wages for apprentices and their mentors, which they believed would raise the status of apprenticeship and attract both apprentices and mentors. In some industries, skill certifications have become key elements of workers’ credentials, and in some of the programs we studied, the certifications were made part of the training. For example, the sound and communication workers in northern California integrate into their apprenticeship program the BICSI training, an industry- recognized certification that some contracts require all workers to have. Similarly, CompTIA, a trade association that develops certifications in many technical aspects of personal computer service, support, and networking, plans to offer certification for IT technical support specialist apprentices who pass the formal instruction. Labor has not led a systematic effort to identify apprenticeable occupations and, therefore, the full potential of apprenticeships may not have been realized. Some industries with shortages of skilled labor have not used apprenticeship to meet those needs. Labor has focused its efforts to expand apprenticeship on a few occupations for which skills need to be improved and shortages exist. Its efforts to identify new occupations for apprenticeship have been largely reactive and, as a result, Labor is not influencing the expansion of apprenticeships to industries in need of skilled training. Instead of being reactive, Labor can take a leadership role in identifying occupations where apprenticeship can contribute to providing needed skills, using available information and staff to better direct the expansion of apprenticeship nationally. In addition, Labor has identified workforce development funds to support some of these efforts, but has not systematically located resources for apprenticeships needing funds for program design, which could help ensure their success. Further, Labor has not done all it could to widely disseminate information about the apprenticeship program, although doing so would result in employers overcoming their concerns and wanting to participate. The agency has not set up a way for program sponsors to share information on lessons learned, such as through online databases that sponsors could query, with other employers interested in establishing apprenticeships. Such an information exchange would help potential program sponsors understand how apprenticeship could be beneficial, overcome difficulties that may arise in their efforts to establish a program, and alleviate concerns they have about apprenticeship requirements. For example, this exchange could allow the classroom training modules and work standards established for programs in one location to inform employers and apprenticeship representatives in other locations. Similarly, a more detailed apprenticeship database could help people who are considering establishing new programs by identifying others who have experience in operating similar programs. Currently, the database’s incompatibility with some state systems hinders networking and sharing of lessons learned among apprenticeship representatives who are working to establish new programs. It also limits Labor’s ability to measure progress on the use of apprenticeship in newly approved occupations. To expand apprenticeship, particularly into occupations not traditionally apprenticed, Labor must take the lead in coordinating and promoting the development of programs. As part of this effort, we recommend that the Secretary of Labor ensure that ATELS Lead a systematic effort to work with state apprenticeship councils and others interested to identify apprenticeable occupations that have shortages of skilled labor and establish plans for promoting apprenticeship programs in these occupations, Work with other federal workforce development programs to identify funding for developing apprenticeships when additional support is needed, Establish a mechanism for sharing among Labor representatives and employers information on apprenticeship programs, particularly those in occupations not traditionally apprenticed, and Ensure that the apprenticeship database contains detailed information on current programs so that accurate and complete information is shared and progress in meeting labor market needs can be evaluated. The Department of Labor commented on a draft of this report, stating that it agrees with all four recommendations and is planning actions to implement them (see app. III). Labor plans to have ATELS take the lead in identifying apprenticeship opportunities for occupations with skilled labor shortages as well as in new and emerging industries. Through enhanced coordination with other federal workforce investment system programs, ATELS will explore additional financial, technical, and communications support for expanding apprenticeship opportunities. To better share information on apprenticeship programs, ATELS has engaged a contractor to manage a major public information initiative, including reaching out to growth industries and high-demand occupations. Further, Labor stated that in redesigning the apprenticeship information management system, it has begun to make necessary improvements, and expects that the final design will provide accurate and complete information throughout the registered apprenticeship system. We are sending copies of this report to the Secretary of Labor and other interested parties. 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) 512-7215 or Joan T. Mahagan at (617) 565-7532. Key contacts and staff acknowledgments for this report are listed in app. IV. We took several steps to determine efforts the U. S. Department of Labor has made to expand apprenticeship to new occupations and to understand the impediments to starting apprenticeship programs in fields not traditionally apprenticed. We interviewed Labor officials at the national, regional, and state levels to obtain an understanding of how apprenticeable occupations are identified and how apprenticeship programs are registered. We visited four states to discuss how each state implements and manages the apprenticeship program, particularly how they approve new programs. From those programs registered in recent years, we judgmentally selected 10 programs in each state that addressed labor market needs or were in nontraditional occupations. We collected detailed information on the approval process and any impediments to it from the responsible federal or state apprenticeship representative and from the employers. We also spoke with members of the Federal Committee on Registered Apprenticeship, National Association of State and Territorial Apprenticeship Directors, as well as trade associations, unions, and other knowledgeable individuals to discuss their roles and obtain their views on expanding apprenticeship to respond to labor market needs. In order to describe examples of apprenticeship programs that responded to current labor market needs and how they have done so, we studied in depth several apprenticeship programs that either had been established or were being established in occupations that are not traditionally apprenticed. To identify these, we obtained suggestions from Labor officials, state apprenticeship council officials, and other knowledgeable experts in apprenticeship. Our activities in reviewing these programs included speaking to employers, observing and touring a training facility, and speaking to developers of the formal training. Following are summaries of programs that exemplify efforts to develop new apprenticeships that respond to labor needs. In 1995, high-level representatives of AT&T’s wireless telephone facilities and the union, International Brotherhood of Electrical Workers (IBEW), met to discuss their mutual concerns about the workforce’s capability to meet the company’s needs as manufacturing processes changed. From that meeting, development of a new apprenticeship was undertaken in an occupation called production technologist. Production technologists were to be responsible for both direct production work on products and for indirect work, such as production planning, routine equipment maintenance, and training. Management at the Shreveport, Louisiana, and Denver, Colorado, plants agreed to implement the apprenticeship with the union. One issue needing resolution was concern that the position involved combining the skills of a variety of different workers, such as engineers, electricians, and machinists. Some union members believed it would hurt workers in individual trades if the production technologists worked across trades. However, union management convinced them of the importance of including specific training in the apprenticeship, such as less-complicated machine repairs that could reduce production downtime. Labor approved the occupation as apprenticeable in December 1997. The production technologist apprenticeship was developed as an 8-year program. Under the guidance of the Enhanced Training Opportunity Program, a training program sponsored by both the employer and the union, Northern Illinois University developed many aspects of the position, including the training program. Although workers entering an apprenticeship program at the company would normally have expected to take a pay reduction, IBEW representatives believed that would discourage high-quality workers from applying and negotiated with the employer to pay apprentices their previous salary. To date, many of the courses have been developed and taught, although development of the work process-specific courses has been expensive— totaling about $160,000 so far. The training developers report that the most expensive part of course development is the design of tests that measure the mastery of critical competencies. Videoconference training has been provided to allow workers from the two geographically dispersed sites to “attend” classes at Northern Illinois University, but transitioning to web- based training to reduce telecommunications costs is actively under consideration. Because of technological changes, the training developers anticipate that some of the courses, such as those on semiconductors and industrial controls, will need to be updated before they are presented to another class of apprentices. In total, the apprenticeship will include 17 major courses as well as some additional training. One challenge to the apprenticeship’s continuity is the change of employers during the planning and implementation of the apprenticeship. Initial apprenticeship program discussions were with AT&T, the program was implemented when Lucent owned the production facility, and the division was bought out by Avaya. As of May 2001, Avaya was negotiating the sale of various manufacturing assets and capacity to another company, leaving the future of the apprenticeship program uncertain. As a result, the production technologist apprenticeship program has not expanded since its inception, although it was initially conceived as a program that would train hundreds of apprentices. The training developers report, however, that the eight apprentices in the program have had a major impact on the production process. Some apprentices received corporate recognition for their novel work on improving production-related processes. A trade association of companies and professional members in the computing and communications market—the Computing Technology Industry Association (CompTIA)—has recently obtained a grant from Labor to pursue developing an apprenticeship for workers to provide information technology (IT) technical support. CompTIA representatives had recognized the need for on-the-job experience for these workers. Their research has revealed that companies often must train their IT service and support staff to meet company needs. Further, almost half of companies surveyed would pay a higher salary to an individual who had already completed an industry-sponsored IT service and support a certification program that included hands-on working experience, interaction with customers, and working in teams. CompTIA representatives believe these skills can only be developed on the job; students at the postsecondary level often receive technical instruction and successfully test for an industry certification (some of which CompTIA sponsors), but lack the on-the-job experience, thereby reducing their employability. A representative from CompTIA, aware of the concerns about IT staff needing on-the-job training, heard a Labor Office of Apprenticeship Training, Employer and Labor Services (ATELS) staff member’s presentation on apprenticeships at a conference. He realized that the apprenticeship structure could be used to overcome this skill deficiency but also recognized that the industry had not delineated the occupations within the IT service industry and their skill requirements. CompTIA submitted a proposal to Labor requesting a grant of $550,000 to explore registered apprenticeship as a means of addressing the IT workforce shortage and the lack of on-the-job experience that entry-level IT workers often have. Labor, recognizing that CompTIA was in a unique position to convene a knowledgeable team from industry, decided to fund the grant, using monies that the Workforce Investment Act authorized the Secretary of Labor to set aside for dislocated worker demonstration projects. With the Labor grant of $550,000, CompTIA plans to convene a group from industry to identify IT occupations that are apprenticeable, the skills required, and the related instruction requirements. CompTIA believes that with the 2,000 hours of work experience required under the apprenticeship model, the apprentices would be able to gain the skills necessary to perform many of the entry-level jobs in IT technical support, including customer service technician, help desk specialist, network technician, configuration technician, and web developer. The industry representatives would also develop the work processes and related technical instruction required for the apprenticeship, including certifications identified as necessary. CompTIA plans to enlist pilot sites to test the apprenticeship model(s) that is developed. In about 1987, the National Electrical Contractors Association and the IBEW operating in Northern California realized that more sound and communications installers were needed to meet the growing demand for the installation of low-voltage systems, such as those used in remote controls, burglar and fire alarms, data and telephone lines, and audio and video systems. For example, sound and communications installers working at a grocery store construction site could be installing intercom connections throughout the store, public address systems, alarms at entrances, electronic locks that could be on timers, data lines from the cash registers, and satellite data link systems. A joint apprenticeship and training committee hired a training director to develop the apprenticeship program. The committee identified an existing occupation title that could be used, and modified the work process standards to meet their needs. The training director then developed training for the program and oversaw its implementation. California’s apprenticeship council approved the apprenticeship program in 1987, and the first formal training was started in 1993. Funding for the related instruction is obtained from two sources. California provides funds that cover about 40 to 50 percent of the cost of instructors for training. These funds provide a set amount of money for each hour apprentices spend in the classroom ($4.37 as of our March 2001 visit). In addition, the 135 contractors bound by the bargaining agreement that supports the joint apprenticeship training committee pay $0.30 per hour ($0.60 beginning on September 1, 2001) for each hour worked by individuals they employ who are under the bargaining agreement. The present program requires 6,000 hours of on-the-job training, and 450 hours of related formal instruction provided by the joint apprenticeship training committee in facilities that are also used for other IBEW training programs. Instruction ranges from basic courses, such as “Use and Care of Hand Tools” to more technical courses, such as “Certifying the Fiber-Optic Cabling System,” and includes BICSI training, a certification program on cable installation. Twice a week, apprentices attend night classes taught by instructors from the field who have received training on instructing. As of June 2001, about 650 apprentices had completed the program and about 1,100 were enrolled. Labor has spearheaded a national effort to develop apprenticeships for childcare development specialists—those who provide care directly to young children. Labor wished to provide a credentialed career path for childcare providers through registered apprenticeships that would “reduce turnover, increase wages for providers, provide a more stable environment for children, and overall improve the quality of early childhood programs.”Although childcare apprenticeships had been implemented in West Virginia earlier, this effort was in response to a 1997 White House effort to focus the nation’s attention on the importance of addressing the need for safe, affordable, available, quality childcare. Using funds provided for this purpose in its budget appropriation, Labor made grants totaling $3.4 million in 1999 and $3.3 million in 2000 to states to implement this initiative. Interest was aroused within the states and the childcare industry through a nationally broadcast videoconference hosted by the Secretary of Labor at a cost of $22,000. Although the videoconference created interest, implementing apprenticeship programs in an industry unfamiliar with the concept involved much coordination and communication. We discussed implementation of the program with officials from Indiana, New Hampshire, and Vermont who received first- round grants. In all three states, the next step was to bring together a diverse mix of representatives—from industry, apprenticeship oversight agencies, and state agencies—who had an interest in childcare. The apprenticeship representatives from the states all reported that several meetings were held to reach consensus on what the apprenticeship should entail. One commented that each group had its own jargon, and it took several meetings to develop a common language. Training was provided in a consistent way to all apprentices in each state. Each state developed a common work process that laid out skills that should be addressed in the 2-year on-the-job portion of the apprenticeship. Each state also identified specific courses apprentices could attend—four courses in Indiana, six in Vermont, and six or seven in New Hampshire— and the colleges where they could attend them. In Vermont, the training is free to childcare providers, and is funded with childcare grant funds; in New Hampshire, the first course is free to the apprentice, paid for with a state health and human service block grant, and half of the remaining courses are also free; and in Indiana, some scholarship funds are available from an organization that supports childcare workers. In addition, each state has developed or is developing training specifically for the apprentices’ supervisors. New Hampshire’s program used funds from the Labor grant to develop this training and to buy laptop computers for supervisors to borrow for participating in distance learning courses. Because wage rates within the childcare industry are relatively low, Vermont chose to use part of its Labor grant to subsidize wages for the apprentices and their mentors. Apprentices can earn regular increases that will raise their wages from $0.25 to $2 an hour over the 2-year apprenticeship. Supervisors would also receive wage supplements of $0.50 to $2 an hour. Vermont representatives are planning how to continue this wage subsidy after the grant funding ends. They have written a grant proposal to obtain some state Workforce Investment Act funds and have created an advisory board that is working toward securing long-term funding. Reaching out to childcare centers to encourage them to sponsor apprentices entailed considerable effort in each of the states. New Hampshire used some of its federal grant funds to hire three recruiters who met with childcare center directors, helped them plan the apprenticeships, and continue to monitor them. One center director commented that if she had not had a representative to help develop the apprenticeship program details, she probably would not have pursued the program. Responsibility for marketing apprenticeship to childcare centers in Vermont has primarily belonged to the Agency of Human Service, whose staff members have made many direct contacts with center directors. Information was also provided to the public through an extensive website. Indiana used part of its federal grants to hire a full-time project coordinator for the childcare apprenticeship project who recruits both employers and apprentices. As a result of the implementation of the first round of grant awards to 10 states and the District of Columbia, 251 programs registering 527 apprentices had been established through January 2001. In addition, a second round of grants has been awarded to 10 states. Labor anticipates distributing a third round in 2001. Recipients of grant awards are required to identify ways to sustain the program once federal funding ends. States we contacted are grappling with this condition and are exploring a number of options to ensure their program’s longevity. Indiana plans to reduce the full-time project coordinator position to part-time. Vermont is seeking sources of funds to sustain its wage subsidies for apprentices and supervisors. New Hampshire’s Commissioner of Labor has committed to finding funds to continue to pay for staff to recruit apprenticeship sponsors. Over the last few years, Labor has recognized that an apprenticeship in the youth work field could provide quality training for workers who deliver comprehensive services to young people. Many resources are committed to serving youth as a result of Labor’s youth opportunity grants and increased emphasis on youth services under the Workforce Investment Act. Labor wished to upgrade the field of youth work by developing an occupation targeted to supporting youth, and believed that apprenticeship provided the opportunity to systematically examine and address the needs of the field. Labor itself spearheaded the effort to define the occupation of youth development practitioner and will be supporting its implementation through grants. Early on, Labor drafted on-the-job training requirements and proposed related instruction, and had a focus group comment on them. Labor held forums around the United States to discuss the apprenticeability of this occupation and incorporated those results into the apprenticeship description, receiving enthusiastic support for the apprenticeship. Labor then approved the occupation as apprenticeable and formally established it as an apprenticeship occupation in October 2000. In April 2001, Labor announced the availability of $1.45 million in competitive grants to support the dissemination of information, to publicize the occupation and apprenticeship, and to support interested communities in the implementation of the apprenticeship programs. These funds, whose source is discretionary funding authorized under the Workforce Investment Act, are intended to stimulate and support the broad implementation of the apprenticeship. In July 2001, Labor awarded grants to nine entities at the local community level that can serve as intermediaries to bring together stakeholders to establish and register youth development practitioner apprenticeship programs. In addition, Labor awarded three grants to national organizations that have youth programs employing youth development practitioners. Labor also awarded a grant to the National Council on Employment Policy to establish a clearinghouse of information on practice and curriculum to support local communities in developing and implementing their apprenticeship programs. We discussed the planned implementation of a youth development practitioner apprenticeship program in Alaska with a program representative and the ATELS state director. The Cook Inlet Tribal Council in Alaska recently obtained a Youth Opportunity Program demonstration grant to support about 70 staff members who work directly with youth in 47 locations. Although they have hired staff with available funding, they realize that the level of education and experience among staff members varies widely. Most do not have college degrees, and the employee development director believes the apprenticeship model is a good way to provide the professional development that staff need. She also believes that for rural Alaska, apprenticeship is a useful model because it allows staff to stay in the community to receive the necessary instruction. This helps retain staff who may not return to their communities after locating elsewhere. Because the youth development practitioner occupation was not defined specifically until recently, curriculum needs to be developed for the occupation, which will cost an estimated $75,000. The Council estimates that the development and delivery of training will cost an estimated $300,000 to $400,000. Staff is widely spread throughout the state and instruction will need to be provided over the Internet. However, many staff members are in villages without Internet providers, which necessitates significant spending on long-distance connections. The employee development director expects to seek other state funding, possibly through the Workforce Investment Boards. At the national level, Labor selected 13 entities to receive grants totaling about $1.5 million. Meanwhile, at the local level, the Alaska tribal council’s employee development director noted that interest in the apprenticeship among the council staff was high, and she planned to start the apprenticeships by October 1, 2001. We spoke with apprenticeship officials in Maine and the District of Columbia, who noted that either hiring or retaining pharmacy technicians is difficult for employers in their areas. Apprenticeships for pharmacy technicians are either just recently under way or being developed in each location. Pharmacy technicians serve as aids to pharmacists in store and hospital pharmacies, performing such tasks as keeping records of drugs delivered to the pharmacy, storing incoming merchandise in proper locations, and cleaning equipment. In the District of Columbia, CVS, a pharmacy chain, was operating a training center housed at the District’s Department of Employment Services’ center. An apprenticeship representative from the District apprenticeship council convinced CVS that they should sponsor apprenticeships for pharmacy technicians to help meet their growing need for this staff. The apprenticeship representative explained that the structured on-the-job training and formal instruction would provide the staff with the necessary skills. A 2-year apprenticeship program was established that requires 144 hours of formal instruction each year. Workers are released from work to attend the training, and CVS provides the formal instruction. In Maine, a pharmacy technician apprenticeship program is being established with Maine Medical Center, a large hospital with about 40 staff members in its pharmacy department. The hospital had a high turnover rate for these technicians—42 percent in 2000—who often left after they were trained. After the representative from Maine’s apprenticeship council explained apprenticeship to the pharmacy department, department management became convinced that they needed to increase wages. After an analysis of comparable wages elsewhere, they decided to raise pharmacy technicians’ wages an average of 13 percent, with the entry-level apprenticeship wage rising from $8.53 to $9.99 and the top wage rising from $14.99 to $18.64. Management also established training requirements, one of which is for apprentices to take two courses each semester from a local technical college for which the state will pay $100 per course. The college offers the required courses on-line, allowing other pharmacy technicians located throughout the state to participate if their employers sponsor apprenticeship programs. The courses in the District presently have three apprentices enrolled. In Maine, some apprentices had already started courses but the agreement with the Maine apprenticeship council had not been finalized as of June 2001. A representative from the hospital expected that they would limit the number of apprentices to 10. The apprenticeship representative hopes to now convince other hospitals in Maine to replicate the Maine Medical Center’s program and is reaching out to some pharmacy chains. In addition to those named above, Kevin F. Murphy, Corinna A. Nicolaou, Carol L. Patey, and James P. Wright made key contributions to this report. | Apprenticeship, which combines supervised on-the-job training with formal instruction, benefits both employers and employees by providing the skills and knowledge necessary for a specific job and a credential recognized throughout an industry. The use of apprenticeship is standard practice in some industries, but expansion beyond traditional occupations has been limited. The Department of Labor has not systematically identified new occupations suitable for apprenticeship programs, nor has it successfully alleviated the concerns of some employers about apprenticeship requirements, which has slowed the expansion of apprenticeship to new occupations. Labor has approved 19 new occupations for apprenticeships in the last five years, and many of these have been in less traditional occupations, such as internetworking technicians. Employers are often wary of apprenticeship programs. For example, some employers are reluctant to commit to incremental increases in wages as required by apprenticeship regulations. GAO identified several apprenticeship programs in which apprenticeship training helped to develop workers with sought-after skills. The key to the establishment of the several programs GAO reviewed was the close interaction between employers and federal or state apprenticeship officials to ensure that employers understood the value of apprenticeships. |
Pipelines transport about 65 percent of the crude oil and refined oil products and nearly all of the natural gas in the United States. Table 1 shows the three primary types of pipelines that form a 2.2-million-mile network across the nation. Pipelines are inherently safer than other modes of freight transportation for hazardous liquids and natural gas. Although an average of about 24 fatalities resulted from pipeline incidents each year from 1989 through 2000, this number is relatively low compared with the number of fatalities from other forms of freight transportation. On average, about 66 people die each year in barge incidents, about 590 in railroad incidents, and about 5,100 in truck incidents. Despite the relative safety of pipelines, pipeline incidents can have tragic consequences, as evidenced by the pipeline ruptures in Bellingham, Wash. (1999), and Carlsbad, N. Mex. (2000). These incidents, which caused 15 fatalities, highlight the importance of pipeline safety. OPS develops, issues, and enforces regulations to ensure the safe transportation of hazardous liquids and natural gas by pipeline. In fiscal year 2002, OPS employed about 135 people, over half of whom were pipeline inspectors. In addition, state agencies have roles in pipeline safety. In general, OPS retains full responsibility for inspecting and enforcing regulations on interstate pipelines but certifies states to perform these functions for intrastate pipelines. Certified states are allowed to impose safety requirements for intrastate pipelines that are stricter than the federal regulations. In 2002, 48 state agencies, the District of Columbia, and Puerto Rico were certified for intrastate natural gas pipeline inspections, and 13 state agencies were certified for intrastate hazardous liquid pipeline inspections. OPS also uses some states to help inspect interstate pipelines. These states, or “interstate agents,” inspect segments of interstate pipelines within their boundaries. However, OPS handles any enforcement actions identified through inspections conducted by these interstate agents. In 2002, 11 states were acting as interstate agents—2 states for hazardous liquid pipelines, 5 states for natural gas pipelines, and 4 states for both types of pipelines. In total, there are about 400 state pipeline safety inspectors trained to assist OPS in overseeing pipeline safety within their states. OPS has traditionally carried out its oversight responsibility by establishing minimum standards in its regulations and enforcing them uniformly across pipelines. However, this uniform regulatory approach does not account for differences in the risks faced by individual pipelines. For example, pipelines located in the Pacific Northwest states are susceptible to damage from geologic hazards, such as landslides, but OPS’s uniform, minimum regulations do not address this risk. Recognizing that pipeline operators face different risks depending on such factors as location and the products they carry, OPS began exploring the concept of a risk-based approach to pipeline safety in the mid-1990s. In 1996, the Accountable Pipeline Safety and Partnership Act included provisions for DOT to establish a demonstration program to test a risk- based approach. As a result, OPS established the Risk Management Demonstration Program, which went beyond the agency’s traditional regulatory approach by allowing individual companies to identify and focus on the unique risks to their pipelines. Partly on the basis of OPS’s experience with the demonstration program, the agency moved forward with a new regulatory approach—termed integrity management—to supplement uniform, minimum regulations. In a May 2000 report, we recognized the potential benefits of a risk-based approach to pipeline safety; however, we expressed concern that OPS did not have performance measures in place to demonstrate the effectiveness of the Risk Management Demonstration Program or the resulting integrity management approach. The integrity management approach requires individual pipeline operators to develop programs to systematically identify and address risks to the segments of their pipelines that could affect “high consequence areas” where a leak or rupture would have the greatest impact, including highly populated or environmentally sensitive areas. OPS designed the integrity management approach to achieve greater safety by allowing individual operators flexibility in tailoring their programs to the characteristics of their pipelines. This flexibility is reflected in performance-based requirements, which allow operators to determine the most appropriate processes and technologies to use in their integrity management programs, subject to OPS’s review. For example, operators may use a variety of techniques for assessing pipeline integrity and analyzing these results and other available information about the conditions of their pipelines. In addition, OPS’s integrity management program requirements include prescribed elements that provide some consistency among integrity management programs. For example, OPS requires all hazardous liquid pipeline operators to conduct a baseline assessment of the integrity of all pipeline segments that could affect high consequence areas, periodically reassess the integrity of these pipeline segments, take prompt action to address any anomalies found during the assessments that threaten the integrity of the pipeline, and develop measures of the program’s effectiveness. After September 11, 2001, OPS advised pipeline operators also to consider potential terrorist threats to their pipelines in their assessments of pipeline integrity. OPS has to complete several important steps to implement its integrity management approach under an ambitious self-imposed schedule, including finalizing requirements for integrity management programs and inspecting the programs of more than 1,000 hazardous liquid and natural gas transmission pipeline operators. Although it may take OPS until 2006 or later to complete these steps, the agency’s schedule for the next 2 years is particularly challenging. To finalize the requirements for integrity management programs, OPS plans to issue proposed and final rules establishing these requirements for natural gas transmission pipeline operators by spring 2003. The agency has already issued separate rules establishing requirements for hazardous liquid pipelines. OPS is issuing separate rules for the different types of pipeline operators because of differences in the products carried by their pipelines, the types of risks faced, and the configuration of the pipelines. For example, hazardous liquid pipelines are more subject to metal fatigue, which can increase the risk of pipeline failure, than gas pipelines because they experience a greater number of pressure cycles. However, hazardous liquid pipelines also tend to be more uniform in size than natural gas pipelines, which makes it easier for them to accommodate internal inspection devices to detect corrosion. These differences have implications for the requirements for integrity management programs, such as the types of assessment methods that operators can use to identify risks to their pipelines and the appropriate intervals between required safety assessments. OPS chose to issue the rule for operators of large hazardous liquid pipelines (those with 500 or more miles of pipeline) first because it needed more information on how integrity management principles should be applied to smaller hazardous liquid pipelines and natural gas transmission pipelines. Consequently, OPS issued requirements for operators of large hazardous liquid pipelines in December 2000 and similar requirements for operators of small hazardous liquid pipelines (those with less than 500 miles of pipeline) in January 2002. OPS anticipates issuing a proposed rule for operators of gas transmission pipelines by the end of summer 2002 and a final rule in spring 2003. In addition to completing the requirements, OPS needs to inspect the integrity management programs developed by more than 1,000 individual operators of hazardous liquid pipelines and natural gas transmission pipelines. OPS has developed and begun to implement the following four- phased approach for reviewing and monitoring the programs for 65 operators of large hazardous liquid pipelines. Phase 1: From January through April, 2002, OPS conducted “quick hit” inspections of each operator’s identification of pipeline segments that could affect high consequence areas to determine if the operator had correctly identified these segments. OPS also reviewed documents describing how each operator intends to implement all elements of an integrity management program to determine whether the operator was making satisfactory progress in developing a program. Phase 2: From August 2002 through November 2004, OPS plans to conduct “comprehensive” inspections of each operator’s more fully developed integrity management program, including each operator’s plans for conducting an initial assessment of the safety of its pipelines. OPS estimates that each inspection will require about 2 weeks. Phase 3: After completing phase 2, OPS plans to monitor operators’ progress on their programs through periodic inspections. OPS anticipates that each operator will be inspected at least once every 2 years. Phase 4: Concurrently with the other phases, OPS plans to review and respond to notifications from operators of changes in their programs. For example, an operator is required to notify OPS if it cannot repair any anomaly that affects the integrity of the pipeline within the time frame specified in the rule. OPS is conducting and planning a variety of activities aimed at carrying out these four phases, including developing inspection protocols and providing training to federal and state inspectors on conducting the inspections. OPS anticipates using a similar phased approach to review and monitor the programs for operators of small hazardous liquid and natural gas transmission pipelines. According to OPS officials, OPS’s schedule for implementing the integrity management approach is ambitious and presents a significant challenge. For the 65 operators of large hazardous liquid pipelines, OPS plans to conduct all of the comprehensive inspections within 4 years of issuing the final rule requiring integrity management programs for these operators. If OPS issues the final rule for integrity management programs for natural gas transmission pipelines in spring 2003, as it anticipates, and follows a similar schedule for conducting comprehensive inspections, then the agency will not complete inspections of these pipelines before spring 2006. However, because there are about 60 more interstate natural gas transmission pipeline operators than hazardous liquid operators that OPS will need to inspect, it may take the agency longer to complete these inspections. During this time frame, OPS also has to perform ongoing oversight activities, such as conducting standard inspections, investigating incidents, and inspecting pipeline construction. Figure 1 shows a time line for the steps that OPS must complete to implement integrity management for large and small hazardous liquid pipelines and gas transmission pipelines. According to OPS officials, the agency is implementing integrity management under an ambitious time frame because it wants to emphasize to operators the importance of evaluating and improving the safety of their pipelines. In addition, OPS’s integrity management approach fulfills some long-standing congressional mandates and recommendations of the National Transportation Safety Board (the Safety Board), and the agency wants to address concerns about the amount of time it has taken to fulfill these mandates and recommendations. Although the schedule is ambitious, OPS officials believe the agency can meet its time frame by hiring additional federal inspectors, using contractor support, and relying on state pipeline safety inspectors to conduct integrity management inspections for intrastate pipelines. However, as shown in figure 1, the next 2 years leave little margin for error if OPS is to follow its schedule. For example, agency officials acknowledge that they have prepared protocols and guidance for comprehensive inspections under a tight time frame in order to meet their target date for starting these inspections. In addition to meeting its ambitious schedule, OPS faces a number of other challenges in implementing its integrity management approach. Some challenges—such as enforcing the requirements for integrity management programs consistently and effectively, and measuring and reporting on the effectiveness of the integrity management approach—are more urgent for hazardous liquid pipeline operators because they have begun implementing their programs. Other challenges—such as ensuring that operators use pipeline safety assessment methods appropriately and establishing an inspection interval—have been addressed in OPS’s requirements for integrity management programs for hazardous liquid pipelines and must now be resolved for natural gas transmission pipelines before OPS can issue a final rule for these pipelines. In addition, since September 11, 2001, OPS faces the challenge of developing an approach to overseeing pipeline security, including how to incorporate security into its integrity management and standard inspections of pipeline operators. OPS is taking a variety of actions to address these challenges as hazardous liquid pipeline operators are implementing their individual programs. However, in attempting to meet its ambitious schedule for implementing the integrity management approach for hazardous liquid pipeline operators, OPS has not yet required these operators to adopt standardized measures for monitoring the performance of their programs or to provide the agency with the results of such measures. Agency officials told us that they intend to establish such requirements by the end of 2002 and are considering ways to report performance measurement data to local officials. OPS also needs to resolve several issues related to its approach for overseeing pipeline security. For example, OPS will need to determine how best to use its existing resources, as well as those of its state partners, for carrying out security oversight because the agency does not anticipate obtaining additional resources for this purpose. In implementing its integrity management approach, OPS faces the challenge of enforcing compliance with the program’s flexible requirements consistently and effectively—a much more difficult task than enforcing compliance with uniform minimum safety standards, as OPS has traditionally done. According to representatives of the pipeline industry, environmental organizations, and states, inspectors will face difficulties in judging the adequacy of complex integrity management processes that will vary from company to company. For example, under the integrity management rules, operators must analyze risks for each pipeline segment that could affect high consequence areas in order to identify actions needed to enhance public safety or environmental protection. Operators may choose from a range of actions, such as improving leak detection systems or installing shut-off valves to limit the amount of product released during a leak or rupture, but they must implement those actions they have identified as necessary. It will be challenging for inspectors to determine the adequacy of operators’ risk analyses because, although the rule specifies some risk factors that operators should consider, it allows them to choose from a wide variety of methods for conducting risk analyses. Furthermore, because inspections will be conducted by five regional offices and 48 state partners, it will be challenging for OPS to ensure that inspectors make consistent judgments nationwide. OPS officials have told us that their main goal in implementing the integrity management rules is to develop a nationally consistent approach for inspecting operators’ integrity management programs. The agency is taking a number of steps aimed at ensuring consistency, including completing a set of detailed inspection protocols and guidance designed to provide clear criteria to inspectors for evaluating the adequacy of operators’ actions and making enforcement decisions; putting together inspection teams of staff from multiple regions, including its most experienced inspectors, as well as external experts and state representatives; and requiring all OPS and state inspectors who will conduct integrity management inspections to complete a set of relevant training courses. According to OPS officials, the development and use of detailed protocols and guidance for conducting integrity management inspections are their most important means for ensuring the consistency of inspectors’ decisions during these inspections. OPS has developed an initial set of protocols and guidance for the comprehensive inspections of operators of large hazardous liquid pipelines. The agency plans to pilot test the use of these protocols in its first five comprehensive inspections, which are scheduled for August through October, 2002. The agency intends to make necessary adjustments to the protocols and guidance on the basis of this pilot testing and to revise them periodically afterward on the basis of further experience with its inspections. OPS, according to some environmental organization representatives, may face particular difficulties in enforcing its integrity management rules because operators may disagree with enforcement actions pertaining to flexible requirements in the rules. OPS officials told us that they intend to vigorously enforce the integrity management rules, levying fines for serious violations, to ensure that operators comply with the requirements. After conducting 40 quick hit inspections of hazardous liquid pipeline operators, the agency has decided to take enforcement actions in 36 cases. OPS anticipates that about half of these actions will be notices of amendment and the other half will be notices of probable violation. Notices of amendment cite inadequate operator procedures and require operators to make needed improvements. Notices of probable violation generally contain a proposed compliance order requiring companies to take action to correct the violations found and may propose fines. According to OPS officials, the agency anticipates that many operators will question integrity management enforcement actions, but it has prepared for this challenge by increasing its enforcement staff. It also plans to establish a new Enforcement Office, which will formulate enforcement policies and review enforcement actions to ensure consistency, and it plans to provide more training on enforcement issues for inspector and enforcement staff. OPS officials have stressed that they have been under tight time frames in developing an inspection and enforcement approach for large hazardous liquid pipelines and that this approach will evolve over time, as the agency implements the approach for small liquid and gas transmission pipelines. Because the methods typically used for assessing the integrity of hazardous liquid pipelines are either not currently suitable for a large portion of natural gas pipelines or would interrupt the supply of gas to customers, OPS faces the challenge of ensuring that natural gas transmission pipeline operators use alternative assessment methods appropriately. Integrity management programs for hazardous liquid pipeline companies allow the use of two primary assessment methods: (1) internal inspection devices, or “smart pigs,” that run inside the pipeline to detect anomalies, such as corrosion, metal loss, or damage to the pipeline, and (2) hydrostatic testing, a process of draining the pipeline, filling it with water, and increasing the pressure of the water to test the strength of the pipeline. Both methods have limited applications for testing natural gas transmission pipelines. Specifically, one industry association estimates that smart pigs cannot move through about half of gas transmission pipeline mileage because of such pipeline features as variations in diameter, sharp bends, and valves that do not fully open. Hydrostatic testing, which interrupts the supply of natural gas to consumers for up to 3 weeks per test, may leave communities without an energy source because natural gas transmission pipelines have minimal storage facilities.Although integrity management programs for hazardous liquid pipeline operators allow the use of alternative safety assessment methods, they also specify that any other method must provide an equivalent level of protection and that operators must notify OPS before conducting the assessment. As an alternative to smart pigs and hydrostatic testing, OPS is considering allowing gas transmission pipeline operators to use a method called “direct assessment” to assess the integrity of their pipelines. Direct assessment consists of four steps: Preassessment. The pipeline operator analyzes information about the physical characteristics of the pipeline—such as the coating material, soil moisture, and past leaks—to determine whether direct assessment is appropriate, what threats are likely to be present and significant, where these threats are likely to occur, and what tools should be used to inspect the areas of the ground above the pipeline where the threats are likely to occur. Indirect inspections. The operator uses one or more inspection tools to examine the pipeline through the soil in areas identified during the preassessment. For example, to identify corrosion on the exterior surface of a pipeline, an operator walks over the areas of the pipeline holding a tool that takes readings through the soil to assess the condition of the pipeline’s surface. Separate passes over the pipeline with two or more different types of tools are generally required to get an accurate assessment. Direct examinations. Using the results of the aboveground examination, the operator digs holes at intervals along the pipeline to examine suspected problem areas. After the holes have been dug, the pipeline can be examined visually and with diagnostic equipment, such as tools that measure the thickness of the pipe, to determine whether the operator needs to repair the pipeline or take other corrective action. For safety reasons, the pressure of the natural gas within the pipeline is generally reduced by about 25 percent during this step. Postassessment. The operator integrates and analyzes the information gathered during the three previous steps to determine whether additional excavations are necessary and how often pipeline segments should be reassessed. Like other assessment methods, direct assessment has some limitations. For example, direct assessment has been proven reliable in detecting only one threat to the integrity of pipelines—external corrosion—while smart pigs can identify a wide range of threats to the integrity of pipelines, such as external corrosion, internal corrosion, and metal loss from external damage. State pipeline safety officials and some natural gas pipeline company representatives we spoke with are concerned about the limitations of direct assessment and believe that its use should be closely monitored. For example, the Texas Railroad Commission’s pipeline safety section requires intrastate pipeline operators to obtain approval from the office if they plan to use direct assessment to assess the safety of their pipelines. To obtain approval, the operators must present evidence at a hearing that this method is a valid choice for the circumstances of the pipeline and receive approval from the commission. OPS officials explained that the agency has ongoing research activities focused on advancing the state of the art of direct assessment technology. Agency officials expect to issue a proposed rule by the end of this summer for integrity management requirements for natural gas transmission pipeline operators, which will address how direct assessment should be treated as an assessment method. Establishing an appropriate interval between the safety inspections that operators are required to make of gas pipelines is likely to be a complex and controversial challenge for OPS because the agency must strike a balance between the existing industry standards, which allow intervals of up to 20 years, and shorter intervals. Although the appropriate interval for individual pipelines could vary with their circumstances, OPS is including a maximum interval in the requirements for integrity management programs to ensure that all operators conduct their inspections within a reasonable time frame. For hazardous liquid pipelines, OPS requires inspections at least once every 5 years. For natural gas transmission pipelines, longer intervals could be justified for several reasons: Pressure fluctuations, which can weaken a pipeline, are less frequent. Thicker pipeline walls or operation at lower pressure is already required in high consequence areas under the existing uniform requirements. Internal corrosion is less likely because natural gas contains a minimal amount of moisture. Fewer storage facilities exist, therefore, interrupting the flow of gas to conduct inspections of the pipeline would have a greater impact on customers. Because of these differences, the industry standards for natural gas pipeline integrity management programs (published by the American Society of Mechanical Engineers) allow maximum inspection intervals from 5 years to 20 years, depending on the type of assessment method and test procedures used and the operating pressure of the pipeline. For higher pressures, the maximum interval is 5 years for less stringent methods and procedures (e.g., using direct assessment and excavating a sample of potential problem areas) or 10 years for more stringent methods and procedures (e.g., using direct assessment and excavating all problem areas). For lower pressures, the maximum interval is 20 years using any type of assessment method and the most stringent test procedures. According to some pipeline industry and environmental group representatives, the maximum inspection interval for natural gas transmission pipelines should be limited to between 5 and 10 years to allow for a “worst-case” scenario. However, industry representatives noted that longer inspection intervals could be justified more for natural gas pipelines than for hazardous liquid pipelines, given the differences in their characteristics. For example, they cited the greater possibility of damage to liquid pipelines from pressure fluctuations and internal corrosion and noted that external corrosion can threaten both types of pipelines. One natural gas transmission pipeline operator told us that it would take 12 years for a worst possible case of external corrosion to damage a pipeline enough to cause a failure. According to this operator, a 10-year inspection interval would allow time for pipeline operators to detect and repair such a worst case before it resulted in an incident. OPS is trying to achieve a balance between these arguments as it prepares the proposed rule on integrity management for gas transmission pipelines. For the proposed rule, OPS is considering a maximum inspection interval of 5 or more years for pipelines assessed by direct assessment and 10 years for pipelines inspected by smart pigs or hydrostatically tested. For pipelines that operate at lower pressure, OPS is considering allowing inspection intervals that are longer than 10 years. OPS faces the challenge of establishing performance measures to determine the overall effectiveness of the integrity management approach and monitor the progress of individual operators’ programs. Such performance measures would assist in determining the impact of the integrity management approach on pipeline safety and identifying needed improvements. OPS officials told us that the agency has identified some performance measures for integrity management, intends to require operators to report the results of these measures to the agency, and is considering ways to report performance measurement information to local officials and the public. According to OPS officials, the agency has developed measures of the overall effectiveness of the integrity management approach on the basis of its data on pipeline leak and rupture incidents and will start publicly reporting these measures by early 2003. Some recent improvements in OPS’s incident data, such as new requirements for operators to report on whether incidents occurred in high consequence areas, should allow OPS to use these data to measure the overall performance of the integrity management approach in reducing incidents in these areas. (OPS’s efforts to improve these data are discussed later in this report.) For example, the agency intends to measure the effectiveness of integrity management by tracking reductions in the number of significant pipeline incidents and in the volume of oil spilled in high consequence areas. However, because operators of large hazardous liquid pipelines did not begin implementing their integrity management programs until 2002 and other types of pipeline operators will not begin implementing their programs until subsequent years, it will be some time before OPS can analyze trends and determine the impact of the integrity management approach on safety. OPS also intends to develop new requirements for operators to report uniform performance measures for their individual integrity management programs. OPS’s current integrity management rules for hazardous liquid pipelines require operators to develop performance measures for their programs, but the rules do not specify what measures they should use. As a result, these measures will not be consistent, and therefore OPS will not be able to use these data to develop industrywide measures or to compare the performance of operators. OPS and industry officials have told us that the development of consistent performance measures for operator integrity management programs has been difficult because of a lack of agreement on which measures can be standardized. OPS officials have recently worked with both the hazardous liquid and gas transmission pipeline industries to identify performance measures for integrity management programs that can be standardized, such as the numbers of integrity assessments conducted and repairs completed. OPS intends to modify its integrity management requirements for liquid pipeline operators by the end of 2002 to include a requirement that operators adopt these standardized measures and make the results of these measures available to OPS. Until these operators start providing such standardized data to OPS, the agency’s ability to monitor and compare the performance of operators’ integrity management programs, some of which began in spring 2002, will be limited. The agency also intends to include similar requirements for gas transmission pipeline operators in the proposed and final integrity management rules for these pipelines, anticipated by spring 2003. OPS intends to require that hazardous liquid as well as natural gas transmission operators start making these standardized performance measurement data available to the agency in 2004. Although OPS intends to make industrywide measures on the effectiveness of the integrity management approach available on its Web site and in public reports, the agency has not yet determined what measures of individual operators’ performance will be made publicly available or how this information will be communicated. The Safety Board and some public interest organizations have recommended that pipeline operators provide more information to the public about their safety operations. In response, the hazardous liquid and gas transmission pipeline industries, with the encouragement of OPS, are developing joint guidelines for operators on communicating safety information about their pipelines to the public and expect to finalize these guidelines by the end of 2002. At that time, OPS plans to consider whether to adopt all or part of these guidelines as regulations. However, the guidelines will not address what information operators should provide to state and local officials and the public about their integrity management programs. The liquid and gas pipeline industries intend to develop additional guidelines on this issue after finalizing their initial guidelines, and OPS plans to consider incorporating these additional guidelines as requirements after they are finalized. In addition to this industry initiative, OPS is currently considering alternatives for reporting information on the performance of individual operators’ integrity management programs. Because operators want to protect information that may pose a security risk if publicly distributed, OPS officials have told us that they are considering developing a system that would make information on individual operators’ performance available to local officials who need it, but not to the general public. Since September 11, 2001, OPS has faced the challenge of ensuring that operators are taking appropriate actions to protect their pipeline systems from acts of terrorism. To address this challenge, OPS has been developing an approach for overseeing pipeline security that does not involve the development of new regulatory requirements. Under this approach, OPS and state inspectors will review operators’ pipeline security programs to determine whether they follow guidelines developed by the pipeline industry with OPS’s participation and review. The agency intends to conduct these reviews as part of its comprehensive inspections of integrity management programs as well as its ongoing standard inspections of pipelines. These reviews will focus on how operators are managing security risks at critical facilities, because the agency will expect operators to have more rigorous security practices in place at these facilities. OPS is developing protocols for conducting these security reviews, but it still needs to resolve several issues to fully develop and implement its security oversight approach. Currently, OPS’s regulations have few specific requirements pertaining to security. The agency has decided not to develop new security regulations because it believes that progress can be achieved more quickly by encouraging companies to voluntarily improve their security practices following industry guidelines. In addition, OPS officials are concerned that the inherent openness of the rulemaking process would require the agency to publish sensitive information, such as definitions of critical facilities and specific protective measures. Furthermore, RSPA’s Office of the Chief Counsel has determined that OPS currently has enough statutory and regulatory authority to take enforcement actions if it finds that security at a critical pipeline facility is inadequate. Industry representatives told us that they prefer a nonregulatory approach, citing concerns about the need for flexibility in designing security programs suitable for each facility. However, some state pipeline safety officials, as well as some Members of Congress, have suggested that new security regulations may be needed to ensure that operators improve their security programs and practices. Legislation has been proposed that would require DOT to prescribe standards for pipeline security programs and approve or disapprove each operator’s program on the basis of their adherence to these standards. Before fully implementing its security oversight approach, OPS must reach agreement with pipeline operators on certain aspects of its security reviews, including the identification of critical pipeline facilities. A representative of the hazardous liquid pipeline industry told us that pipeline companies are concerned about this issue because of the cost of increased security at critical facilities, particularly if higher threat levels are declared. OPS has worked with the pipeline industry to develop guidance on how to determine which pipeline facilities are critical and what protective measures need to be taken at these facilities for various threat levels. According to OPS officials, during security reviews of individual operators, OPS and state inspectors will review whether each operator has appropriately applied this guidance to its facilities. OPS must also reach agreement with the pipeline industry on what sensitive company security information inspectors will need to examine when reviewing pipeline security programs. Industry representatives have told us that operators are reluctant to share such information with OPS because the agency may not be able to prevent its public disclosure under the Freedom of Information Act. OPS officials have told us that they will try to address such concerns by having inspectors review sensitive documents on-site and take with them only those documents they need. OPS will also need to determine how best to deploy its existing resources as well as those of its state partners for carrying out pipeline security oversight, because it does not anticipate obtaining additional resources for this purpose. This effort will involve determining the role of state inspectors in conducting security reviews and identifying the training that OPS and state inspectors will need to conduct these reviews. OPS officials have told us that states will play a key role in conducting these reviews, but some state pipeline safety officials have told us that they have not received clear guidance from OPS on their role in security oversight. One official noted that states have very limited resources and would need additional staff to conduct security reviews of pipeline operators. Furthermore, several state officials emphasized to us that their inspectors would need security-related training to be able to conduct security reviews of pipeline operators. However, according to an official of the Transportation Safety Institute, which trains OPS and state inspectors, the institute has not yet developed such training for these inspectors. OPS officials have told us that the agency’s next step in developing its security oversight approach is to communicate with its state partners regarding their role in implementing this approach. The agency intends to work with states in refining its protocols for security reviews and in developing security-related training for OPS and state inspectors. However, the lack of a workforce plan and a strategy for communicating with its state partners, as discussed in the next section of this report, may hamper OPS’s ability to ensure that it has the resources and expertise it needs to oversee pipeline security and that it is effectively involving states in this effort. OPS’s efforts to ensure it has the resources and expertise needed to implement its integrity management approach are hampered by the lack of an up-to-date assessment of current and future staffing and training needs and an examination of the workforce’s deployment across the organization—essential elements of a workforce plan. Although OPS has estimated the number of inspectors it needs to hire to implement its integrity management approach and has developed a curriculum to train federal and state inspectors, the agency has not prepared a workforce plan—an important component of successful human capital management. Furthermore, the resource estimates are outdated and cover only the initial phases of implementation. Also, although OPS says it will need to augment its own resources with those of states to implement integrity management, the agency has acknowledged that its efforts to communicate with states about their role in integrity management have been limited. This limited communication has left some states uncertain of their role and uncertain about whether they will be prepared to carry out their expected responsibilities under OPS’s integrity management approach. OPS has several initiatives that may address some of these issues, such as using teams of inspectors and developing inspection protocols and guidance, but no initiative to estimate its long-term resource needs. Finally, while the agency intends to hold some discussions with states about their role in integrity management, it lacks a strategy for communicating how it will involve states in implementing this new regulatory approach. OPS is hampered in its efforts to ensure that it has the resources and expertise to successfully implement its integrity management approach by the lack of a workforce plan. By workforce planning, we mean the short- and long-term strategies to identify OPS’s current and future staffing needs; the appropriate workforce deployment across the agency; the knowledge, skills, and abilities needed for staff to implement integrity management; and the training to fulfill these needs. OPS has estimated that it needs to hire 28 inspectors by fiscal year 2003, an increase of 50 percent from fiscal year 2001, to inspect approximately 1,000 individual integrity management programs for hazardous liquid and gas transmission operators. This estimate is in addition to the approximately 100 of about 400 state inspectors that OPS plans to train and use to assist with inspecting integrity management programs, although some states may need to hire additional inspectors. OPS based these estimates on the proposed integrity management rule for operators of large liquid pipelines. However, OPS made several significant changes between the proposed and final rules but did not adjust its estimates to account for these changes. The following are examples of the outdated and incomplete components of OPS’s resource estimates: OPS added inspections to its implementation process. The agency based its resource estimates on the assumption that inspectors would perform one inspection but has since revised its procedures to include two different inspections. This change should have increased the original resource estimates. Resource estimates cover only the first two phases of a four-phase implementation process. According to OPS officials, their ultimate goal is to hire enough inspectors to carry out the third and fourth phases— conducting inspections every 2 years and responding to notifications from operators of changes in integrity management programs. However, OPS has not determined its resource needs for the third and fourth phases. According to OPS officials, they informally updated their resource estimates for integrity management for each fiscal year budget request but did not document the changes. Furthermore, OPS does not have an agencywide estimate of the resources it needs to maintain its entire range of pipeline safety oversight activities. In addition to the new integrity management inspection responsibilities, OPS must still conduct its standard inspections. However, OPS could not tell us how the coordination of time and resources for all types of inspections will take place. Because OPS has not created a workforce plan, it is unclear how the implementation of its integrity management approach will affect the resources it needs to fulfill other obligations. Another important element of a workforce plan is training. OPS has developed a training curriculum designed to prepare state and federal inspectors for successfully implementing the integrity management approach. The agency is working with the Transportation Safety Institute to design and teach several new training courses specifically on OPS’s hazardous liquid integrity management approach. OPS anticipates that about 180 inspectors (80 federal and 100 state) will complete the training by spring of 2003. The training involves classroom courses and on-the-job training. The classroom training involves eight core classes, which have already been taken by most state and federal inspectors, and an additional seven classes specifically designed for integrity management. The additional classes cover such issues as the requirements and basic concepts of using smart pigs to assess the integrity of pipelines and integrity management program inspection and compliance requirements. For on-the-job training, OPS is using a “team approach” to conduct integrity management inspections, in which trainees will attend inspections led by OPS’s senior inspectors who have been involved in all phases of implementing the integrity management approach. Each team will consist of staff from multiple regions, including its most experienced inspectors and inspectors-in-training, as well as external experts. Starting in August 2002, when OPS will begin its comprehensive inspections of hazardous liquid operators, state representatives will also be included in these teams. This approach will allow senior inspectors to serve as mentors to the trainees, provide on-the-job training, and help inspectors make the transition to this new approach. When OPS finalizes the rule on the gas transmission integrity management requirements, inspectors will require additional training. OPS’s training may help ensure that inspectors have the technical expertise to conduct integrity management inspections, but making the transition to this new approach may present a challenge for some inspectors. Pipeline operators, industry associations, environmental organizations, and OPS officials acknowledge that the integrity management approach represents a fundamental shift in how OPS oversees the pipeline industry. Federal and state inspectors that are accustomed to following an approach for inspecting pipelines for compliance with uniform standards will now have to evaluate programs that are unique to individual operators. One OPS regional office official stated that this new approach “will require a different thought process,” and that not making the transition adequately could result in inconsistent inspections between OPS regions and states. However, according to OPS headquarters officials, the agency’s detailed inspection protocols and guidance as well as inspector training will help ensure that integrity management inspections are conducted consistently. OPS officials told us that they will use the assistance of state pipeline safety inspectors to achieve their ambitious schedule for inspecting the integrity management programs of pipeline operators, but OPS has had only limited communications with its state partners about their role in implementing integrity management. This limited communication could result in states not being adequately prepared to meet the demands of the integrity management approach. State pipeline safety inspectors are an invaluable resource for OPS because they are familiar with pipeline safety issues unique to their states and can improve safety by increasing the frequency and thoroughness of inspections of pipeline operators. OPS plans to leverage federal and states’ resources to inspect the integrity management programs of more than 1,000 hazardous liquid and gas transmission operators. For example, states will be primarily responsible for inspecting the programs of an estimated 156 intrastate hazardous liquid and 520 intrastate gas transmission operators. Despite the important role of the states, state pipeline officials we spoke with said that they have had little to no communication with OPS about how states will be involved in integrity management inspections. For example, one state’s officials assumed OPS would contact them to participate in the quick hit inspection, but these officials did not know that states were being excluded from these inspections. OPS did not allow state inspectors to participate in the quick hit inspections because the agency felt it would be too difficult to coordinate the inspections within its self-imposed time frame. OPS’s apparent lack of communication with states leaves some states unsure if they will have the resources and expertise to meet the demands of the integrity management initiative. State officials told us that they are unsure how many of their inspectors will be trained by OPS over the next few years, and that they do not know enough about OPS’s integrity management approach to determine whether they need to change some of their own in-house training, hire more inspectors, or both. One state’s officials said that, because OPS has not provided any information to their state, they could only speculate about states’ roles under the published final rule and could not justify requests for additional resources in preparation for the new integrity management approach. Another state official said that, given the availability of training in the past, it could take about 10 years to train just that state’s inspectors. When we raised this concern to OPS officials, they responded that the agency has changed its training schedule and will be capable of training more people. Although OPS has described its relationship with its state partners as an important component of the integrity management program, OPS officials acknowledge that in their initial phase of implementing integrity management, they have not focused on communicating with states regarding their plans for implementing the new approach. The officials explained that they have delayed communicating this information to states because states were not involved in the first phase of implementation, which included quick hit inspections of hazardous liquid operators. OPS officials further noted that since September 11, 2001, their communications with states have focused on security-related issues. (However, as previously described, some state pipeline safety officials told us that they have not received clear guidance from OPS on their role in security oversight.) According to agency officials, they are starting to contact states that will be involved in their first comprehensive inspections of hazardous liquid operators, scheduled to begin in August 2002, and will communicate further with states about their role in integrity management as these inspections continue. In addition, OPS officials explained that the agency plans to hold an annual meeting with states in September 2002 and a planning exercise with states in January 2003; both of these events will provide opportunities for OPS to communicate with states about their role in the integrity management initiative. However, these annual meetings do not address the need for OPS to formally communicate with states throughout the implementation process in order to effectively coordinate the use of both federal and state inspectors. Obtaining complete and accurate data on reportable pipeline incidents is important to OPS for monitoring operators’ safety performance, identifying safety trends, and planning future initiatives. Under the integrity management approach, useful and reliable data are also important, because OPS is using its data to, among other things, measure the effectiveness of this approach in improving pipeline safety. According to a joint government and industry task force report on hazardous liquids,complete and accurate information on pipeline incidents is essential for the successful implementation of a risk management system. In the past, we, the Safety Board, DOT’s Office of the Inspector General, and others have identified problems with the completeness and accuracy of OPS’s data. For example, as we testified earlier this year, OPS’s former incident report forms included so few cause categories (seven or fewer, depending on the form) that about one-fourth of all pipeline incidents were attributed to “other” causes—a category too broad for useful analysis. In addition, OPS’s incident forms did not provide for collecting data on hazardous liquid spills of less than 50 barrels or for measuring the total impact of an incident, particularly its damage costs. In addition, OPS did not require liquid pipeline operators to submit data on the characteristics of their pipeline infrastructure (e.g., age or size), which it needed to analyze trends and compare the operators’ safety performance, nor did it collect complete data from natural gas pipeline operators. Finally, OPS did not have a procedure for following up with operators to ensure that their incident reports included any necessary revisions. To improve the completeness and accuracy of its data, OPS is undertaking several initiatives, most of which it plans to have implemented for the collection of 2002 data. To more accurately determine the causes of incidents, OPS revised its incident report forms in 2001 and early 2002 for natural gas transmission and hazardous liquid incidents, respectively, to include 25 categories of causes. The agency plans to revise the form for natural gas distribution incidents by the end of 2002. The revised forms for hazardous liquid operators also require these operators to report spills of 5 gallons or more (instead of 50 barrels or more) and to provide more complete information on the total costs of an incident. To enable it to better analyze trends and compare operators’ performance, OPS revised its annual report forms for natural gas transmission pipeline operators for 2001 data and intends to revise these forms for natural gas distribution pipeline operators for 2002 data. In July 2002, the agency proposed instituting annual reports for liquid pipeline operators for 2002 data. To ensure that operators complete incident reports in an accurate and timely manner, OPS has assigned an inspector in each region to review incident report forms for completeness and accuracy. It has also instituted new electronic notification procedures to ensure that operators submit revised incident reports, if necessary. These and other major data improvement initiatives are summarized in table 2. According to OPS officials, OPS plans to use the data that it collects to, among other things, help measure the effectiveness of its integrity management approach, focus its oversight efforts on the greatest risks to pipeline safety, and prioritize research and development projects. One performance measure that OPS plans to develop using the new incident report forms is the number of high consequence areas affected by pipeline incidents. This number should decrease over time as operators focus their efforts on these areas through their integrity management programs. To focus its oversight efforts on the greatest risks, OPS plans to analyze the improved data on incident causes to better understand the greatest safety risks and deploy staff accordingly to address these risks. OPS also plans to use the data on incident causes to identify the research and development projects that are most critical to improving pipeline safety. Although OPS’s initiatives appear to address past criticisms, government and industry officials believe it is too early to say whether further improvements are needed. According to the Safety Board, state pipeline safety officials, industry groups, and pipeline operators, OPS’s initiatives address the agency’s underlying data problems and will enable OPS to better understand the causes of incidents so it can focus its efforts to improve safety. However, officials from the Safety Board noted that these initiatives are merely a first step, and they emphasized that OPS should periodically reassess its forms and procedures and take steps to revise them as necessary. In addition, a state pipeline safety official noted that although there are now 25 cause categories on the incident forms, there will still be some uncertainty, since operators have the option of choosing “other.” Finally, officials from industry groups told us that it will be several years before OPS has sufficient data for analyzing trends in incidents. OPS is aggressively pursuing its integrity management approach and taking action to improve the quality of its data. If properly implemented, these initiatives should improve pipeline safety. However, OPS still has significant challenges to overcome in implementing its new regulatory approach. Although OPS is carrying out a variety of activities aimed at overcoming these challenges, the agency lacks a workforce plan containing current and future resource estimates for these initiatives. The absence of such a plan could hamper OPS’s ability to meet its ambitious time frames and successfully implement its new regulatory approach. Furthermore, OPS does not have an effective strategy for communicating with its state partners and, as a result, these states may not be fully aware of the role OPS expects them to play in implementing integrity management and may not be adequately prepared for this role. If states are not adequately prepared, OPS will probably not be able to meet its ambitious time frame for inspecting pipeline operators’ integrity management programs. Finally, the lack of a workforce plan and strategy for communicating with states may hamper OPS’s ability to ensure that it has the resources and expertise it needs to oversee pipeline security and that it is effectively involving states in this effort. We recommend that the Secretary of Transportation direct OPS to develop a workforce plan that contains an updated assessment of OPS’s current and future staffing and training needs and an examination of the workforce’s deployment across the organization and develop a strategy for communicating to the states what role they will play in conducting integrity management inspections and other oversight activities. We provided a draft of this report to DOT for its review and met with DOT officials, including OPS’s Associate Administrator, to obtain their comments. In addition, DOT’s Assistant Secretary for Administration provided written comments, which are reprinted in appendix I. The DOT officials generally agreed with the draft report’s recommendations. Regarding workforce planning, they noted that OPS intends to formulate detailed plans for the longer term after it has completed the final integrity management rule for gas transmission pipelines. While we are encouraged that OPS intends to develop a workforce plan, we believe that the agency needs to ensure that its planning efforts encompass both its short-term and long-term staffing and training needs. In particular, the agency should develop a strategic workforce plan now in order to establish a solid foundation for implementing integrity management and accomplishing its mission and programmatic goals. Such a plan should identify the resources and expertise OPS needs to carry out its initiatives, including how it will leverage its resources with those of its state partners. A workforce plan will help the agency meet its ambitious time frame for implementing the integrity management approach and address challenges it faces in doing so. OPS should monitor and periodically update the plan to address changing needs. Regarding communicating with the states, the DOT officials explained that OPS is trying to define what role the states will play in integrity management inspections and is currently engaged in discussions with states regarding their involvement in this initiative. Although we believe that this is a step in the right direction, the agency needs to formulate and adopt a strategy for communicating with its state partners that will help ensure that the agency effectively involves states in integrity management and other oversight efforts over the longer term. OPS officials also provided some technical clarifications, which we have incorporated in this report as appropriate. To examine OPS’s steps to implement the integrity management approach, identify the challenges OPS faces in implementing this approach, and assess OPS’s plans for obtaining the resources and expertise needed to oversee pipeline safety under this approach, we reviewed OPS documents, analyzed OPS’s resource estimates, visited states, and interviewed OPS and pipeline industry officials as well as others with pipeline safety expertise. OPS documents that we reviewed included the proposed and final rules that establish the integrity management requirements, comments on the proposed rule, OPS’s documentation on its plans for implementing the integrity management approach, and OPS’s resource estimates and training schedule. We analyzed OPS’s resource estimates to determine their accuracy and consistency. We also visited state pipeline agencies in Texas, Washington, New York, and Virginia. We chose to visit these states because their pipeline oversight agencies are among the most active of OPS’s state partners in implementing the integrity management approach. For example, officials in these states provided comments on OPS’s proposed integrity management rules and/or have been involved in efforts to develop integrity management program requirements. In addition, Texas has its own integrity management rule for natural gas and hazardous liquid pipeline operators. We also conducted in-person and telephone interviews with the following: representatives from state and national pipeline industry associations; officials at several pipeline companies; pipeline safety officials in those states we visited; representatives from environmental advocacy organizations; officials from the Environmental Protection Agency and the National Transportation Safety Board; representatives from Cycla Corporation, a contractor that is working for OPS on some components of implementing integrity management; a representative from the Transportation Safety Institute, which provides the training for state and federal pipeline safety inspectors; and officials from OPS’s headquarters and five regions. To determine OPS’s major initiatives to improve the quality of its data on pipeline incidents, we reviewed and compared the agency’s new data- collection forms with its previous forms. We also interviewed officials working for pipeline companies that fill out these forms. We interviewed officials from the Safety Board and the DOT Office of the Inspector General, OPS officials who implement the data-collection activities, representatives from pipeline industry associations, and state pipeline agency officials. We conducted our work from November 2001 to July 2002 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 its date. At that time, we will send copies of this report to congressional committees and subcommittees with responsibilities for transportation safety issues, the Secretary of Transportation, the Administrator of the Research and Special Programs Administration, and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or guerrerop@gao.gov. Key contributors to this report were Susan Fleming, Judy Guilliams-Tapia, Michael Horton, Wyatt Hundrup, and Sara Vermillion. | The Office of Pipeline Safety (OPS) is implementing a new approach to overseeing the safety of a 2.2-million-mile network of pipelines in the United States that transports potentially dangerous materials, including hazardous liquids, such as oil and natural gas. OPS has to complete several important steps to implement its integrity management approach within an ambitious, self-imposed schedule. The agency began applying this new regulatory approach to hazardous liquid pipelines in 2000 by issuing final rules requiring operators of these pipelines to develop integrity management programs. While implementing its integrity management approach, OPS must also perform ongoing oversight duties, such as inspecting the construction of new pipelines and investigating pipeline incidents. In addition to meeting its ambitious schedule, OPS faces a number of other challenges in implementing this new regulatory approach. These challenges include (1) enforcing the integrity management requirements consistently and effectively, (2) ensuring that natural gas transmission pipeline operators use assessment methods appropriately, (3) establishing an inspection interval for natural gas transmission pipelines, (4) measuring and reporting on the effectiveness of the approach, and (5) developing and implementing an approach for overseeing pipeline security. OPS's efforts to identify the resources and expertise needed to implement its integrity management approach are hampered by the lack of an up-to-date assessment of current and future staffing and training needs and an examination of the workforce's deployment across the organization--essential elements of a "workforce plan." |
The Hunter is a pilotless aircraft resembling a small airplane that is controlled from a ground station. (See fig. 1.) It is intended to perform reconnaissance, target acquisition, and other military missions by flying over enemy territory and transmitting video imagery back to ground stations for use by military commanders. The Hunter program (formerly called the Short-Range UAV program) began in 1989 as a joint-service effort in response to congressional concern over the proliferation of UAVs by the different services and the need to acquire UAVs that could meet the requirements of more than one service. DOD started the program by procuring two candidate systems for competitive testing. In early 1993, after the Hunter was selected as the winning system, DOD approved its low-rate initial production of seven systems and awarded a $171-million contract. Each system includes eight UAVs with payloads, a launch and recovery station, ground stations for controlling flight and processing information from the UAVs, and other related equipment. (See fig. 2.) DOD plans to buy 24 systems for the Army, 18 for the Navy, 5 for the Marine Corps, and 3 for training, for a total of 50 systems. DOD Instruction 5000.2 requires that efforts to develop a system’s logistical supportability begin early in the acquisition process to assure that it can be successfully operated and maintained when deployed. These efforts include developing the proper procedures for maintaining the system and for training military personnel to operate and repair the system. Accordingly, the contract for the Hunter UAV system required that the contractor develop logistic support information and deliver it when the low-rate production contract option was awarded in February 1993. Such logistic support information is supposed to identify and document (1) functions that personnel must perform to operate and maintain a system in its operational environment; (2) the types of military personnel, such as air vehicle pilots and maintenance technicians, best suited to perform the operations and maintenance functions; (3) all training, including training curriculums and training materials, required to prepare personnel to operate and maintain the system; (4) all equipment required to maintain the system, such as mechanical tools used to repair trucks, and computer hardware and software used to test and repair faulty electronic equipment; and (5) the system maintenance schedule. As of December 1994, the contractor had not delivered adequate logistic support information. In 1993, the Joint Tactical UAV Project Office conducted a logistics demonstration to evaluate the adequacy of the logistic support information provided by the contractor. For the logistics demonstration, the contractor trained military personnel to conduct system maintenance and developed system manuals describing 3,107 maintenance tasks. The trained military personnel attempted all of the maintenance tasks, but they completed only 56 maintenance tasks on the first attempt. After government analysis, and extensive revisions by the contractor, military personnel were able to complete 1,526 more tasks. Government testers informed us that 1,347 of the 3,107 maintenance tasks were so ill-defined in the contractor-supplied manuals that revisions were not practical. In a letter dated January 1994 to the contractor, the Hunter contracting officer stated that the results of the logistic demonstration reflected a system that was not yet sustainable and did not have a support structure in place. The contracting officer identified logistic support information as the primary area of deficiency. He informed the contractor that the system manuals were grossly inadequate to either operate or maintain the system and that the training curriculum was insufficiently defined. According to the logistics demonstration final report, the system manuals contained insufficient references, incorrect or vague cautions and warnings, and conflicting equipment terminology. The testers concluded that these deficiencies caused the manuals to be difficult to use and error prone and that the system manuals could lead to equipment damage and injury to personnel. The Joint Tactical UAV Project Office revised the contract delivery schedule to allow additional time for the contractor to deliver adequate logistic support information. The revised schedule delayed the delivery of logistic support information from February 1993 until October 1994 for unit maintenance and until June 1995 for depot maintenance. Analysts at the U.S. Army Missile Command, the Hunter program’s lead logistics agency, reviewed all available logistic support information in May 1994. They concluded that, based on the contractor’s past history of not developing logistic support information in accordance with DOD policy and the sheer magnitude of the work remaining, the contractor would not be able to provide complete logistic support information before June 1995. Missile Command logistics analysts said that without adequate logistic support information, DOD would have to rely on the contractor for logistic support. Based on DOD’s experience with other programs, Missile Command officials expect contractor logistic support to be more expensive than the support originally planned to be provided by the services. For example, government cost estimates of service-provided operations and maintenance for a Hunter system was set at $2.9 million a year for peace-time operations. However, the contractor has already proposed billing the government about $1.7 million to provide logistic support for one system for 300 flight hours in a 3-month operational exercise. This equates to about $5,666 per flight hour and $6.8 million a year for one system. As we have seen on other systems such as the Pioneer UAV and the SLQ-32 shipboard electronic warfare system, insufficient logistic support information can also lower system readiness. For example, the Pioneer’s readiness has been degraded because faulty maintenance manuals caused maintenance personnel to order the wrong replacement parts, and logistics assessment reports on the SLQ-32 show that inadequate technical manuals increased operations costs and lowered readiness levels. DOD policy requires that operational test and evaluation be structured to determine (1) the operational effectiveness and suitability of a system under realistic combat conditions and (2) whether the minimum acceptable operational performance requirements have been satisfied. As stated in our December 1993 report, results of the limited user testing conducted during 1992 revealed significant performance deficiencies in the Hunter system. While some actions have been taken or are planned that are designed to correct problems, our review indicates that serious deficiencies remain unresolved. We also found that none of the fixes had been operationally tested to ensure that the system meets minimum acceptable operational requirements. In addition, acceptance testing on the first low-rate production system, which began in May 1994, disclosed new problems. As of October 1994, the delivered system had not been accepted. Furthermore, during acceptance testing in late October 1994, an air vehicle was almost totally destroyed when it went out of control. Consequently, DOD grounded the Hunter system. Limited user testing conducted in 1992 showed that the Hunter system was unreliable in several critical areas. The system required frequent unanticipated repairs, the air vehicle engine performance was unsatisfactory, and the built-in-test equipment was inadequate. These problems have yet to be resolved. To ensure that the Hunter is reliable and does not create an excessive maintenance burden, system requirements specify that it require no more than one unanticipated repair every 4 hours. However, limited user tests showed that the Hunter required unanticipated repairs every 1.2 hours. DOD acknowledges that the system failed to meet this requirement but has taken no further action to demonstrate that the system can perform as required. Instead, DOD has relied on contractor estimates, which state that the requirement for unanticipated repairs is achievable. The importance of system reliability was demonstrated during Operation Desert Storm. According to DOD’s lessons learned, the frequent failure of the Pioneer showed that UAV systems must be reliable to adequately support combat operations. Limited user tests conducted in June 1992 disclosed that the two engines used in each air vehicle, which were designed for a motorcycle, were particularly unreliable and had a short life. The engines experienced recurring problems with valve seizures. Because of the repeated engine failures during testing, the project manager directed the contractor to replace all engines with modified versions. Although the purchase price of the motorcycle is under $8,000, DOD has contracted not-to-exceed prices as high as $53,000 each for the engines. The replacements showed some improvements, however, failures continued. Army test officials concluded that each UAV unit equipped with 2 Hunter systems could be required to replace from 3 to 10 engines a week. Furthermore, the frequent engine replacements could overburden the services’ logistics systems. According to program officials, these engine problems have been corrected and the original systems procured have been retrofitted with the changes. Program officials also plan to incorporate the modifications in the systems being produced. Program officials also said the air vehicle engines demonstrated acceptable performance during subsequent verification testing. However, valve seizures reappeared during more recent testing. In fact, during July 1994, while testing the first low-rate production system delivered, the problems with push rods and valve seizures continued. Test officials have refused to accept delivery of this system until these problems are resolved. In addition, at least two earlier crashes, which resulted in significant damage to the air vehicles, have been partially attributed to other engine-related failures. Hunter’s built-in-test is supposed to identify system faults needing repair. However, following limited user testing, test officials concluded that the built-in-test equipment consistently failed to meet requirements and required redesign to correct the deficiencies. The built-in-test detected only 11 of 154 problems during the tests and isolated the cause of only 2 of the 11 faults detected. The test agency concluded that the inadequate built-in-test design significantly hampered system maintenance and increased the time to correct problems. In 1993, logistics demonstration testing disclosed that while some software modifications had been made, Hunter’s built-in-test equipment still did not meet requirements. Currently, DOD plans no further testing of the Hunter built-in-test equipment until February 1995. Most Army and Marine Corps units planning to use the Hunter need UAVs that operate at ranges greater than that at which the ground station can directly control the Hunter. DOD plans to extend the range of the Hunter through a process called “relay operations.” Relay operations involve controlling one UAV at long range through a second UAV operating at a closer range, as shown in figure 3. Establishing a relay is to be accomplished by the ground station transmitting commands to and receiving video imagery from the air vehicle operating at long ranges through relay equipment on the UAV operating at a closer range. Most of the limited user tests planned to demonstrate this capability failed because of engine failures or other problems with the air vehicle and relay component. The test agency concluded that the system’s ability to transmit video imagery during relay operations was unacceptable for a fielded system. DOD has incorporated some modifications intended to improve the system’s relay capability and overcome past poor video quality. However, according to an official of the Defense Contract Management Command, subsequent testing has determined that the quality of the video imagery from the low-rate production system that has been delivered, but not accepted, is worse than that demonstrated during the limited user tests. The contractor has replaced system components in an attempt to solve the problem. However, the adequacy of the changes has not been verified in flight testing because the system has remained grounded. The Hunter system is supposed to locate and identify targets so that they can be engaged by artillery fire. The system is also expected to detect where artillery lands in relation to the target so that the artillery can be adjusted. To be effective, these tasks must be done quickly so that the targets can be hit before they are able to take cover or move. During the limited user tests conducted in 1992, the Hunter failed to meet requirements. Army testers concluded that the system was not sufficiently timely and may never meet Army standards. Even though the system demonstrated unsatisfactory performance during the 1992 testing, DOD’s current plans do not include any corrective action to resolve this deficiency. DOD officials stated that this is because the system operational requirements documents do not establish specific time frames in which the Hunter must be able to support artillery operations. However, the mission needs statement that justified procurement of the Hunter states that the system is intended to acquire targets that would then be engaged by artillery or other means. We believe that a requirement to adjust artillery fire in a timely fashion is inherent in missions whose objective is to engage targets. The Defense Contract Management Command is responsible for accepting delivery of the system hardware and began acceptance testing of the first low-rate production system in May 1994. On June 14, 1994, the Command recommended that the UAV program office terminate acceptance testing because extensive software changes were needed and the air vehicle flew in a circle even when programmed for straight and level flight. Acceptance testers also noted that air vehicle engines continue to have valve seizures. However, the Joint Tactical UAV Project Office ignored the recommendation and acceptance testing continued. In July 1994, the Command reported to the UAV program office that several problems needed to be resolved prior to system acceptance. The Command identified software as the most critical problem with the system and pointed out that the existing software was not acceptable for field use. In addition, test results continued to show that the air vehicles pulled to the left during takeoff and flight. On some air vehicles, this condition was severe and could affect safety of flight. Therefore, tests of the system’s speed and altitude capability were performed by flying the air vehicle in a circle; the air vehicle could not meet contractual requirements when it was flying straight and level. DOD officials believe that subsequent system modifications have resolved this problem. However, the adequacy of the modifications has not been fully tested because the system remains grounded. The acceptance testing of the first low-rate production system delivered also showed a significant increase in the loss of data link connections between the ground station and the air vehicle when compared to the results of the 1992 limited user test. DOD currently plans to begin full-rate production of the Hunter system for the Army and the Marine Corps before verifying that the system will meet the Navy’s needs. If subsequent testing of a Navy version of the Hunter were to show the system to be unsuitable for naval use, DOD would already be fully committed to a system that did not meet the need of all services, as called for by Congress. As a result, the congressional call for DOD to develop a joint-service system is at risk. Although DOD plans call for operational testing before full-rate production, the testing will not include an evaluation of the system’s ability to meet the Navy’s operational requirements. Operational testing of the Navy requirements is not scheduled until after DOD plans to commit to full-rate production of the land-based Hunter. According to the Commanding General of U.S. Army Operational Test and Evaluation Command, the DOD Director of Operational Test and Evaluation has expressed concern that the operational testing of the Navy variant will not occur until after the full-rate production decision for the land-based system. Hunter program officials maintain that the contractor showed that the Hunter can be operated from a ship during a maritime demonstration. However, according to a Navy official, this demonstration did not reflect realistic operational conditions. For example, during the shipboard demonstration, the contractor removed all aircraft from the flight deck. According to the Navy official, under realistic conditions, other aircraft would remain on the deck of the ship during operation of the Hunter system. In addition, there have been at least five air vehicle crashes involving the tail hook recovery system that would be used to land the Hunter aboard ship. Under the Defense Acquisition Board (DAB) approved program schedule (see fig. 4), DOD has seven systems under contract with deliveries scheduled through April 1995 and operational testing from November 1994 to May 1995. This schedule allows a 23-month break, from April 1995 to March 1997, in the delivery of UAV systems. The UAV Joint Project Office asserts that it must award a second low-rate production contract for four additional systems to reduce the 23-month break in production deliveries and keep skilled contractor employees on the job. However, as indicated in figure 5, the level of contractor employees will still be significantly reduced even with the additional production because the second production contract award is not anticipated to be made before June 1995. Furthermore, a sizable break in production deliveries of over one year would still exist. Therefore, the impact of a second procurement on labor force stability would be marginal at best because at that point in time less than 50 employees would be retained. In addition, not awarding the second production contract reduces the risk from further commitment to a potentially unsuitable system. We recommend that the Secretary of Defense prohibit award of a second low-rate production contract until the Hunter system satisfactorily demonstrates that it is operationally effective and operationally suitable and will satisfactorily meet the requirements of the Army, the Marine Corps, and the Navy. We did not obtain written agency comments on this report. However, we discussed its contents with officials from the Office of the Secretary of Defense, the Assistant Secretary of the Navy, the Defense Airborne Reconnaissance Office, the UAV Joint Project Office, and the Joint Tactical UAV Program Office and incorporated their comments as appropriate. The officials maintained that award of a second low-rate production contract is warranted to prevent a prolonged break in production deliveries and retain skilled contractor employees. Our review indicated that even with a second production contract, a significant break in production deliveries and a significant reduction in contractor employees would still occur. Because of the risks involved in further committing to an unproven system, we believe that further production should be deferred until the system demonstrates that its problems are solved and its performance is satisfactory. The officials pointed out that operational testing of the Navy variant is to be done before a commitment is made to its production. By that time, however, DOD will have already made the full-rate production decision on the Army and the Marine Corps version jeopardizing the goal of a common-service system. To accomplish our objectives, we focused primarily on the results of system testing, including logistics and shipboard demonstrations and limited user testing. We also examined the results of technical tests that assessed some other aspects of the system’s performance. In addition, we reviewed (1) test plans and schedules, (2) performance requirements documents, (3) acquisition plans, (4) the original contract and all modifications, and (5) other records bearing on the Hunter UAV status and potential suitability and effectiveness. We obtained information from officials of the Program Executive Office for Cruise Missiles and UAV Joint Project Office, Naval Air Systems Command, Arlington, Va.; Hunter Joint Tactical UAV Program Office and Integrated Material Management Center, U.S. Army Missile Command, Huntsville, Ala.; U.S. Army Training and Doctrine Command, Fort Huachuca, Ariz.; DOD Contract Management Command, Sierra Vista, Ariz.; Marine Corps Combat Development Command, Quantico, Va., and 1st Remotely Piloted Vehicle Company, Twenty-Nine Palms, Calif.; Aviation Requirements Branch, Commander, Naval Surface Forces Atlantic, Norfolk, Va.; and Weapons Support Improvement Group, Assistant Secretary of Defense for Production and Logistics, Office of the Secretary of Defense, Washington, D.C. We performed our work from October 1993 to November 1994 in accordance with generally accepted government auditing standards. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report. A written statement must also be submitted to the Senate and House Committees on Appropriations with an agency’s first request for appropriations made more than 60 days after the date of the report. We are sending copies of this report to appropriate congressional committees; the Secretaries of the Army and the Navy; and the Director, Office of Management and Budget. We will make copies available to others upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Jack Guin, Assistant Director; Pam Greenleaf, Evaluator-in-Charge; John S. Warren, Evaluator; and Charles A. Ward, Evaluator. Louis J. 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A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Department of Defense's (DOD) acquisition of the Hunter Short-Range Unmanned Aerial Vehicle (UAV), focusing on whether: (1) the system is logistically supportable; (2) previously identified performance deficiencies have been corrected; and (3) the system represents a valid joint-service effort. GAO found that: (1) the Hunter UAV system is not logistically supportable and has serious unresolved performance deficiencies; (2) the contractor had not delivered required logistical support information as of December 1994; (3) the system may be unsuitable for theater operations and may require costly contractor maintenance and support; (4) the vehicle is grounded because of a number of crashes during testing; (5) DOD plans to go into full production before determining whether the land-based vehicle is suitable for naval operations, which jeopardizes the joint-service system; (6) although DOD recently restructured the Hunter program, the program faces further delays and curtailment of critical testing while allowing for the procurement of defective systems; and (7) the planned award of a second low-rate production contract will have a minimal effect on preserving the contractor's skilled labor pool. |
When PTO receives a patent application, it assigns it to a team of patent examiners with relevant technology expertise. PTO does not begin examining patent applications upon receiving them and PTO’s data shows that, as of June 2013, the average time between filing and an examiner’s initial decision on the application was about 18 months. On average, it takes 30 months for PTO to issue a patent once an application is submitted. The focus of patent examination is determining whether the patent application satisfies the statutory requirements for a patent, including: (1) novelty, (2) nonobviousness, (3) utility, and (4) patentable subject Generally, other patents, publications, and publicly disclosed but matter. unpatented inventions that pre-date the patent application’s filing date are known as prior art. During patent examination, the examiner, among other things, compares an application’s claims to the prior art to determine whether the claimed invention is novel and nonobvious. The examiner then decides to reject or grant the claims in the application and deny the application or grant a patent. U.S. patents include the specification and the claims: The specification is a written description of the invention that, among other things, sufficiently discloses the invention and the manner and process of making and using it. The specification must be written in full, clear, concise, and exact terms so as to enable any person skilled in the art to make and use the invention. As an example, an excerpt from the specification for a cardboard coffee cup and insulator invention describes “corrugated containers and container holders which can be made from existing cellulosic materials, such as paper.” The claims define the scope of the invention for which protection is granted and must be definite. There are often a dozen or more claims per patent, and they can often be difficult for a layperson to understand, according to legal commentators. For example, one claim for the cardboard coffee cup insulator begins by referring to “a recyclable, insulating beverage container holder, comprising a corrugated tubular member comprising cellulosic material and at least a first opening therein for receiving and retaining a beverage container.” A patent’s claims can be written broadly or be more narrowly defined, according to legal commentators, and applicants can change the wording of claims—which can affect their scope— during examination based on examiner feedback. Patents are a property right and—like land—their claims define their boundaries. When a property right is not clearly defined, it can lead to boundary disputes, although to some extent uncertainty is inherent. Consequently, legal commentators define high-quality patents as those whose claims clearly define and provide clear notice of their boundaries. Once issued by PTO, a patent is presumed to be valid. However, the patentability of its claims can be challenged in administrative proceedings before PTO or its Patent Trial and Appeal Board and its validity can be challenged in federal court. For example, the AIA established three new administrative proceedings for entities to challenge the patentability of a patent’s claims: Inter partes review.patent owner to request review of an issued patent by presenting prior art to PTO—either patents or other publications—to challenge the claimed invention’s patentability as obvious or not novel. This review proceeding became available on September 16, 2012, 1 year after the enactment of the AIA, but entities cannot request this review until the This proceeding allows anyone who is not the later of (1) 9 months after a patent is granted or (2) completion of post-grant review, if such a proceeding is held. Post-grant review. This proceeding allows anyone who is not the patent owner to request a review of an issued patent that challenges at least one of the claims’ patentability in more circumstances than inter partes review—such as the invention not being useful—and not solely based on prior art. This proceeding is available for patents issued from patent applications with a filing date of March 16, 2013, or later and requests must be filed within 9 months of the patent’s issuance. Transitional program for covered business method patents. This proceeding allows anyone who is sued or charged with infringing a covered business method patent to request a review of the patent to challenge a claim’s patentability in generally the same circumstances as post-grant review. This review proceeding became available on September 16, 2012, and requests must be filed within 9 months of the patent’s issuance. In addition, a patent’s validity can be challenged in the 94 federal district courts throughout the country by, for example, presenting additional prior art that PTO may have been unaware of when it granted the patent. Challenges to a patent’s validity are often brought by an accused infringer Patent owners can bring who has been sued for infringing the patent. infringement lawsuits against anyone who uses, makes, sells, offers to sell, or imports the patented invention without authorization because a patent is a right to exclude others from practicing the invention. Exactly what a patent covers and whether another product infringes the patent’s claims are rarely easy questions to resolve in litigation, according to legal commentators. As noted, appeals of district court decisions in infringement cases are heard in the U.S. Court of Appeals for the Federal Circuit in Washington D.C. In patent infringement lawsuits, the accused infringer often challenges the patent’s validity as an “affirmative defense,” meaning that even if the infringement allegations are true, the would-be infringer is not liable because the patent is invalid. A party accused of infringement can also file a lawsuit to obtain a court decision on whether they are infringing or whether the patent is valid, which is known as a declaratory judgment action. If a patent infringement lawsuit is not dismissed in the initial stages, it proceeds to discovery (a process that exists in all federal civil litigation) and claim construction. Discovery requires the accused infringer to produce documents or other information that shows, among other things, how the allegedly infringing product is made and operates to help the patent owner establish infringement. Similarly, the patent owner must produce documents or other information that the accused infringer can use to challenge the patent’s validity, among other things. However, parties that do not offer products or services using the patents at issue often have far fewer documents to disclose—because they do not have any documents related to their products or services—than patent owners or accused infringers who do offer products or services. With this information the patent owner specifies which patent claims allegedly are infringed and the alleged infringer responds by explaining why the allegedly infringing product is not covered by the patent’s claims. This identifies the patent claims the court needs to interpret. Known as claim construction, this is a fundamental issue in patent cases, and each party tries to persuade the court to interpret the patent claims in its favor. The court has broad discretion in how it goes about this process, which can involve a hearing with testimony from witnesses, according to legal In addition, if the patent’s validity is being challenged, commentators. the alleged infringer specifies why the patent allegedly is not valid, including any prior art. This hearing is often referred to as a Markman hearing after the Supreme Court’s decision in Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996). for the infringement that are at least what a reasonable royalty would be for the use made of the invention by the infringer. In addition to being enforced in the federal courts, patents can also be enforced at ITC, which handles investigations into allegations of certain unfair practices in import trade. Specifically, certain patent owners can file a complaint with ITC if imported goods infringe their patent or are made by a process covered by the patent’s claims. If ITC determines after an investigation that an imported good infringes a patent, the agency can issue an exclusion order barring the products at issue from entry into the United States, which the President can disapprove for policy reasons. ITC decisions can be appealed to the U.S. Court of Appeals for the Federal Circuit. Legal commentators have reported that a 2006 Supreme Court decision led to increased complaints alleging imported goods infringed U.S. patents being filed with ITC, and recent ITC data show that the number of investigations instituted by ITC increased from 32 in 2006 to 37 in 2012. According to PTO data, applications for all types of patents have increased in recent years, and patents granted for software-related technologies have seen dramatic increases over the past 2 decades (see fig. 1). Software-related patents occur in a variety of technologies containing at least some element of software, and cover things like sending messages or conducting business over the Internet (e.g. e- commerce). Patents related to software can, but do not generally, detail computer software programming code in the specification, but often provide a more general description of the invention, which can be programmed in a variety of ways. According to legal commentators, the number of software-related patents grew as computers were integrated into a greater expanse of everyday products. By 2011 patents related to software made up more than half of all issued patents. Software was not always patentable, and Supreme Court decisions in the 1970s found mathematical formulas used by computers were not patentable subject matter. However, a 1981 Supreme Court decision overturned PTO’s denial of a patent application for a mathematical formula and a programmed digital computer because, as a process, it was patentable subject matter. Subsequently, in 1998, the Federal Circuit ruled that a mathematical formula in the form of a computer program is patentable if it is applied in a useful way. According to PTO officials, the agency interpreted these cases as limiting their ability to reject patent applications for computer processes. Legal commentators also said that after these decisions, particularly the 1998 Federal Circuit decision, software-related patenting grew as many technology companies made the conscious effort to generate more patents for offensive or defensive purposes—that is, to use them to sue or countersue competitors in infringement lawsuits, rather than use them to recoup R&D costs. As recently as 2010, the Supreme Court has noted that the patent statute acknowledges that business methods are patentable subject matter. From 2000 to 2010, the number of patent infringement lawsuits fluctuated slightly, and from 2010 to 2011, the number increased about 31 percent. Our more detailed analysis of a generalizable sample of 500 lawsuits estimates that the overall number of defendants in these cases increased from 2007 to 2011 by about 129 percent over the 5-year period. This analysis also shows that operating companies brought most of these lawsuits and that lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants during this period. Some stakeholders we interviewed said that they experienced a substantial amount of patent assertion without firms ever filing lawsuits against them. From 2000 to 2011, about 29,000 patent infringement lawsuits were filed in U.S. district courts. The number of these lawsuits fluctuated slightly until 2011, when there was a 31 percent increase (see fig. 2). Specifically, about 900 more lawsuits were filed in 2011 than the average number of lawsuits filed in each of the previous years. Some stakeholders we interviewed generally attributed the increase in 2011 to patent owners’ anticipation of the passage of AIA, which restricts the number of accused infringers who can be joined in a single lawsuit. Prior to the enactment of AIA, plaintiffs could sue numerous defendants in a single lawsuit. AIA restricts this practice by prohibiting joining unrelated defendants into a single lawsuit based solely on allegations that they have infringed the same patent. According to the legislative history of AIA, this provision was designed to address problems created by plaintiffs joining defendants, sometimes numbering in the dozens. As a result, some stakeholders we interviewed generally agreed that the increase in 2011 was due to the fact that plaintiffs had to file more lawsuits at the end of 2011 after AIA’s enactment in order to sue the same number of defendants or anticipated this change and rushed to file lawsuits against multiple defendants before it was enacted. In addition, our analysis of a generalizable sample of data from 2007 through 2011 estimates that the number of overall defendants in patent infringement suits increased by about 129 percent over the 5- year period (see fig. 3). Representatives of several operating companies that we interviewed said they are being sued more often since the mid-2000s. For example, one former official at a large technology company told us that, in 2002, the company was a defendant in five patent infringement lawsuits, but in 2011, it was a defendant in more than 50. However, a few legal commentators we interviewed said that such increases are common during periods of rapid technological change—new industries lead to more patents and the number of patent infringement lawsuits also increases because there are more patents to be enforced. Similarly, one researcher working on these issues told us that, historically, major technological developments—such as the development of automobiles, airplanes, and radio—have also led to temporary, dramatic increases in patent infringement lawsuits. Operating companies brought most of the patent infringement lawsuits from 2007 to 2011. According to our analysis of data for this period, operating companies and related entities brought an estimated 68 percent of all lawsuits. PMEs and likely PMEs brought 19 percent of the lawsuits. PMEs and likely PMEs brought 17 percent of all lawsuits in 2007 and 24 percent in 2011, although this increase was not statistically significant. In contrast, operating companies and related entities filed 76 percent of the lawsuits in 2007 and 59 percent in 2011, a statistically significant decrease. Individual inventors brought about 8 percent of the lawsuits, and research firms and universities brought less than 3 percent over the 5 year span. In about 3 percent of the lawsuits there was insufficient evidence to determine the type of plaintiff (see fig. 4). Our analysis of the data from 2007 through 2011 shows that PMEs tended to sue more defendants per suit than operating companies. For this period, there were about 1.9 defendants on average for suits filed by operating companies, and about 4.1 defendants on average for suits filed by PMEs. In addition, a disproportionate share of PMEs sued a relatively large number of defendants. For example, about 12 percent of PMEs sued 10 defendants or more in a single lawsuit, compared to about 3 percent of operating companies, a statistically significant difference. Thus, even with bringing about a fifth of all patent infringement lawsuits from 2007 to 2011, PMEs sued close to one-third of the overall defendants, accounting for about half of the overall increase in defendants. Additionally, the estimated total number of defendants sued by PMEs more than tripled from 834 in 2007 to 3,401 in 2011, while the increase in the total number of defendants sued by operating companies was not statistically significant. Often both the NPE and operating company appear as plaintiffs in the same suit. agreements where they transfer patents from an operating company to a PME, and one legal commentator who also structured such deals told us that operating companies often retain an interest in the gains from any lawsuits the PME files. This commentator also said that there are many PME lawsuits in which the identity of interested operating companies is intentionally hidden; our review of court records indicates that corporate relationships may not be easily deciphered. In some cases, business relationships were easily identifiable from court records and in other cases the links were more difficult to identify. Further, some operating companies, like PMEs, also assert patents not related to products they produce, according to some stakeholders. Research firms. Representatives from a few of the companies we interviewed said that they invested heavily in R&D and made efforts to share their technology with other companies and to help them develop new products. Specifically, these representatives told us that their companies did not focus on producing products but, rather, mainly developed new technologies and then licensed them to operating companies to pay for continued R&D. These representatives also said that they provided technical support to the firms they license patents to helping them to make the best use of their patented technologies, which distinguishes them from PMEs. Universities. Many universities license their patented technologies to companies who use them in their products, according to a representative from each of two large research universities we spoke with, although they said that the licensing revenue is generally small in relation to other sources of university revenue. They also noted that licensing at many universities is mostly driven by life sciences research and that, sometimes before research begins, universities develop partnerships with private sector firms, such as pharmaceutical companies, who have the first right to bring patented ideas into the marketplace. Our analysis of patent infringement lawsuit data from 2007 to 2011 shows that on average about 46 percent of the lawsuits involved software- related patents. Between 2007 to 2011, 64 percent of defendants were sued over software-related patents, and these patents were at issue in the lawsuits that accounted for about 89 percent of the increase in defendants over this period (see fig. 5). About 49 percent of the patents in our sample were asserted within 5 years of being granted, and there was no statistically significant difference between software-related patents and other patents in this regard. Our analysis of patent infringement lawsuit data from 2007 to 2011 shows that operating companies and PMEs both asserted software-related patents, although PME lawsuits involved these patents to a much greater extent. Specifically, about 84 percent of PME lawsuits from 2007 to 2011 involved software-related patents, while about 35 percent of operating company lawsuits did. However, operating companies brought a greater number of lawsuits involving software-related patents, given that they filed more lawsuits overall. By defendant, software-related patents were used to sue 93 percent of the defendants in PME suits and 46 percent of the defendants in operating company suits (see fig. 6). Technology-related operating companies were not the only companies sued for infringing software-related patents; other sectors were also sued for infringing such patents, including retail companies and local governments. We estimate that 39 percent of suits involving software- related patents were against firms in nontechnology sectors, according to our analysis of 2007 to 2011 data. One representative from a retail company noted that historically, all of the patent infringement lawsuits brought against the company used to be related to products they sold. However, as of mid-2012, the representative said that half of the lawsuits against the company were related to e-commerce software that the company uses for its shopping website—such as software that allows customers to locate their stores on the website—and were brought by PMEs. Representatives of retail and pharmaceutical companies told us they also defend lawsuits brought by PMEs related to features on their websites––typically software that outside vendors provide to them, rather than something they developed. Additionally, city public transit agencies have been sued for allegedly infringing patents by using software for real- time public transit arrival notifications, according to a few stakeholders we interviewed. For 2007 to 2011, an estimated 32 percent of patent infringement lawsuits were filed in 3 of the 94 federal district courts: the Eastern District of Texas, the District of Delaware, and the Central District of California. These districts also had the most lawsuits filed for the period of 2000 to 2011 (see fig. 7). In addition, our review of 2007 to 2011 litigation data shows that PMEs filed more lawsuits in the Eastern District of Texas than other types of plaintiffs. Specifically, from 2007 to 2011, 39 percent of PME and likely PME lawsuits were filed in the Eastern District of Texas, compared to about 8 percent of lawsuits filed by all other plaintiffs. Some stakeholders we interviewed said that in their view this occurs because juries in this district favor patent owners over alleged infringers. In addition, one study we reviewed that looked at all decisions for all patent lawsuits from 1995 to 2011, showed that the Eastern District of Texas, the Eastern District of Virginia, and the District of Delaware were among the top districts for quicker trials, higher success rates, and higher damage awards for patent owners. An estimated 21 percent of patent infringement cases from 2007 to 2011 were still ongoing. Of the remaining cases, our analysis shows that about 86 percent either ended or likely ended in a settlement. This occurred because both parties agreed to a judgment that the judge sanctioned, both parties agreed to end the lawsuit, or the plaintiff, who had brought the lawsuit, asked for it to be dismissed. Lawsuits brought by both operating companies and PMEs settled or likely settled at similar rates. Less than 3 percent of the cases that were not ongoing ended in a trial and judgment, or were on appeal, which was consistent with what some representatives of operating companies told us—very few of their lawsuits go to trial because they settle quickly to avoid high litigation costs. We were not able to determine litigation cost information from our sample data, and we found very little information on the costs of patent infringement lawsuits in court records. Further, as one stakeholder we interviewed noted, all litigation is expensive, not just patent infringement litigation. According to a 2011 nongeneralizable survey of patent lawyers by AIPLA, the cost of defending one patent infringement lawsuit, which excludes any damages awarded, was from $650,000 to $5 million in 2011, depending on how much was at risk. As for damages awarded, a 2012 study that looked at all district court patent decisions that proceeded through trial from 1995 to 2011 found that the median damage award was over $5 million dollars and that damage awards in NPE cases were higher than in other types of suits. The authors of a 2012 paper who collected data from a nonrandom, nongeneralizable set of 82 operating companies noted that total litigation costs for NPE suits, including damages awarded and legal fees, were around $300,000 for small and medium companies and $600,000 for large companies. The author of another 2012 paper sought to examine the impacts of NPE litigation on small companies and collected data from a nonrandom, nongeneralizable set of 223 small technology companies. Of the 79 companies that indicated that they had received a patent demand, 31 reported that the demand affected the company in various ways, including reduced hiring or a reduced value of their company—which the author collectively described as “significant operational impacts.” In addition to lawsuits, patent assertion occurs without firms ever filing lawsuits, but the extent of this practice is unclear because we were not able to find reliable data on patent assertion outside of the court system. According to representatives of some operating companies we spoke with, they often get letters from patent owners offering licenses for the use of their patents. They said that these letters, which they refer to as “demand letters,” sometimes threaten lawsuits if the parties do not reach a licensing agreement. These company representatives told us that for every patent infringement lawsuit filed against them, they might receive many times more letters notifying them of potential infringement and offering licenses. Representatives from a few operating companies we spoke with said that these letters can sometimes help to resolve issues without litigation, but that at times the letters can be so vague that they do not reference the patents at issue or what products the operating company sells that may be infringing these patents. However, a few PME representatives told us that operating companies generally ignore their letters, thus leading the PMEs to sue the companies first to get their attention. A few of these PMEs also told us that they are more likely to sue without sending a demand letter after a 2007 Supreme Court decision expanded accused infringers’ ability to file preemptive declaratory judgment lawsuits seeking determinations that the patent is invalid, unenforceable, or not being infringed. judgment lawsuit can derail patent owners’ attempts to reach a licensing agreement, according to a few PMEs we spoke with. The threat of a declaratory Because licenses or payments resulting from out-of-court patent assertions are almost always confidential, it is difficult to know the cost of these settlements. The authors of the 2012 study noted above of a nonrandom, nongeneralizable set of 82 operating companies attempted to identify this cost. The 46 companies that provided data on costs reported that they spent an average of about $30 million on NPE suits, including both legal fees and settlements, which were settled without litigation from 2005 to 2011. MedImmune Inc. v. Genentech, 549 U.S. 118 (2007). Stakeholders we spoke with identified three key factors that likely contributed to many recent patent infringement lawsuits: (1) unclear and overly broad patents, (2) the potential for disproportionately large damage awards, and (3) the increasing recognition that patents are a valuable asset. Several of the stakeholders we spoke with, including representatives from PMEs, operating companies, and legal commentators, said that many recent patent infringement lawsuits are related to the prevalence of low- quality patents; that is, patents with unclear property rights, overly broad claims, or both. Although there is some inherent uncertainty associated with all patent claims, several of the stakeholders with this opinion noted that claims in software-related patents are often overly broad, unclear or both. Unclear and overly broad patents do not provide notice about their boundaries and the uncertainty of a patent’s scope then usually needs to be resolved in court, according to some stakeholders we spoke with. Stakeholders we interviewed identified several reasons why patents may be overly broad, unclear, or vague: Some stakeholders representing different interests, including operating companies, PMEs, and legal commentators, said the use of unclear terminology in patents can lead to a lack of understanding of patent claims and, therefore, what constitutes infringement, which needs to be resolved in court. For example, two of these stakeholders said the computer software industry does not have clear terminology or common vocabularies for describing concepts, innovations, and ideas. Language describing emerging technologies, such as software, may be inherently imprecise because these technologies are constantly evolving. In contrast, pharmaceutical drug patents are relatively clear because they use standardized scientific terminology, according to a few stakeholders. Some stakeholders, including operating companies and legal commentators, emphasized that claims in software patents sometimes define the scope of the invention by encompassing an entire function––like sending an e-mail––rather than the specific means of performing that function. According to a few stakeholders we spoke with, functional claims and other overly broad claims may allow patent owners who sue for infringement to argue in court that their patent covers (1) an entire technology when it may only cover a small improvement, or (2) future technologies that their patent did not originally intend to cover. For example, representatives from one PME we spoke with said they had successfully sued companies for infringement even though the companies were implementing their idea in a completely different manner than described in their patent–– noting that they had patented their invention before the technology to best implement it was actually available. In addition, a few stakeholders noted that in certain circumstances patent owners can file a reissue application with PTO, which can sometimes broaden the scope of patents after they are issued. In addition, a few stakeholders noted that patent owners can also file continuation applications during patent examination, which, depending on the type filed, allow new subject matter to be added to the patent application. According to some stakeholders—including PMEs and representatives of operating companies that were sued for patent infringement—broad patents on concepts they would not expect to be patented make it easy to infringe a patent without intending to do so, although this is not a defense since patent infringement is a strict liability offense.capital firms we spoke with said that many software-related patents they encountered were for obvious concepts and did not represent any real contribution to new technology. Other stakeholders, including operating companies, judges, and legal commentators, also said some patents, particularly software-related patents, should never have been issued because they were obvious, not novel, or lacked definiteness. For example, the software start-up and venture Unclear boundaries make it hard to determine whether a patent is actually related to a particular technology. Several diverse stakeholders, including PMEs, operating companies, legal commentators, and judges we interviewed said that many overly broad or vague patent claims do not sufficiently identify the scope of the patent’s coverage. This lack of notice makes it difficult for entities to identify relevant existing patents and prior art before developing new products, according to some legal commentators and operating companies. This difficulty reduces the effectiveness of searching for existing patents to ensure the product being developed does not infringe on valid patents and, according to several stakeholders, including PMEs, legal commentators, and venture capital and start-up firms, entities do not always conduct patent searches. For example, representatives from a software start-up company we spoke with told us that searching for relevant patents before developing new products is unrealistic and diverts already scarce resources, particularly because their product development process can be as short as 2 months. In contrast, pharmaceutical company representatives we spoke with said that development of new drugs is so expensive that patent searches are a necessity and that they can conduct thorough searches because their patents are described clearly and are easy to find in industry databases. In addition, a few stakeholders we spoke with told us that the sheer volume of patents makes searching for relevant patents before developing new products particularly difficult, especially for products that combine many patented technologies. For example, these stakeholders we spoke with estimated that a typical smartphone uses from 50,000 to 250,000 patented technologies because such devices incorporate technologies from digital cameras, global positioning systems, and wireless communication. In contrast, pharmaceutical company representatives we spoke with said they are able to conduct thorough patent searches, in part, because there are fewer patents per drug. Determining the licenses a new product needs can be costly when many patents are involved; according to data from the AIPLA survey, the median cost for a legal validity and infringement opinion is $15,000 per patent. Additionally, a technology start-up company told us that they may avoid patent searches because damage awards can be tripled for willful infringement, and by not searching for existing patents, they can claim ignorance. Even if an entity conducts a patent search, identifies a relevant patent, and wants to avoid infringing it by obtaining a license to use it, according to several diverse stakeholders we spoke with, including PMEs, legal commentators, and operating companies, identifying the owner could be difficult because patent owners are not required to notify PTO of changes in assignment or ownership. According to some stakeholders we spoke with, finding patent owners is further complicated by the fact that some of these patent owners create subsidiary companies solely to hold their patent rights. In fact, several stakeholders we interviewed, including legal commentators, operating companies, and a PME, said that some entities intentionally hide the existence of their patents until a sector or company are using the patented invention without authorization and can be sued for infringement. Further, some economic literature we reviewed suggests that the numerous technologies in many products are sometimes patented by many different patent owners and can have overlapping rights, making it difficult and costly to determine which patents the operating company needs to license. We discuss PTO’s current efforts to address these notice problems later in the report. Most of the representatives from operating companies we interviewed said that PMEs specifically have played a role in the rise in patent infringement litigation. Some of the representatives from operating companies also said that PMEs are often more willing to bring lawsuits based on a broad interpretation of their patents’ claims because they cannot be countersued for patent infringement since they do not produce a product. Some economic literature we reviewed suggests that accused infringers have an incentive to settle quickly to avoid the uncertainty of claim construction and high litigation costs, particularly if they face very high costs of changing their products to avoid infringement. Although a few stakeholders said that operating companies have also brought lawsuits alleging infringement of poor quality patents that they do not practice, and several stakeholders, including PMEs, operating companies, and legal commentators, said they believe the prevalence of low quality patents was driving recent increases in litigation more than PME suits. Disproportionately large damages awarded by the courts can motivate patent owners to file lawsuits, according to several stakeholders, we spoke with, including operating companies, PMEs, and legal commentators. According to some stakeholders, the potential for large damage awards may encourage some patent owners to file lawsuits in the hope that the accused infringer settles to avoid going to court. A few representatives of operating companies told us that companies prefer to settle lawsuits before trial for smaller amounts of money rather than risk having to pay large damage awards and legal fees, even if they know the case against them is weak. They said that some patent owners file infringement lawsuits knowing that defendants will settle the case before the court determines whether infringement occurred or the patents are valid. In addition, some operating company representatives said that patent owners often sue operating companies that have purchased licenses to use software in order to get settlements from numerous infringers rather than suing the vendor. One PME we spoke with said that although it tries to sue technology vendors whenever possible, it sues end users most of the time because these are usually profitable companies, and there is greater potential for larger settlements. Until 2011, damage awards could be calculated using the 25 percent rule—whereby the alleged infringer would pay a royalty rate equivalent to 25 percent of the expected profits for the product that incorporates the patent at issue. As a result, according to some stakeholders, damage awards were outsized and did not reflect the value of the patent or the patent’s contribution to the product at issue, making it possible for the owner of only a few patents to capture most of the profit from a product, even though thousands of other patents also contributed to the development of the product. In a 2011 report, FTC noted that some legal rules for calculating damages were not grounded in economic analysis and therefore may under- or overcompensate patent owners for infringement in comparison to the market. FTC reported that overcompensation can overincentivize patenting and patent litigation. Moreover, the FTC report included concerns from some industry participants that the value added by one patented technology may be very small relative to the price of the entire product for complex products. Uniloc USA, Inc., v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). enhanced damages.noted that there is still a need for improvement in the way damages are calculated. Several stakeholders, including PMEs and legal commentators, we interviewed said that the recognition that patents are a more valuable asset than once assumed may have contributed to recent patent issuance trends and patent infringement lawsuits. Within the last 10 years, technology companies in particular have increasingly realized that patents are valuable and can be important to their corporate strategy, according to some of these stakeholders. This trend may have started, according to literature we reviewed, when Texas Instruments Inc. was looking for additional sources of revenue in the 1980s and started to more aggressively assert its patents to increase revenue.used patents to protect inventions rather than to generate revenue, according to some stakeholders, including legal commentators and a PME, we spoke with. Prior to this, entities Despite the new value placed on patents, some industries may have slightly different approaches to patenting. For example, a few representatives of venture capital and software start-up firms told us that they do not always apply for patents until their companies are well established because patent attorneys are expensive, and the process is time consuming. They told us that the cost of R&D is low relative to the cost of applying for a patent, so there is minimal incentive in the software industry to patent in order to recoup R&D costs. For example, representatives from one small software company we spoke with said that they could develop a product in a little as 2 months with only a few programmers. They also noted that it is relatively easy to get patents on their software even with their minimal R&D efforts—it is just a matter of paying the patent attorney’s fees. On the other hand, several representatives from the pharmaceutical industry told us that patents are actually critical to their ability to recoup the costs of developing a new drug, which can cost as much as $1 billion and take from 10 to 15 years. Further, several stakeholders, including operating companies, PMEs, and legal commentators, we interviewed said that investors have played a role in the increasing number of patent infringement lawsuits. Specifically, according to some of these stakeholders, some PMEs have financial backers who fund the purchase and enforcement of patents and expect to see a return on their investment, sometimes turning to contingency fee law firms to carry out the lawsuits, where the law firm pays all of the litigation costs but shares in any award or settlement. Furthermore, economic literature suggests that inventors who do not have the resources or skills to enforce patents on their own benefit from partnering with PMEs that specialize in patent monetization, and this was confirmed by some of the stakeholders we spoke with. For example, one inventor we spoke with said that he was able to sell his patents to a PME that specialized in patent litigation when his start-up company failed, which allowed him to fund a new company. Representatives from a university we spoke with also said universities look to outside entities, such as PMEs, to finance patent infringement litigation because universities cannot cover the up-front costs of filing a lawsuit. Representatives from one PME we spoke with said that they helped a small inventor get the attention of large technology companies that were infringing his patent and ignoring his licensing requests. In addition, one patent broker we spoke with said that well-known operating companies often do not want to file patent infringement suits because of potential public backlash, so they sell or transfer their patents but retain an interest in any settlement or award. The federal court system is implementing some new initiatives to improve the handling of patent cases. A pilot program was established for certain U.S. district courts to encourage the enhancement of expertise in patent cases among district court judges and a model order was issued in response to high discovery costs for e-mails and other electronic documents in patent cases—known as e-discovery. In addition, some recent decisions in the Federal Circuit and the Supreme Court may also affect future patent infringement litigation. In January 2011, Congress established a pilot program in certain U.S. district courts to encourage the enhancement of expertise in patent cases among district court judges. This pilot program would create a cadre of judges who have advanced knowledge of patents due to more intensified experience in handling the cases, according to a statement made during the congressional debate for the law. Specifically, the law required AOUSC to designate at least 6 district courts that met certain eligibility requirements to participate in a 10-year pilot program. As of December 2012, AOUSC had designated all 14 federal district courts that applied as participants. Currently, 7 of the 14 district courts participating in the pilot program have adopted case management rules to govern patent cases, such as how cases are allocated to judges in the program, although some districts’ rules predated the program. Some legal commentators and other stakeholders we interviewed said they were hopeful that the pilot program would lead to some meaningful improvements in patent case management in the courts. However, a few judges we interviewed said that more resources are needed to improve the handling of patent cases and that the needed resources were not appropriated to implement the pilot program. For example, they told us that hiring additional law clerks would help with the increased workload and processing of patent cases resulting from participation in the pilot program. Because participation in the pilot program does not come with additional resources, some districts decided not to participate, according to the judges we spoke with. For example, a district court judge told us that his district court did not volunteer for the pilot program because funds were not appropriated to implement it. In general, several stakeholders we spoke with agreed that it is too early to tell what impact the patent pilot project will ultimately have on patent litigation. In response to high discovery costs, in September 2011, the Advisory Council for the U.S. Court of Appeals for the Federal Circuit issued a model order regarding discovery for e-mail and other electronic documents (known as e-discovery) targeted to patent cases. According to some legal commentators and judges we interviewed, the technical complexity of patent cases leads to expansive discovery requests that are time consuming and expensive and, as is typically the case with most documents produced in discovery, do not necessarily produce documents used at trial. For example, a study conducted by AIPLA found that discovery costs can range from $350,000 to $3 million, depending on the size of the potential settlement. One judge we spoke to said that only a few of the documents in discovery are actually used at trial—often less than one document in 10,000—and representatives from one operating company told us that about 2,000 of the 10 million documents they were asked to produce were actually used in a recent trial. After the issuance of the e-discovery model order, a few federal district courts have adopted similar rules to streamline e-discovery in patent cases, according to legal commentators we spoke with. Courts with e- discovery rules are more efficient and reduce litigation costs for everyone involved, according to a few judges we spoke with. For example, under the model order, discovery begins with an exchange of core documentation concerning the patent, allegedly infringing product, prior art, and finances before an exchange of e-mails. However, at least one federal district court that handles a large volume of patent infringement cases declined to adopt specific discovery rules, noting that it would be a mistake for the courts to bind themselves to specific rules given differences among cases. In general, several stakeholders we spoke with agreed that it is too early to tell what impact e-discovery rules will ultimately have on patent litigation. Several federal judges and other stakeholders we interviewed said that the judiciary had the ability to address some of the aforementioned factors contributing to patent infringement litigation in court decisions and that certain recent court decisions have helped to address some of these problems. In the future, they said the courts would continue working to address them. Specifically, these stakeholders said that recent court decisions about what constitutes patentable subject matter and what satisfies the obviousness and definiteness requirements would help combat overly broad and ill-defined patent claims once the decisions were incorporated into PTO’s patent examination guidelines and implemented by examiners. For example, two stakeholders said that a 2012 Supreme Court decision restricted what constitutes a patentable process and a 2007 Supreme Court decision made it easier to combine separate pieces of prior art to prove a patented invention was obvious and, thus, not eligible for a patent.some stakeholders also identified several decisions that have changed damages law. Despite these cases, some stakeholders said that the judicial system has contributed to recent problems in patent infringement litigation and is either unable or unwilling to rectify them. For example, they noted that judges should be more willing to award attorney fees in exceptional cases to the winning party in order to address the growing number of patent infringement lawsuits. PTO has taken several recent actions that are likely to affect patent quality and patent litigation in the future, including agency initiatives and changes required by AIA. For example, PTO is implementing initiatives to continue to improve the quality of software-related patents and to improve patent examination searches. The agency is also implementing the new administrative trial proceedings created by AIA. We identified four initiatives that PTO is currently undertaking to address patent quality and patent search: In February 2011, PTO issued supplemental guidelines to assist in the examination of claims in applications for compliance with the definiteness requirement and began training patent examiners in how to implement them. PTO often updates its patent examination manual or issues guidance to patent examiners in response to changes in case law and these recently issued supplemental guidelines try to ensure that all technologies receive consistent examination practices, according to PTO officials. These guidelines specifically address examination of claims with functional language—which recites a feature by what it does rather than by what it is—in computer- implemented claims. For example, the guidelines state that examiners should determine whether the application discloses the computer and algorithm that perform the claimed function in sufficient detail that someone of ordinary skill in the art would know how to program the computer to perform the claimed function, and that the inventor was in possession of the claimed invention. The guidelines further noted that the algorithm may be expressed in any understandable terms and generally do not call for the application to contain actual computer code. The supplemental guidelines attempt to make examination of applications consistent and resulting patents clearer across all technologies, according to PTO officials. In May 2012, an internal PTO review showed that PTO examiners were making 4 to 6 percent more rejections in patent applications across all technology areas based on claims not being clear and definite than before the supplemental guidelines were issued. PTO officials said patent requirements are established by statute and case law, which constrains the agency’s ability to alter requirements for patent applications. PTO officials told us that only court decisions or statutory changes could change the law to require more detail for algorithms in software-related patents, for example. In November 2011, in response to the recommendations from FTC’s 2011 report, PTO acknowledged that more uniform terminology would help to improve the quality of software-related patents and began working to establish a partnership with the software industry to address this issue. In January 2013, PTO announced the Software Partnership—a cooperative effort with the software industry to explore ways to enhance the quality of software-related patents, including through the use of more uniform terminology. Subsequently, roundtable meetings with the software industry were held in New York City, New York and Stanford, California in February 2013. Additionally, PTO is working to implement a new patent classification system, called the Cooperative Patent Classification (CPC), which launched in January 2013. Since October 2010, PTO and the European Patent Office (EPO) have been collaborating to develop the CPC, which is a joint patent classification system that is intended to allow companies and patent applicants to conduct more effective searches for patents that might be related to technologies they are developing or planning to use, which may reduce some of the infringement that contributes to current patent litigation, according to documents we reviewed. CPC is also designed to allow for more frequent updating of patent classes, so that similar technologies can be grouped together, which should improve PTO’s ability to adapt to emerging technologies quickly, according to agency documents we reviewed. PTO is also working to provide greater transparency on patent ownership by and issued a notice in November 2012 to obtain public input on regulations it was considering to require patent ownership information to be verified and updated at certain times during patent examination and after patent issuance. Specifically, PTO is currently considering issuing regulations that would require ownership information to be verified and updated periodically. In addition, PTO held a round table discussion in January 2013 to obtain public input on how the agency could collect and provide such information to the public. Since holding the round table, PTO officials have been considering the input and written comments and have been discussing what the appropriate next steps should be. PTO officials noted, however, that the agency does not have substantive rulemaking authority so its ability to issue regulations requiring updates to the ownership information is limited without additional statutory authority. In addition to these initiatives, in 2009 PTO began a patent quality initiative to measure and improve overall patent quality. After public comment and round table discussions, PTO released a set of new metrics in 2010 for fiscal year 2011 to assess patent quality throughout examination, rather than solely at the end of examination, which had been its practice. These metrics include, among other things, looking at the timeliness of patent examiners’ decisions and whether examiners reject claims for the right reasons.review patent examination quality after patents are issued. PTO officials said that they did not examine the nature of patent infringement litigation and issues in dispute or review trends in such litigation. In 2003, the However, the agency generally does not National Academies reported that litigation rates could be a useful measure of post-grant patent quality, presuming that litigated patents define less clear boundaries. One study in the National Academies’ report examined the link between examiner inputs, including the number of hours used to examine a patent, and the likelihood that the patent would end up in a lawsuit. The study found a statistically significant result, implying that patents that examiners spend more time examining are less likely to be involved in litigation, suggesting the patents are of higher quality. In February 2013, PTO officials said that they generally try to adapt to developments in patent law and industry to improve patent quality, as they are doing with their new examination guidelines and their software- related patent partnership. However, the agency does not currently use information on patent litigation in initiating actions like these. However, some staff in PTO’s Office of the Chief Economist have suggested that analyzing relationships between the types of patents involved in infringement litigation and internal patent examination data, including the timeline between the filing and grant of a patent and changes in the wording of claims could potentially benefit patent quality and examination by identifying meaningful patterns in the examination of patents that end up in court. As noted, our analysis of litigation data showed that about two-thirds of patent infringement defendants were sued for infringing software-related patents. Given the extent of litigation associated with these patents, examining trends in patent infringement litigation, including the types of patents and issues in dispute, and linking this information to internal data on patent examination, could provide PTO with information to improve patent quality and the examination process. However, PTO staff economists said that looking at litigation trends was not without challenges. For example, they said that less than 2 percent of patents end up in court. In addition, patents usually end up in court long after they are issued, and examination procedures may have long since changed. PTO officials and a few stakeholders also noted that there are other factors that affect litigation trends, including economic conditions and inherent differences among industries. PTO is in the process of implementing the three new post-grant review proceedings created by AIA and described previously—inter partes review, post-grant review, and a transitional program for covered business method patents. These proceedings replace or supplement certain reexamination proceedings conducted by patent examiners with proceedings conducted by judges at PTO’s Patent Trial and Appeal Board—making them more closely resemble a patent trial, according to PTO officials we spoke with. According to some stakeholders, these proceedings are most likely to be used by companies that have been sued for patent infringement. PTO issued rules to govern the proceedings in August 2012 and hired additional judges soon after AIA was passed. Specifically, PTO’s Patent Trial and Appeal Board plans to move from 100 to more than 200 judges on staff by the end of 2013, according to PTO documents we reviewed. In addition, judges at the Board have been coordinating with stakeholders in the patent community to create a streamlined discovery process for these proceedings. The judges told us they want to avoid the massive discovery requests that add time and expense to patent trials in federal district courts, but said that details of how they handle discovery will continue to evolve over time.director of PTO is required to study and report to Congress on how these and other provisions of AIA are being implemented no later than September 16, 2015. According to agency officials, PTO plans to meet this 2015 deadline, and the agency has started collecting and publishing information on the number of times the new AIA proceedings are being The used and the timing of implementation. As of July 31st, 2013, there had been 395 requests for inter partes reviews and 39 requests for review under the transitional program for covered business method patents, according to data from PTO. Given that challenging a patent’s validity is a common defense for those who have been accused of patent infringement, PTO officials we spoke with mentioned that the new post-grant proceedings may have the potential to reduce future patent litigation because they offer a less costly and faster alternative to settling patent disputes in federal district courts. For example, a representative of a number of technology companies we spoke with estimated that the legal and filing fees for using one of these proceedings would be between $166,000 and $390,000, depending on the proceeding, for an average patent, while legal fees could be upwards of $5 million for an infringement case filed in district court. According to the Board judges we spoke with, these proceedings will be faster than most litigation in district court—which takes 2-½ years for the patent infringement trial to begin on average, according to a recent study— because the regulations stipulate that they normally are to conclude within 1 year of being initiated. However, representatives from some operating companies said that they will not use these post-grant review proceedings if federal judges do not consistently delay the costly trials until the Board completes its review. In the past, federal judges have not always been willing to suspend a lawsuit while waiting for PTO to conduct reexaminations, but may be more likely to do this given the regulatory 1 year timeline, according to these representatives. Judges at the Board told us they are working to ensure that the post-grant review proceedings are completed within 1 year. In addition, some operating company representatives we spoke with said that post-grant review in particular would be of limited utility since they only have 9 months after a patent is issued to file a request for review, but usually only learn about a patent’s existence after being sued or receiving a demand letter, which is often many years after the patent has been issued. Finally, representatives from some operating companies said they are not planning to use post-grant review to challenge a patent’s validity because an adverse final decision by the Board generally prohibits them from challenging the patent’s validity again in court. These representatives said that they consider this to be a major flaw in post-grant review. However, a few other stakeholders said that patent owners need certainty in their patent’s validity and that the same party should not be able to challenge the patent’s validity through post-grant review and in the federal courts. Judges at the Board said they were aware of this issue and would continue to monitor it. Public discussion surrounding patent infringement litigation often focuses on the increasing role of NPEs. However, our analysis indicates that regardless of the type of litigant, lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants between 2007 and 2011, and most of the suits brought by PMEs involved software-related patents. This suggests that the focus on the identity of the litigant—rather than the type of patent—may be misplaced. PTO’s recent efforts to work with the software industry to more uniformly define software terminology and make it easier to identify relevant patents and patent owners may strengthen the U.S. patent system. Further, PTO has available internal data on the patent examination process that could be linked to litigation data, and a 2003 National Academies study reported that using these types of data together could provide useful insights into patent quality. Examining the types of patents and issues in dispute represents a potentially valuable opportunity to improve the quality of issued patents and the patent examination process and to further strengthen the U.S. patent system. We are recommending that the Secretary of Commerce direct the Director of PTO to consider examining trends in patent infringement litigation, including the types of patents and issues in dispute, and to consider linking this information to internal data on patent examination to improve the quality of issued patents and the patent examination process. We provided a copy of our draft report to PTO for review and comment. PTO concurred with key findings and our recommendation in its written comments, which are reproduced in appendix II. PTO also provided additional clarifying comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Commerce, the Federal Trade Commission, the International Trade Commission, the Administrative Office of the U.S. Courts, the appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your 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 staff who made major contributions to this report are listed in appendix III. Section 34 of the Leahy-Smith America Invents Act (AIA) mandated that GAO conduct a study on the consequences of patent litigation by nonpracticing entities (NPE). Our objectives were to determine: (1) what is known about the volume and characteristics of recent patent litigation activity; (2) what is known about the key factors that contribute to recent patent litigation trends; (3) what developments in the judicial system may affect patent litigation; and (4) what actions, if any, has the Patent and Trademark Office (PTO) recently taken that may affect patent litigation in the future. To address all four of these objectives, we reviewed relevant laws, including AIA, and interviewed officials from PTO, the Federal Trade Commission (FTC), and the International Trade Commission (ITC). We also interviewed the following 44 stakeholders knowledgeable about patent litigation: Ten representatives from operating companies and industry groups from an array of industries, including software, computer hardware, retailers, and pharmaceuticals, who had been regularly sued in recent years for patent infringement. We identified these operating companies and industry groups by using patent infringement litigation data from 2005 through 2011, which we discuss below. Eight representatives of patent monetization entities (PME) and research firms that had regularly sued others in the past 10 years. We identified these PMEs by using patent infringement litigation data from 2005 through 2011, and they represent a range of business models. Fourteen legal commentators, economists, and consultants that had conducted research closely related to our objectives. We identified them through our review of academic literature on patent litigation and the patent system and they each had done work related to the issues we were asked to study. We also interviewed one representative each from two large research universities that license patents, two patent brokers who help others buy and sell patents, four venture capitalists, and four individual inventors at software start-up companies and at a small inventor advocacy group. We identified these universities, brokers, venture capitalists, and start-up companies based on our review of academic literature on patent litigation and the patent system and they were knowledgeable of the issues we were asked to study. Because stakeholders varied in their expertise with various topics, not every stakeholder provided an opinion on every topic. We were not able to find reliable data on patent assertion outside of the court system—which often consist of patent owners sending letters demanding licensing fees to potential infringers before filing suit and, as a result, our data analysis focuses on patent infringement litigation rather than patent assertion more broadly. In addition to steps we took to address all four objectives, to describe what is known about the volume and characteristics of recent patent infringement litigation activity, we reported data from the American Intellectual Property Law Association’s (AIPLA) 2011 survey on the costs of patent litigation.litigation and the patent system in general and assessed the methodology of the studies we reported on for soundness. To assess the reliability of data from PTO, AIPLA, and RPX, we conducted interviews and reviewed relevant methodology documentation. We found that these data were sufficiently reliable for purposes of this report. We also reviewed academic literature on patent We also analyzed patent infringement litigation data that we purchased from Lex Machina, a firm that collects and analyzes data on patent litigation. Lex Machina maintains a database created from public electronic court filings for all patent infringement lawsuits filed in U.S. federal district courts, beginning in the year 2000. From this database, Lex Machina selected a random, generalizable sample of 100 lawsuits per year from 2007 through 2011, identifying for each lawsuit the patent(s) being litigated, the court hearing the lawsuit, and the lawsuit’s outcome. The sample size allowed us to draw conclusions about patent infringement lawsuits filed in each of these years, with a margin of error of no more than plus or minus 5 percentage points over all these years and no more than plus or minus 10 percentage points for any particular year. Each sample element was subsequently weighted in the analysis to account statistically for all the members of the population, including those that were not selected. To assess the reliability of data from Lex Machina, we met with Lex Machina staff, examined documentation, and tested and reviewed the sample data for completeness and accuracy. We found the data to be sufficiently reliable for our purposes. We also obtained patent infringement data from RPX, another firm that collects data on patent infringement lawsuits, in an effort to verify Lex Machina’s litigant categorizations. For the plaintiffs named in each lawsuit, Lex Machina also provided an entity description, classifying the plaintiffs as follows: an operating company, or a likely operating company; an entity related to an operating company; a PME or a likely PME; a university; an individual or trust; or a research firm. To classify a plaintiff, Lex Machina placed more weight on statements made by the plaintiff in official documents, such as its own court and Securities and Exchange Commission (SEC) filings, and statements appearing on a website maintained by the plaintiff. From these sources Lex Machina obtained information that would help it to determine the entity type, such as statements indicating that the plaintiff made or sold a product or offered services, or evidence that the plaintiff shared corporate ownership with such an entity. Some statements, such as a statement describing a plaintiff’s business as focused on patent licensing, indicated that the plaintiff was in the business of patent monetization. In some cases, the plaintiffs’ own statements did not lead to a definitive classification, and Lex Machina consulted other sources to obtain relevant information about the plaintiff’s business activities. To the extent possible, Lex Machina relied on additional sources they characterized as “verified and objective,” such as corporate databases and articles of incorporation. To the extent that Lex Machina lacked official information, it used professional judgment to classify plaintiffs based on information from other sources, such as news articles, blogs, court filings by opposing parties, and Lex Machina’s own database. Examples of information from these other sources that were used to classify plaintiffs include: (1) the number of patent infringement lawsuits filed by the plaintiff; (2) whether the plaintiff had been sued for patent infringement in other lawsuits or counterclaims; (3) whether the plaintiff had been subject to a declaratory judgment lawsuit for noninfringement or invalidity; (4) the number of defendants sued in each lawsuit and in total; (5) statements about the plaintiff in news articles, blogs, or in court filings by an opposing party, such as a statement characterizing the plaintiff as a patent monetization entity; (6) whether the plaintiff was represented by an attorney known to represent patent monetization entities; and (7) evidence of linkages between the plaintiff and a patent monetization entity, such as a common principal or a street address shared in common. In some cases, the difficulty of finding information about the plaintiffs, their business activities, and their corporate relationships led Lex Machina to choose no entity classification at all. Such plaintiffs were classified as “Insufficient Evidence.” We reviewed Lex Machina’s classifications of first named plaintiffs to ensure their reliability and consistency. We found 29 cases where we differed with Lex Machina’s original classification. They adjusted their classifications in all but five of the cases. We agreed on different labels in these cases mainly based on our preference for the “entity related to operating company” label. Table 1 presents the evidence or information we used to review Lex Machina’s classifications of first named plaintiffs. In addition to steps we took to address all four objectives, to describe what is known about the key factors that contribute to recent patent litigation trends, we reviewed academic literature on the patent and judicial system and the benefits and costs of patent assertion, including economic and legal studies. In addition to steps we took to address all four objectives, to describe developments in the judicial system that may affect patent litigation, we interviewed officials and judges from the U.S. District Courts for the District of Delaware and for the Eastern District of Texas. We selected these district courts because they had high levels of patent infringement lawsuits according to Lex Machina data. We also interviewed judges with the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., which hears appeals of patent cases decided in federal district courts. We also interviewed officials from the Administrative Office of the U.S. Courts (AOUSC), and the Federal Judicial Center––organizations that provide broad administrative, legal, and technological services and support to the judicial branch. We also reviewed documents and data from the courts, as well as economic and legal studies. In addition to steps we took to address all four objectives, to describe what actions, if any, PTO has recently taken that may affect patent litigation in the future, we conducted interviews with officials from PTO and reviewed documents and data from this agency, as well as economic and legal studies. In addition to the individual named above, Tim Minelli (Assistant Director), Justin Fisher, Cindy Gilbert, Karen Keegan, Rob Marek, Susan Offutt, Alison O’Neill, Nalylee Padilla, Dan Royer, Susan Sawtelle, Jeanette Soares, Ardith Spence, Kiki Theodoropoulos, and Jacqueline Wade made key contributions to this report. | Legal commentators, technology companies, Congress, and others have raised questions about patent infringement lawsuits by entities that own patents but do not make products. Such entities may include universities licensing patents developed by university research, companies focused on licensing patents they developed, or companies that buy patents from others for the purposes of asserting the patents for profit. Section 34 of AIA mandated that GAO conduct a study on the consequences of patent litigation by NPEs. This report examines (1) the volume and characteristics of recent patent litigation activity; (2) views of stakeholders knowledgeable in patent litigation on key factors that have contributed to recent patent litigation; (3) what developments in the judicial system may affect patent litigation; and (4) what actions, if any, PTO has recently taken that may affect patent litigation in the future. GAO reviewed relevant laws, analyzed patent infringement litigation data from 2000 to 2011, and interviewed officials from PTO and knowledgeable stakeholders, including representatives of companies involved in patent litigation. From 2000 to 2010, the number of patent infringement lawsuits in the federal courts fluctuated slightly, and from 2010 to 2011, the number of such lawsuits increased by about a third. Some stakeholders GAO interviewed said that the increase in 2011 was most likely influenced by the anticipation of changes in the 2011 Leahy-Smith America Invents Act (AIA), which made several significant changes to the U.S. patent system, including limiting the number of defendants in a lawsuit, causing some plaintiffs that would have previously filed a single lawsuit with multiple defendants to break the lawsuit into multiple lawsuits. In addition, GAO's detailed analysis of a representative sample of 500 lawsuits from 2007 to 2011 shows that the number of overall defendants in patent infringement lawsuits increased by about 129 percent over this period. These data also show that companies that make products brought most of the lawsuits and that nonpracticing entities (NPE) brought about a fifth of all lawsuits. GAO's analysis of these data also found that lawsuits involving software-related patents accounted for about 89 percent of the increase in defendants over this period. Stakeholders knowledgeable in patent litigation identified three key factors that likely contributed to many recent patent infringement lawsuits. First, several stakeholders GAO interviewed said that many such lawsuits are related to the prevalence of patents with unclear property rights; for example, several of these stakeholders noted that software-related patents often had overly broad or unclear claims or both. Second, some stakeholders said that the potential for large monetary awards from the courts, even for ideas that make only small contributions to a product, can be an incentive for patent owners to file infringement lawsuits. Third, several stakeholders said that the recognition by companies that patents are a more valuable asset than once assumed may have contributed to recent patent infringement lawsuits. The judicial system is implementing new initiatives to improve the handling of patent cases in the federal courts, including (1) a patent pilot program, to encourage the enhancement of expertise in patent cases among district court judges, and (2) new rules in some federal court districts that are designed to reduce the time and expense of patent infringement litigation. Recent court decisions may also affect how monetary awards are calculated, among other things. Several stakeholders said that it is too early to tell what effect these initiatives will have on patent litigation. The U.S. Patent and Trademark Office (PTO) has taken several recent actions that are likely to affect patent quality and litigation in the future, including agency initiatives and changes required by AIA. For example, in November 2011, PTO began working with the software industry to develop more uniform terminology for software-related patents. PTO officials said that they generally try to adapt to developments in patent law and industry to improve patent quality. However, the agency does not currently use information on patent litigation in initiating such actions; some PTO staff said that the types of patents involved in infringement litigation could be linked to PTO's internal data on the patent examination process, and a 2003 National Academies study showed that such analysis could be used to improve patent quality and examination by exposing patterns in the examination of patents that end up in court. GAO recommends that PTO consider examining trends in patent infringement litigation and consider linking this information to internal patent examination data to improve patent quality and examination. PTO commented on a draft of this report and agreed with key findings and this recommendation. |
As discussed in our previous report, according to congressional supporters of the legislation, the goals of the NMTC program are to direct new business capital to low-income communities, facilitate economic development in these communities, and encourage investment in high-risk areas. The program strives to meet these goals by providing tax credits as investment incentives to prompt investors to provide capital that in turn, will facilitate development in low-income communities and businesses. For purposes of the NMTC program, low-income communities generally are defined as census tracts that meet specified poverty rate or median family income levels. The darkened areas of figure 1 illustrate that census tracts qualifying for NMTCs are widely distributed across the nation. Specifically, about 39 percent of all census tracts qualify for NMTCs and 36 percent of the nation’s population lives in these census tracts (see app. I for a table of NMTC eligibility as a percentage of state population and of state census tracts). The CDFI Fund has the authority to allocate NMTCs under the direction of the Secretary of the Treasury. The legislation limits the allocation of equity eligible for tax credits from 2001 through 2007 from $1 billion to $3.5 billion per year, totaling $15 billion over the 7 years. The first step in the NMTC program is to apply to the CDFI Fund for certification as a CDE, which is an entity that manages investments for community development. Nonprofit entities and for-profit entities may be certified as CDEs. To be certified, the CDE must be a domestic corporation or partnership, for federal tax purposes, and be duly organized under the laws of the jurisdiction in which it is incorporated or established. A CDE must have a primary mission of serving or providing investment capital for low-income communities or low-income persons, and must maintain accountability to residents of these low-income communities by filling at least 20 percent of the CDE governing or advisory board positions with low-income community representatives. The second step for a CDE is to apply for an allocation of tax credits from the CDFI Fund. CDEs are to use the tax credits allocated to attract investors. Both for-profit and nonprofit CDEs can apply for allocations of NMTCs. However, only a for-profit CDE may offer NMTCs to its investors while a nonprofit CDE must intend to transfer the allocation to one or more for-profit subsidiaries. The application asks a series of questions about the CDE, its track record, the dollar amount of allocated tax credits being requested, and the plans for using the credits to support activities in low- income communities. Applications are then reviewed and scored by a mix of CDFI Fund staff and external reviewers who have experience in business, real estate, or community development finance. The CDFI Fund considers reviewers’ scores, reviews applications, and awards an amount of allocated tax credits to those applicants judged to be the most highly qualified. These decisions on scoring applications and awarding allocations are to be based on a range of criteria under which applicants can receive scores of up to 25 points in each of the four following areas: community impact, which is the extent to which the applicant targets particularly economically distressed communities, has the active participation of community representatives in designing and implementing its business plan, and can demonstrate community development and economic impacts; business strategy, which is having prior performance providing similar kinds of products and services—applicants can score an additional 5 points by demonstrating a record of successful investment in disadvantaged communities or businesses and another 5 points by investing in businesses unrelated to the applicant; capitalization strategy, which is securing investor commitments; and management capacity, which is experience investing in low-income communities. Figure 2 shows what happens after the allocations are made to CDEs (i.e., CDE allocatees). The basic process is that investors acquire stock or capital interest in CDEs in order to receive the tax credits. In turn, these CDEs must use “substantially all” of the proceeds in making qualified low- income community investments (QLICI). Eligible QLICIs might include loans or investments to businesses; development of commercial, industrial, and retail real estate projects; and development of for-sale housing in low- income areas. Beginning with the first year of the investment in a CDE, investors are entitled to claim the tax credit over a 7-year period with 5 percent of the initial investment claimed for each of the first 3 years and 6 percent for each of the final 4 years, or a total of 39 percent over the 7 years. During the 7-year period, NMTCs could be subject to a recapture event if the CDE allocatee (1) ceases to be a CDE, (2) does not satisfy the “substantially all” requirement, or (3) redeems the investment. In general, a recapture event means that investors in that CDE are required to increase their income tax liability by the credits previously used plus interest for each resulting underpayment of tax. The recapture of credits affects the investor who originally purchased the equity investment and subsequent holders. Investors cannot continue to claim the tax credit if their equity investment is returned to them before the end of the 7-year period. A CDE is required to provide notice, within a certain period, to (1) any investor who acquires a qualified equity investment (QEI) in the CDE that entitles the investor to claim the NMTC and (2) each current and prior holder of a QEI if a recapture event has occurred. After being selected to receive an allocation, each CDE allocatee must sign an allocation agreement with the CDFI Fund before officially designating QEIs and offering tax credits to its investors. The agreement is to set forth the terms and conditions, such as the amount of NMTC allocation, approved uses of the allocation, approved service area, and reporting requirements. While most sections of the agreement are the same for every allocatee, other sections, such as the authorized uses of an allocation (e.g., loans to businesses and equity investments in other CDEs), are tailored to each CDE allocatee. As specified in the IRS regulations, CDE allocatees must issue the NMTCs to investors within 5 years of receiving an allocation. CDEs that receive returns of capital from investing in QLICIs have 12 months to reinvest those funds in QLICIs; reinvestment is not required in the final year of the 7-year credit allowance period. CDEs also must agree to periodically report data on investors and project activities. The rules also govern the types of businesses that can participate in NMTC projects. In general, a qualified active low-income community business (QALICB) is a corporation (including nonprofit corporations) or partnership that satisfies certain requirements, including the following: Gross income. Generally, at least 50 percent of the total gross income must be derived from the active conduct of a qualified business within any low-income community. Tangible property. At least 40 percent of the use of tangible property must be within a low-income community. Services performed. At least 40 percent of the services performed by its employees must be performed in a low-income community. Regulatory requirements preclude some types of business activities from qualifying as QALICBs (e.g., residential rental property, golf courses, massage parlors, liquor stores, race tracks or other gambling facilities, and farms). In general, for a business to be treated as a QALICB, the CDE must have “reasonably expected” at the time of the investment that the business would remain in compliance with the QALICB requirements for the term of the investment. Except for those requirements that affect a QALICB, the CDE is not required to monitor whether a business continues to comply with requirements after the initial investment is made. As investors provide equity to CDEs and CDEs invest in low-income communities, the CDFI Fund is to monitor compliance with the allocation agreements. IRS is to monitor compliance with the tax consequences of NMTC allocations, focusing on whether CDEs met the “substantially all” requirement. If this requirement is not satisfied, the tax credits claimed by investors plus interest thereon are potentially subject to recapture. To describe the status of the NMTC program, we interviewed various CDFI Fund and IRS officials tasked with program design and implementation. We reviewed CDFI Fund notices and planning documents on program milestones and implementation. We also attended conferences sponsored by the CDFI Fund and various industry groups to better understand the NMTC program implementation as it proceeded. To profile CDEs that received NMTC allocations based on the issues raised most frequently by the staff of congressional committees, we analyzed both certification and allocation application data provided by the CDFI Fund. We identified the issues and counted their frequency based on interviews with majority and minority staff at seven congressional committees and subcommittees as we prepared our 2002 report (see app. II). We could not analyze one of the issues on the size of the CDEs because of concerns about the data reported. The identified issues that we could analyze were as follows: geographic distribution of the community development projects proposed by CDE allocatees, including the scope of the area to be served ranging from local to national, the type of community served such as urban or rural, and the specific states to be served; experience in serving low-income communities; and type of service activity proposed for the community development project. Because the data on these issues came from proposals made in applications filed by the 66 CDE allocatees rather than the signed allocation agreements, we cannot say that the CDEs will actually serve the geographic areas or provide the types of service proposed. Much of the data on actual investments and projects will not be known until later in 2004. To better understand the issues and data, we interviewed officials from five CDEs in the Washington, D.C., area that had received NMTC allocations and from groups representing venture capitalists, community development corporations, and historic preservation interests. To determine whether the CDFI Fund and IRS have systems in place or planned to ensure compliance with the NMTC program and to evaluate the success of the NMTC program in achieving its goals, we interviewed various CDFI Fund and IRS officials on the systems for obtaining the data to be used for compliance monitoring and evaluation. We reviewed the NMTC legislation and our 2002 NMTC report to determine the goals of the NMTC program. We reviewed the CDFI Fund’s 2003-2008 Strategic Plan to help determine overall CDFI Fund goals related to the NMTC program. We reviewed various CDFI Fund notices and Treasury regulations and rulings on NMTC provisions that may affect NMTC compliance. We met with CDFI Fund and IRS officials about the data they intend to collect and their strategies for identifying noncompliance. We reviewed draft versions of the CDFI Fund’s data collection instruments to identify the data to be captured for compliance monitoring and program evaluation. To gain understanding of evaluation approaches and issues, we reviewed literature on economic development evaluation and reviewed our previous reports and other government documents on economic development evaluation. We did our work at the CDFI Fund’s and IRS’s offices in Washington, D.C., from June 2003 through December 2003 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the CDFI Fund and IRS; their comments are reprinted in appendixes IV and V. Although Congress authorized billions of dollars in annual NMTC allocations beginning in 2001 to spur investments in community development projects, it is unlikely that many investments had been made as of December 2003, according to CDFI Fund officials. The CDEs were not notified of their allocation awards until March 2003, and according to CDFI Fund officials, very few CDEs had offered credits to investors until the last week in August 2003. According to CDFI Fund officials, they made the allocations to CDEs in 2003 instead of 2001 because of the time taken for various start-up tasks for the new program, such as establishing the rules for using the allocations. Congress provided a schedule limiting the annual NMTC allocation for calendar years 2001 through 2007. Table 1 shows this schedule of NMTC limitations. The CDFI Fund allocated to CDEs the authority to issue to their investors up to the aggregate amount of $2.5 billion in equity for which NMTCs may be claimed (the authority includes the aggregate amounts of $1 billion for calendar year 2001 and $1.5 for 2002); it plans to allocate up to the aggregate amount of $3.5 billion for 2003 and 2004 in April 2004. After the March 2003 allocations, the CDFI Fund generated allocation agreements for the 66 CDEs that received the allocations. These agreements govern the use of the allocations and the actions to be taken by CDEs to stay in compliance with the NMTC program. Once agreements have been properly executed and notification is provided to the allocatees, the CDEs can offer tax credits in negotiating with investors on community development projects. The CDFI Fund finished these agreements by September 2003 and CDEs had 60 days to sign them. By January 21, 2004, 57 of the 66 CDEs had signed their agreements. CDFI Fund officials expected that the other 9 CDEs would sign by the end of January 2004. As a result of the timing of the NMTC allocation agreements and investments, CDFI Fund officials did not anticipate that many NMTC community development projects would start in 2003. The CDFI Fund is prepared to start receiving data about specific investor activities in CDEs. In contrast, according to a CDFI Fund official, because CDE allocatees are required to report project-level data annually (through the Community Investment Impact System) at the end of their fiscal years, it is unlikely that significant QLICI activities will be reported until their fiscal year 2004 reports are submitted, which in most cases will not be until the first part of calendar year 2005. CDFI Fund officials said that various NMTC program start-up tasks contributed to the delays in meeting self-imposed deadlines for making allocations and finalizing the allocation agreements. Officials have taken steps, like combining the allocation limitations for the first 4 years into 2, which they believe will mitigate any adverse effects of the delays. To prepare to make the allocations and negotiate the allocation agreements, the CDFI Fund used a three-phased approach that started after Congress authorized the NMTC program in December 2000. These phases implemented a variety of tasks, as follows: Phase 1 on Initial Policy and Regulatory Development (January 2001 to December 2001): The CDFI Fund developed program guidance, certification applications, and other documents; assisted IRS in developing regulations; and reached out to CDEs and other stakeholders. Phase 2 on Policy Refinement and Award Implementation (January 2002 to March 2003): The CDFI Fund certified 1,021 CDEs, developed applicant selection policies, reviewed 345 allocation applications, and announced the allocations in March 2003. Phase 3 on Ongoing Allocations, Post-Award Activities, and Compliance Monitoring (March 2003 projected through July 2004): The CDFI Fund negotiated allocation agreements and debriefed the 279 applicants that did not receive allocations in round one. It is continuing to develop processes to monitor NMTC compliance. At the same time that the CDFI Fund is doing phase 3 tasks, it is also doing tasks for the second round of allocations and making refinements as needed. For example, it is continuing to certify new CDEs, refine allocation materials and selection policies, and work with IRS on resolving rule making and other issues. CDFI Fund officials said that delays in meeting self-imposed deadlines on making the NMTC allocations and finalizing the allocation agreements could be attributed to the many start-up tasks for a new program, such as developing application documents and processes, writing rules and regulations, and addressing comments. For example, CDFI Fund officials noted that they had hoped to make the allocation decisions for 2001 and 2002 during 2002 rather than in March 2003, but they experienced delays in publishing the application announcement, developing the application review system, and dealing with a larger pool of applicants than anticipated. Similarly, CDFI Fund officials said they had hoped to have allocation agreements ready about the same time as the allocation announcement in March 2003 rather than in September 2003 but were delayed due to the longer than anticipated time to publish the initial document; delays in developing and clearing the document; and handling comments from allocatees, investors, and attorneys on the program’s rules and processes. It is not clear whether the 3-year period between program authorization and the first potential NMTC investments had any effects beyond delaying the projects to assist low-income communities and persons. CDFI Fund officials believe that delays have not hurt the program and that they took some steps to minimize any effects. For example, the CDFI Fund released multiple draft versions of the allocation agreement template, in part so that investors wishing to make investments into CDEs in advance of the allocation agreements being finalized would better understand the terms and conditions of those aggreements. Also, the first four annual rounds were aggregated into two multiyear rounds—$2.5 billion for 2001 and 2002 and $3.5 billion for 2003 and 2004. The CDFI Fund has legislative authority to carry over unused limitations on annual allocations. Additionally, given the delays in finalizing the allocation agreements and application system, the CDFI Fund extended the deadline for CDEs allocatees in the first round to prove their eligibility for the second allocation round from February 17, 2004, to March 5, 2004. The profile of the 66 CDE allocatees reflected variation among the issues we analyzed—geographical distribution in areas to be served by community development projects, type of proposed service, and experience with low-income communities. Geographically, allocatees proposed community development projects that served areas ranging from local to national in scope, all types of communities (e.g., urban and rural), and at least 20 states. Also, the proposed projects covered all types of services listed in the allocation application. Finally, all allocatees reported at least some experience in assisting low-income communities. The 66 allocatees had the following profiles for the three geographical issues—service area, type of community, and states served by proposed projects (see app. III for details). Proposed service area: Table 2 shows the number of CDE allocatees and amount of equity that is eligible for credits by the area an allocatee proposed to serve. Of the 66 allocatees, 54, or 82 percent, proposed projects that serve local, state, or national service areas. The remaining proposed projects covered multiple-local areas or multiple states. In terms of the $2.5 billion in equity eligible for NMTC allocated to CDEs, nearly $1.2 billion, or nearly half of the total, went to allocatees with proposed projects having a national scope. Proposed type of community: The 66 allocatees proposed projects that focused more on urban areas (70 percent) than rural areas or mixed/suburban areas. Of the $2.5 billion in equity eligible for NMTCs, the urban projects received 86 percent while rural and mixed/suburban areas received the rest. However, CDEs proposing to serve predominantly urban areas might also serve some rural areas, and vice versa. State and local allocations across states: Of the 66 CDE allocatees, 39 proposed local or single state projects. These 39 projects covered 20 states and the District of Columbia. California and Ohio had the highest number of allocatees. An Arizona allocatee received the largest allocation while the smallest allocation went to a Pennsylvania allocatee. Table 3 shows the number of CDEs receiving allocations and the total amount of equity that is eligible for NMTCs only for projects proposed within one state. The profile of experience in low-income communities and the proposed services to be provided among the 66 CDE allocatees follows. Experience serving low-income communities: Prior experience in serving low-income communities was common among allocatees. All 66 allocatees reported that they have successfully deployed capital to low-income communities and 61 reported successfully providing financial counseling and other services or technical assistance to disadvantaged businesses or communities. Proposed types of services in projects: The proposed projects cover the five types of services included in the NMTC allocation application, as shown in table 4. Some of the 66 CDE allocatees proposed more than one service, which resulted in 171 proposed types of services. Of the 66 CDEs, 78 percent proposed development or rehabilitation of real estate (e.g., retail, manufacturing, office, and community facilities) and 61 percent proposed financial counseling or advice on organizing or operating a business. CDFI Fund and IRS officials have made progress in identifying the data for monitoring NMTC compliance, and the CDFI Fund has developed systems to collect some of these data. However, a number of details remain to be settled on how the data will actually be used to monitor compliance. Officials believe they still have adequate time to complete their plans for monitoring compliance. However, previous deadlines in implementing the NMTC have been missed, many other tasks have to be done, and the agencies have not established schedules or documented plans for ensuring that compliance monitoring processes will be in place when needed. CDFI Fund officials intend to use contractors to evaluate the effectiveness of the NMTC program. The CDFI Fund and CDEs are expected to have significant amounts of data that should be useful for the evaluation. CDFI Fund and IRS officials have identified data for monitoring compliance with NMTC provisions, and the CDFI Fund has made progress in implementing data collection systems. These officials also mentioned various methods for how the data could be used to monitor compliance. However, many details remain to be settled on which methods will be used and how. Officials from both agencies believe they have time to complete their plans for monitoring compliance, but they do not have schedules or documented plans for ensuring that compliance monitoring processes will be in place when needed. NMTC compliance monitoring will focus on (1) events that could lead to recapture of NMTCs from investors and (2) CDEs’ compliance with the terms of their allocation agreements. For both of these areas, the CDFI Fund and IRS will rely on some data that will be routinely collected. The statute establishing the NMTC provide three events that trigger recapture of tax credits for an equity investment in a CDE: the entity ceases to be a CDE, the proceeds of the equity investment cease to be used in a manner that satisfies the “substantially all” requirement, and the investment is redeemed by the CDE. IRS is responsible for determining whether a recapture event has occurred. IRS officials said that they will focus primarily on the “substantially all” requirement and rely on the CDFI Fund to help monitor whether a CDE ceases to be qualified. Further, IRS will rely on data collected by the CDFI Fund to some extent in identifying whether any of the three events leading to recapture occur. To determine whether CDEs remain qualified for the NMTC program, data will be needed on whether CDEs continue to meet the primary mission and accountability tests. To meet the primary mission test, a CDE must show that it has a primary mission of serving or providing investment capital for low-income communities or low-income persons and that at least 60 percent of its activities are dedicated to serving low-income communities or persons. The accountability test is met by demonstrating that 20 percent of the members of either the governing board or advisory board(s) represent the low-income communities or persons in the CDE’s service area. Adherence to these two tests is required as long as an entity participates in the NMTC program as a CDE. To determine whether the entity has a primary mission of serving low- income communities or low-income persons during the initial application for CDE certification, the CDFI Fund reviews an organization’s mission statements (as contained in its bylaws, articles of incorporation, board resolutions, etc.) during the initial application for CDE certification. The CDFI Fund requires applicants to certify that at least 60 percent of its products and services will be directed to low-income communities or low- income persons. To determine whether CDEs meet their accountability test, the CDFI Fund reviews the composition of the governing boards, advisory boards, or both at the time of the initial application. According to an official, the CDFI Fund requires all CDE allocatees, subsidiary allocatees, and CDE investees to certify annually that they continue to meet their certification requirements. CDFI Fund officials indicated that they might conduct audits or reviews to determine whether CDEs continue to meet these tests. IRS officials said that to monitor whether CDEs continue to meet the “substantially all” test, they will review data that the CDEs are required to report, such as the type, amount, and timing of investments. IRS officials also said they will use data on various IRS forms to identify NMTC investors and investment-related data reported by taxpayers. In addition, CDEs will report identifying data on investors and the amount of investments they made to the CDFI Fund, which IRS may use in its compliance monitoring activities. In terms of whether CDEs redeem investments, the CDFI Fund plans to collect data annually on whether CDEs have redeemed any portion of the QEIs received in the previous year. A CDFI Fund official said the Fund was considering whether to request more data on possible redemptions. However, he thought it unlikely that a CDE would redeem any investments prior to the end of the 7-year investment period, since this would disqualify it from the NMTC and would trigger a recapture event. While IRS will monitor compliance with events that could lead to a recapture of tax credits, the CDFI Fund will monitor CDEs for adherence to their allocation agreements. To monitor allocation agreement compliance, CDFI Fund officials said that they would focus on data in section 3.2 of the allocation agreement. Section 3.2 is unique and will be tailored to each allocatee based on specific assertions a CDE made in its allocation application on its proposed use of the tax credits. For example, question 67 of the application for the first round of allocations asked if an applicant’s investments or activities would be targeted principally to communities with higher levels of distress than the minimum poverty and income criteria required by the NMTC program. Section 3.2 is to include related information from those CDEs that checked “Yes” to question 67. Web-based systems designed by the CDFI Fund are expected to be the primary sources of the data that the CDFI Fund and IRS plan to use to monitor compliance. CDFI Fund officials said that all the systems and processes for capturing and using the data from all CDE allocatees should be ready by August 2004. Figure 3 shows the planned integration of the data systems. A fuller description of the purposes and time frames for these systems follows. Allocation Agreement System (AAS): AAS populates fields in the allocation agreements with certain allocatee information and sends an uneditable electronic copy of the allocation agreement to the CDE. CDFI Fund officials told us that AAS was functional in August 2003. Allocation Tracking System (ATS): ATS allows reporting by CDEs of specific data about the use of approved allocations, such as the type, amount, and timing of investments. It will also track various self- reported data on investors in the CDEs. IRS may use the data to track compliance with timing requirements in the IRS regulations. ATS was on-line in November 2003, according to CDFI Fund officials. Community Investment Impact System (CIIS): CIIS is an annual reporting system that collects various data about the CDEs as institutions and about their transactions. These data are to be used to analyze what is happening with CDEs and investment projects as well as to monitor compliance. The CDFI Fund plans to test and implement CIIS by February 2004, receive data from CDEs in June 2004, and verify the data by August 2004. Compliance Monitoring (CM) Tool: The CM Tool extracts data from other databases to monitor for compliance with allocation agreements and helps IRS monitor for recapture events. The CDFI Fund plans for the CM Tool to include “red flags” where appropriate and feasible. The Fund plans to complete the CM Tool by July 2004. CDFI Fund and IRS officials have many details to finish on how they will use the data that are routinely collected for actually monitoring NMTC program compliance. While officials from both agencies have listed possible monitoring processes (e.g., audits, compliance checks, or site visits) and have said that they will develop “red flags” to monitor compliance, neither agency could provide specific details about its proposed compliance monitoring processes. Officials believe they will have sufficient time to develop their compliance monitoring plans more fully. A number of details remain to be settled in determining how the actual monitoring of compliance will occur and how the CDFI Fund and IRS will share data. For example, the CM Tool is to include various “red flags” on noncompliance by CDEs related to their adherence to IRS regulations and CDFI Fund compliance concerns. Presumably, the flags would trigger follow-up to determine whether CDEs actually have been noncompliant. According to officials at both agencies, neither the CDFI Fund nor IRS has yet developed its “red flags.” Furthermore, whether, when, and how follow- up would occur has not been determined by either agency. The CDFI Fund also expects that audits will be used to help determine CDEs’ compliance with recapture events and allocation agreements. What remains to be defined is how many audits will be conducted, who will perform them, and how extensive those audits will be. Similarly, processes beyond audits for following up on potential noncompliance have not been defined. IRS expects to monitor CDEs’ adherence to the “substantially all” test in part by accessing the CDFI Fund’s data. IRS also expects that audits will be a tool for determining CDEs’ compliance and is considering options for selecting CDEs for audit. IRS has told us that it may conduct 5 to 10 random audits of CDEs to help gather baseline data on CDEs. Other audit selection options include use of the CDFI Fund’s data to trigger an audit or as an adjunct to other IRS audit work that may relate to an investor or CDE. CDFI Fund and IRS officials have been developing a memorandum of understanding that would define the relationship between the agencies and their respective roles in monitoring aspects of CDEs’ compliance. For example, both agencies have an interest in monitoring whether an investment has been redeemed. The memorandum is expected to, for example, define how IRS would access the CDFI Fund’s data and how and when the CDFI Fund should alert IRS to CDEs that no longer qualify due to violations of the primary mission and accountability tests. As of January 15, 2004, the memorandum had not been finalized. CDFI Fund and IRS officials believe that they have time to finalize their processes for ensuring NMTC compliance. According to a CDFI Fund official, due to the timing of the allocation agreements, very few CDE allocatees are likely to receive QEIs and make QLICIs in 2003. Thus the first significant data available to be used for aspects of compliance regarding QLICIs will not be available until CDEs file CIIS reports at the conclusion of their fiscal year 2004; some data will not be available to IRS until 2005, after CDEs and investors file tax returns for tax year 2004. Additionally, CDFI Fund and IRS officials note that the potential for recapture of tax credits also provides an incentive to investors to help ensure that CDEs comply with the NMTC program. Finally, allocatees will be required to supply the CDFI Fund with copies of their audited financial statements, with which the CDFI Fund plans to verify some data reported by allocatees. Although the CDFI Fund and IRS have some time to complete their processes for monitoring compliance, officials do not have schedules or documented plans for ensuring that compliance monitoring processes will be in place when needed. To date, some CDFI Fund self-imposed deadlines for making allocations and finalizing allocation agreements have been missed. CDFI Fund officials also face a continuing workload apart from finalizing and implementing these monitoring plans. Officials are currently managing the second round of allocations and, as discussed below, considering how to evaluate the outcomes of the NMTC program. Further, although much of the activity that will need to be monitored may not occur until well into 2004, some parts of the compliance monitoring may need to be developed before others. The “red flags” that are intended to surface potential noncompliance could be needed during 2004 to alert the CDFI Fund and IRS to possible recapture events. Finally, completion of the compliance monitoring plans would help CDFI Fund and IRS officials judge what type and mix of resources they will need to adequately monitor compliance so they can make a more informed budget request for fiscal year 2006. CDFI Fund officials intend to issue a contract for an evaluation of the NMTC program. They expect that the contractor will use some of the data that CDEs will report to the CDFI Fund or maintain in their records pursuant to their allocation agreements. Even though the law authorizing NMTC does not charge the CDFI Fund with responsibility for evaluating the success of the NMTC program, CDFI Fund officials began considering how to evaluate the NMTC program shortly after it was authorized. For example, officials sought the advice of experts in March 2002 on the types of data that would be useful for evaluating the program. However, there was no consensus on the specific data required to evaluate the NMTC program. CDFI Fund officials also drafted a document in May 2002 outlining a broad preliminary framework for evaluating the NMTC program. The preliminary evaluation proposal outlines topics to consider in measuring NMTC program impacts. The topics proposed for assessment are the (1) flow of private capital to CDEs, (2) CDE performance, and (3) outcomes at the community level. However, evaluating the success of economic development programs like the NMTC program is challenging. Our 2002 report detailed some of those challenges, all of which apply in the case of the NMTC program. For example, program impact is usually difficult to determine because it is hard to know what participants and others who invest in low-income communities would have done absent the program. If a program did not exist, what would investors have done with their capital? Would the low- income communities have had more or less economic development due to business growth? Further, program effectiveness is difficult to measure when the program is small relative to total economic activity within the geographic area of interest. These challenges will be particularly problematic for the NMTC program because 36 percent of the U.S. population and 39 percent of the census tracts are eligible. Many of the eligible communities would already have significant business activities that could mask the NMTC impacts. In part due to these challenges and the amount of expertise needed to deal with them, CDFI Fund officials have decided to contract for evaluation services. CDFI Fund officials expect to have a contractor design and implement an NMTC program evaluation. Officials plan to issue a request for proposals in summer 2004 and hire a contractor in early fiscal year 2005. CDFI Fund officials have not yet developed the statement of work for the contract and do not have an expected completion date for the evaluation design or the study itself. CDFI Fund officials note that since initial investments under the program will not likely begin until 2004 (as described above), program results will not be available for evaluation until enough time elapses for the investments to generate an effect. To assist the contractor, the CDFI Fund is collecting significant amounts of data that officials believe may be useful for the evaluation. Additionally, the CDFI Fund requires CDEs to maintain additional records. According to CDFI Fund officials, data on whether an investment recipient (a QALICB) is minority- or woman-owned are to be captured by the CDFI Fund data systems for all CDE allocatees specifically for evaluation purposes. In addition, CDFI Fund officials said that some of the other data collected from CDE allocatees through these data systems could be useful to future evaluators, for example, the location and type of investments made, the type of business receiving the investment, and the gross revenues of the business. Also, officials noted that section 6.4 of the allocation agreement provides that CDEs “shall retain all financial records, supporting documents, and any other records pertinent to the NMTC Allocation.” Officials expect that the data maintained under section 6.4 may also be used for the evaluation. Finally, officials recognize that the contractor may identify other necessary data and, if appropriate, will consider collecting the data. The NMTC program provides billions of dollars over multiple years as an incentive to stimulate additional billions of dollars in investments in low- income communities. Given the significant sums involved, ensuring that funds are properly used to accomplish the economic development envisioned by Congress in creating the program is vital. CDFI Fund and IRS officials have taken a number of steps to implement the program and begin collecting information needed to monitor compliance with the tax laws and the allocation agreements between the CDFI Fund and CDEs. However, the CDFI Fund and IRS have not defined how they will share data, use the data in monitoring compliance, and develop other processes required for an effective monitoring program. Although the agencies do have some time to develop the processes they will use to monitor compliance, they do not have schedules and other documented plans for developing the processes. Having such schedules and plans would help ensure that compliance monitoring processes and resources will be in place when needed, particularly given the other tasks that need to be done and other deadlines that have been missed. To ensure that compliance monitoring processes will be in place when needed, we recommend that the Secretary of the Treasury instruct the Director of the CDFI Fund and the Commissioner of Internal Revenue to develop plans, including milestones, for designing and implementing compliance monitoring processes for the NMTC program. We received written comments on a draft of this report from the CDFI Fund Director and IRS Commissioner (see app. IV and V). Both agencies cited the importance of compliance monitoring in the NMTC program and agreed with our recommendation to develop plans and milestones for designing and implementing compliance monitoring processes for the NMTC program. Staffs at both agencies have been directed to work together to implement a comprehensive compliance program and appropriate information sharing arrangements. In addition, officials from both agencies provided technical comments that we have incorporated into the report where appropriate. The CDFI Fund also attached three other written comments for our consideration (see app. IV). A summary of these comments and our evaluation of them follows. First, the CDFI Fund said that it provided us with a schedule and dates for the major compliance and monitoring tools, such as AAS and ATS. This is true. We made no changes to the report because we had already described these schedules and dates. In making our recommendation, we recognized that progress had been made in ensuring that data would be available for monitoring compliance. However, we had not received schedules or documented plans for ensuring that the processes for monitoring compliance using data from these and other systems would be in place when needed. Second, the CDFI Fund also said that it and IRS took steps to expedite investments in CDEs and build investor confidence, such as IRS incorporating a “look back provision” in its regulations so that investors could claim tax credits for certain investments made before the CDE entered into an allocation agreement, and the CDFI Fund releasing draft versions of the allocation agreement template so that potential investors in CDEs could understand the terms and conditions before an allocation agreement was finalized. Although we did not have evidence that investor confidence was built, we agree that both agencies took steps to offset the delays in finalizing allocation agreements. Although the look back provision may have helped offset delays, we did not change our report because we had already mentioned the release of the draft templates as well as other steps. Third, the CDFI Fund said that although data about any investments being made in CDEs are already being collected through ATS, data on the use of those investments in actual projects are not yet being collected. Such project-related data will be collected annually at the end of each CDE’s fiscal year. This was one of the technical comments that we discussed with CDFI Fund officials and incorporated into the final report. We are sending copies of this report to the interested congressional committees; the Commissioner of Internal Revenue, the Director of the Community Development Financial Institutions Fund, and other interested parties. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions on matters discussed in this report or would like additional information, please contact me or Tom Short at (202) 512-9110 or at brostekm@gao.gov or shortt@gao.gov. Major contributors to this report are acknowledged in appendix VI. To provide a profile of community development entities (CDE) that received New Markets Tax Credit (NMTC) allocations, we reviewed the congressional contact file from a recent GAO report. For that report, we conducted 14 interviews with congressional staff of majority and minority members serving on the following committees. As of the August 2002 allocation application deadline for the first round of NMTC allocations, the Community Development Financial Institutions (CDFI) Fund had certified 1,033 CDEs. Of these 1,033 certified CDEs, 345 applied in the first round of NMTC allocation, requesting nearly $26 billion of equity related to NMTCs. From this applicant pool, 66 CDEs received NMTC allocations. These 66 allocatees requested $5.1 billion in equity, but the allocation limitation for the first round was $2.5 billion. While the average and median amounts requested were $76.8 million and $40.0 million, respectively, the amounts allocated were $37.9 million and $18 million. Furthermore, while 11 of the 66 allocatees received the full amounts requested, the typical allocation was reduced by 58 percent to reach the 2002 allocation limitation. Tables 5 and 6 profile CDEs according to their structure and profit status. Of the 1,033 CDEs certified by the CDFI Fund, nearly 60 percent were structured as single entities and 16 percent were parents with at least one subsidiary CDE. Also, 57 percent of CDEs were certified as for-profit entities and 39 percent as nonprofit entities. The equity allocations for NMTCs ranged from $500,000 to $170 million in credits with 13 allocatees receiving $5 million or less, 20 allocatees receiving more than $5 million to $20 million, 16 allocatees receiving more than $20 million to $50 million, 10 allocatees receiving more than $50 million to $100 million, and 7 allocatees receiving over $100 million. The goals of the NMTC program are not stated in the legislation that authorizes it. Interested congressional staff said they are interested in how the program will affect different community types and service areas. Tables 7 and 8 profile NMTC activity by community types and service areas in terms of the number and percentage of participants, respectively. Over three-quarters of the CDEs applied for NMTC allocations primarily to serve urban areas, while less than 20 percent intended to focus primarily on rural areas. Additionally, a majority of applicant CDEs were planning to serve specific local areas, while 18 percent intended to serve specific states. For type of service area, allocatees proposing local projects received 63 percent of what was requested and multiple-local projects received 37 percent; state, national, and multistate projects received about half of what they requested. Regardless of the type of community (e.g., urban or rural) they proposed to serve, the 66 allocatees received about half of the requested allocations. In addition to the individuals named above, key contributors to this report included C. Robert DeRoy, Evan Gilman, Donna Miller, John Mingus, Cheryl Peterson, Amy Rosewarne, and Kim Young. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | The Community Renewal Tax Relief Act of 2000 authorized up to $15 billion under the New Markets Tax Credit (NMTC) program to stimulate capital investment in low-income and economically distressed communities. The act mandated that GAO report to Congress on the NMTC program by January 31, 2004, 2007, and 2010. Based on consultation with staff at appropriate congressional committees, this report (1) describes the status of the NMTC program, (2) profiles community development entities (CDE) that were selected to receive NMTC allocations in 2003, and (3) determines whether systems are in place or planned to ensure compliance and evaluate the success of the NMTC program. Although Congress authorized the NMTC program to provide credit against federal taxes for billions of dollars starting in 2001 to spur investments in community development projects, CDFI Fund officials said that it is unlikely that many projects had started by the end of 2003 and that they will not know the status of projects for all CDEs until early 2005. Progress was made in developing data systems, selection processes, and program rules, but allocations were delayed because of the various start-up tasks associated with a new program, especially in establishing the rules on using the allocated credits. CDEs that received NMTC allocations (allocatees) proposed projects to serve urban, rural, and mixed areas, as well as local, state, multiple-local, multistate, and national areas. The distribution of state and local allocations was not concentrated in any one state or in a few states. All allocatees reported at least some prior experience in low-income communities, particularly in providing capital to low-income communities. The CDFI Fund and IRS have identified data with which to monitor compliance with allocation agreements and tax laws, and are developing systems to collect the data. However, many details remain to be settled on how the data will actually be used to monitor compliance. Agency officials believe they have time to devise their compliance monitoring processes. However, they do not have schedules or documented plans for ensuring that compliance monitoring processes will be in place when needed, and they have other tasks to complete. In terms of evaluating the NMTC program, the CDFI Fund intends to contract for an evaluation, and officials believe they are collecting significant amounts of data that will be useful for the evaluation and that CDEs will maintain additional relevant data. |
VA and DOD have a long-standing history of sharing health care resources to provide services to their beneficiaries. However, the FHCC is unique among VA and DOD collaborations to deliver health care services in several ways, notably its level of integration, the way it is funded, and its governance structure. The Executive Agreement, signed by the Secretaries of both departments, contains provisions to be met in 12 integration areas regarding specific aspects of FHCC operations, including establishing a governance structure and combining VA and DOD staff into a single, joint workforce. The FHCC’s leadership remains directly accountable to VA and DOD individually, through formal reporting relationships, and jointly, through oversight and advisory entities comprising VA and DOD officials. VA and DOD have been authorized since the 1980s to enter into sharing agreements with each other to improve access to, and the quality and cost-effectiveness of, health care provided by the two departments. Since that time, VA and DOD have entered into a number of sharing agreements to provide services—such as emergency, specialty, inpatient, and outpatient care—to VA and DOD beneficiaries and to reimburse one another for the cost of such services. Starting in the 1990s, VA and DOD expanded their sharing efforts to include “joint ventures”—locations where sharing agreements are in place that encompass multiple health care services for VA and DOD beneficiaries. The FHCC is one of 10 joint venture locations across the country. The October 2010 launch of the FHCC demonstration established a new level of sharing and integration for VA and DOD. Specifically, the FHCC is unique among other VA and DOD joint ventures in three key ways: 1. The FHCC’s integration of the provision of care and operations represents the highest level of collaboration among the 10 VA and DOD joint ventures. For example, the FHCC has a more integrated staffing structure than any other joint venture site. 2. The FHCC has a joint funding source, to which VA and DOD contribute, unlike the other joint venture sites, which each have separate VA and DOD funding sources. NDAA 2010 established the Joint DOD-VA Medical Facility Demonstration Fund (Joint Fund) as the funding mechanism for the FHCC, with VA and DOD both making transfers to the Joint Fund from their respective appropriations. 3. The FHCC operates under a single line of governance to manage medical and dental care, and has an integrated workforce of approximately 3,100 civilian and active duty military employees from both VA and DOD.integrated governance structures; rather, they maintain separate VA and DOD lines of authority. In April 2010, the Secretaries of VA and Defense signed the Executive Agreement that established the FHCC and defined the relationship between VA and DOD for operating the new, integrated facility, in accordance with NDAA 2010. The Executive Agreement contained provisions in 12 integration areas regarding specific aspects of FHCC operations (see table 1). Each of the 12 integration areas contains a number of specific provisions describing how the FHCC should be jointly operated by VA and DOD. Some provisions have designated deadlines, while others do not. For example, within the IT integration area, the Executive Agreement included provisions identifying three specific IT capabilities that VA and DOD were to have in place by opening day of the FHCC, October 1, 2010 (for example, medical single sign-on, which would allow staff to use one screen to access both the VA and DOD electronic health record systems) while other provisions (such as those for financial management and outpatient appointment enhancement solutions) had no scheduled due dates. As established in the Executive Agreement, the FHCC’s leadership and workforce remain directly accountable to both VA and DOD (see fig. 1). The FHCC Director, a VA executive, is accountable to VA for the fulfillment of the FHCC mission, while the Deputy Director and Commanding Officer, a Navy Captain, is accountable to DOD. In addition, the Joint Executive Council (JEC) and the Health Executive Council (HEC) provide oversight for all of the joint ventures, including the FHCC. The JEC is made up of senior VA and DOD officials and provides broad strategic direction for collaboration and resource sharing between the two departments. The HEC, a sub-council of the JEC, provides oversight for the specific cooperative efforts of each department’s health care organizations—VA’s Veterans Health Administration and DOD’s Military Health System. The HEC has organized itself into a number of work groups to carry out its work and focus on specific high-priority areas of national interest. The FHCC Advisory Board, a HEC workgroup co-chaired by and comprising senior officials from VA and DOD, was created specifically to provide guidance and support to FHCC leaders and to resolve issues that arise at the FHCC. The Advisory Board provides guidance for the integration and operations of the facility, including monitoring the FHCC’s performance and advising on issues related to strategic direction, mission, vision, and policy. It also serves as a communication link between the FHCC and VA and DOD executive leadership by reporting on FHCC activities to the HEC. FHCC issues that are not able to be resolved by the Advisory Board are elevated to the HEC for final resolution. The Stakeholders Advisory Council also provides feedback on how well the FHCC is meeting customers’ needs and VA and DOD missions. The Stakeholders Advisory Council is made up of members from various regional and local organizations representing FHCC interests, including representation from local government, TRICARE, and two nearby VA medical facilities. Eleven of 12 integration areas are now either “implemented” or “in progress.” The remaining integration area, IT, remains “delayed,” as it was at our last review, resulting in costly and time-consuming workarounds. DOD’s decision not to seek an MTF designation for the FHCC, as we had recommended in our July 2011 report, has resulted in continued implementation challenges. FHCC officials have implemented or made progress implementing 11 of the 12 Executive Agreement integration areas. Specifically, FHCC officials have implemented 6 integration areas, meaning all associated provisions in the Executive Agreement have been met. Five of the integration areas are in progress, meaning some, but not all, associated provisions have been met, with FHCC officials maintaining or making additional progress meeting the provisions in each integration area. The 1 integration area not implemented or in progress is IT, which is delayed, meaning at least one provision had a deadline provided in the Executive Agreement that was not met. This integration area is discussed in more detail later in this report. (See fig. 2.) FHCC officials have implemented all provisions in 6 of the 12 Executive Agreement integration areas. Of these 6, 4 were integration areas we previously reported as implemented: (1) governance structure, (2) access to health care at the FHCC, (3) research, and (4) contracting. The two other implemented integration areas, quality assurance and contingency planning, moved from in progress at the time of our last review to implemented in this review. Integration areas we previously reported as implemented have remained in that status by maintaining activities or policies that meet the associated provisions in the Executive Agreement. For example, in the area of governance structure, the Stakeholders Advisory Council meets quarterly as required by the Executive Agreement and in another integration area, research, existing policies remain in place. Since our 2011 report, the FHCC met two additional required provisions for the quality assurance integration area: (1) officials obtained accreditation for the integrated facility by relevant external accrediting bodies—the Commission on Accreditation of Rehabilitation Facilities, and The Joint Commission—and (2) FHCC officials reviewed the FHCC’s policy on professional practices. In addition, FHCC officials have established a formal agreement to outline the jurisdiction of VA and DOD related to the security program for the FHCC campus, as the Executive Agreement requires. (See table 2.) Five other integration areas in the Executive Agreement remain in progress: (1) integration benchmarks, (2) property, (3) reporting requirements, (4) workforce management and personnel, and (5) fiscal authority. Each of these integration areas was also in progress at the time of our first report in July of 2011. FHCC officials have actively maintained past progress while continuing to work toward implementation of the provisions in the Executive Agreement associated with these integration areas. Some integration areas cannot be met until a certain point in the integration or depend on other conditions being met. For example, for the integration benchmarks area and the property area, the Executive Agreement specifies that in accordance with NDAA 2010, property transfer may occur upon the earlier of (1) completion of the 15 integration benchmarks or (2) 5 years from the date the Executive Agreement was executed. Thus, the FHCC may address the property integration area prior to the end of the demonstration, in 2015, but it is not required to do so. FHCC officials also are in the process of addressing other integration areas with provisions that do not have specific deadlines associated with them. For example, for the fiscal authority integration area, FHCC officials continue to make progress implementing the provisions, although they have experienced some challenges. Since our last review, the Joint Fund, into which both VA and DOD contribute, has become operational. However, the provision of the Executive Agreement in the fiscal authority integration area that requires the FHCC to develop an operating plan by month that includes workload data has not yet been met. Specifically, the FHCC’s operating plan does not include workload data, which officials reported is because the current VA and DOD IT systems calculate workload data differently. (See table 3.) Despite some progress, the FHCC continues to face costly delays in the IT integration area. The Executive Agreement specified three key IT capabilities that VA and DOD were required to have in place on opening day, in October 2010, to facilitate interoperability of VA and DOD electronic health record systems. In our 2011 report, we found that all three of these IT components were delayed; some of them continue to remain so. As a result of these delays, the FHCC has had to implement costly workarounds to address the needs these capabilities were intended to serve. In addition to delays in developing these specific IT capabilities, other IT capabilities required by the Executive Agreement have not been well defined and implementation plans for them have not been established. Specifically, in our 2011 report, we noted that none of the following three IT capabilities required by the Executive Agreement to be in operation by October 2010 were implemented by that time: (1) medical single sign-on, which would allow staff to use one screen to access both the VA and DOD electronic health record systems; (2) single patient registration, which would allow staff to register patients in both systems simultaneously; and (3) orders portability, which would allow VA and DOD clinicians to place, manage, and update clinical orders from either VA or DOD electronic health records systems for radiology, laboratory, consults (specialty referrals), and pharmacy services. Although none of these capabilities were in place at the time of the FHCC’s opening, FHCC officials reported that subsequently, in December 2010, medical single sign-on and single patient registration became operational, as we noted in our 2011 report. Two orders portability components—pharmacy and consults—remain delayed as of May 2012. While orders portability for pharmacy remains delayed, VA and DOD officials have estimated completion of the consults component by March 2013. Since our last review, orders portability for radiology became operational in June 2011 and for laboratory in March 2012. Officials report that as of March 2012, VA and DOD have spent more than $122 million on IT capabilities at the FHCC. VA and DOD officials reported several reasons for the delays in each of the orders portability components and described the workarounds implemented as a result of these delays. Pharmacy component: Officials have said that they no longer plan to develop a FHCC-specific capability that will allow VA’s and DOD’s electronic health record systems to exchange information for pharmacy orders, as required by the Executive Agreement, until a more long-term effort to merge the departments’ electronic health record systems into a single system is complete. In March 2011, the Secretaries of VA and Defense announced that the two departments had committed to this broader effort, but the departments have not determined when this single electronic health record system will be completed. Officials reported that they have assigned a project team to address this requirement and estimate that they will award a contract for the pharmacy solution by November 2012. Meanwhile, the FHCC continues to maintain the interim orders portability workaround that we previously reported on, which includes five dedicated, full-time pharmacists to conduct manual checks of patient records to reconcile allergy information and identify possible interactions between drugs prescribed in VA and DOD systems. Additionally, FHCC officials reported that they have also hired a full-time pharmacy technician to assist in this process. FHCC officials reported that as of March 2012, they have spent close to $1 million to institute this workaround and that they anticipate spending an additional $750,000 to fund this process from April 2012 through April 2013. Consults component: VA and DOD officials reported that this component, which will allow VA’s and DOD’s electronic health record systems to exchange information for consult orders, remains delayed because of changes to the requirements for this component in response to lessons learned since the FHCC opened. Officials reported that they completed the process of documenting changes to the requirements in February 2012 and will use that information to develop the consults component. Until this IT component is implemented, the FHCC staff in the specialty care clinics manage the consult orders manually by reviewing daily all consult requests to determine if care could be provided at the FHCC, in which case the order is manually entered into the appropriate system. Radiology component: Officials told us that this area was delayed in part because they underestimated the amount of work required to allow VA’s and DOD’s electronic health record systems to exchange information for radiology orders, and they needed additional time to resolve software defects related to the work. Laboratory component: Officials reported that there were delays in delivering a capability that would allow the VA and DOD systems to exchange information for laboratory orders because they needed to address software differences between the VA and DOD systems, such as how the systems detect and combine duplicate orders. In addition, they acknowledged that they underestimated the time and effort required to address such differences. Before the laboratory component was implemented, the FHCC instituted a workaround that required health care providers to review both VA and DOD systems for notifications of laboratory results. Although they were unable to quantify the total cost for all the workarounds resulting from delayed IT capabilities, FHCC officials reported that staff time equivalent to 23 full-time employees is being used to manage the workarounds as a result of delays in IT capabilities to support pharmacy, consults, radiology, and laboratory as well as delays to the other IT components not delivered on time. In addition to the three delayed IT capabilities that were to be in operation by opening day, implementation of three other IT capabilities required, but not defined, by the Executive Agreement—documentation of patient care to support medical and dental operational readiness, financial management solutions, and outpatient appointment enhancements—also have not been implemented, and in some cases work on them has not begun. The Executive Agreement does not provide clear and specific definitions of these three capabilities, nor does it outline deadlines or specific deliverables. Officials reported that as of May 2012, they had not begun to address the requirements for two of the three capabilities— documentation of patient care to support medical and dental operational readiness and outpatient appointment enhancements—nor had they developed plans or time frames for doing so. VA and DOD officials reported that they have determined the requirements for and have begun the technical development of the financial management solutions, such as automated financial reconciliation and billing processes, and they estimate that testing of the initial capability for the financial reconciliation requirement will occur in July 2012. FHCC officials continue to experience implementation challenges related to the FHCC’s lack of an MTF designation. In our July 2011 report, we noted several challenges associated with the lack of an MTF designation at the FHCC, including limits on its ability to access DOD’s drug pricing arrangements for DOD beneficiaries and to use personal services contracts to meet staffing needs, as had been done by DOD prior to the As a result, we recommended that DOD seek a legislative integration.change to designate the FHCC as an MTF to facilitate sharing of all DOD authorities and privileges for the facility. Although DOD concurred with our assessment of challenges based on the lack of an MTF designation, the department has opted not to pursue our recommendation. DOD stated that it anticipates that as the FHCC stabilizes and matures, the confusion caused by the lack of an MTF designation will dissipate and that the challenges we noted in the last report have been addressed by workarounds. However, we have found that some of the integration implementation challenges that could be solved with such a designation remain. In particular, officials told us the FHCC has been denied access to DOD’s drug pricing arrangements for its DOD beneficiaries, which has resulted in the FHCC paying higher prices for certain drugs for DOD beneficiaries than would be the case if it were an MTF, although FHCC officials were unable to quantify the added expense. DOD officials told us that the department continues to explore ways to access DOD’s drug pricing arrangements, despite the lack of an MTF designation, but that so far these efforts have not been successful. In addition, FHCC officials have instituted a workaround to enable them to fulfill staffing needs using personal services contracts—a preferred method for accommodating fluctuations in medical and dental workloads resulting from increases in the number of Navy recruits on-site at any given time. If the FHCC was designated as an MTF, it would have the authority to use personal services contracts, making such a workaround unnecessary. We continue to believe that an MTF designation is important to address the challenges the FHCC faces based on the lack of such a designation, and because it would set a precedent for future VA and DOD integrations to help make the integration process smoother. Although they are required by NDAA 2010 to conduct a comprehensive evaluation of the FHCC at the end of the 5-year demonstration and submit a report on this evaluation to the House and Senate Committees on Armed Services and Veterans’ Affairs, VA and DOD officials said the departments have not yet established an evaluation plan. We have previously found that developing a sound evaluation plan before a demonstration program is implemented can increase confidence in results and facilitate decision making about broader applications of the demonstration. Without such a plan in place during the demonstration— including well-defined measures and standards, such as target scores, for determining performance on each measure—FHCC leadership cannot track progress and make adjustments to improve performance in areas that VA and DOD determine are necessary for the FHCC’s success.addition, we have previously found that joint agreement on commonly desired outcomes, such as those established as performance measures and standards in an evaluation plan, is important for collaborating agencies, such as VA and DOD, to successfully overcome differences in In their agency missions, cultures, and established ways of doing business. The 15 integration benchmarks comprise 38 individual performance measures. For example, the patient satisfaction benchmark is measured using 2 performance measures—a VA measure and a DOD measure based on separate surveys that assess beneficiaries’ experience with care at the FHCC. integrated FHCC meet or exceed those of NCVAMC and NHCGL as separate facilities prior to the integration; an evaluation of whether the services available at the FHCC are appropriate for the needs of its beneficiary population (for example, whether the pediatrics workload is sufficient to maintain a pediatrics department at the FHCC or whether it would be more cost-effective to contract for pediatrics care in the local community); personnel-related factors, such as whether corpsmen are able to be used at their full capacity at the FHCC and develop the medical skills needed for deployment; and FHCC costs. Furthermore, VA and DOD have not set specific target scores for determining successful performance for the existing 15 integration benchmarks. Officials told us they do not expect to establish these scores until the end of the 5-year FHCC demonstration. Although federal financial accounting standards, VA and DOD departmental priorities, and the Executive Agreement—which lays out the purpose of the FHCC—indicate that reliable cost information is important for evaluating the FHCC, VA and DOD officials have not determined what cost measures, if any, will be used in the FHCC’s evaluation. In particular, federal financial accounting standards state that Congress and federal executives need reliable cost information to compare alternative courses of action and evaluate program performance.Veterans Health Administration’s vision statement and the Military Health System’s core values statement highlight the importance of cost or value of health care to VA and DOD. Furthermore, VA and DOD jointly agreed through the Executive Agreement that the FHCC itself was designed to In addition, both the improve cost-effectiveness of health care delivery, along with access and quality, for the beneficiaries of NHCGL and NCVAMC. Prior to the integration, FHCC officials reported that cost savings, mainly one-time construction savings, were one of the original considerations in deciding to integrate the two facilities, but FHCC officials told us that they are unable to determine whether these savings were actually realized. We have previously reported that cost-effectiveness information is important for ensuring that a program produces sufficient benefits in relation to its costs. Although the existing FHCC integration benchmarks include measures related to access and quality, they do not include any measures related to cost-effectiveness, and while VA and DOD officials said they are considering incorporating cost into the evaluation, they still have not determined whether to do so or what cost measures will be used. The FHCC is a 5-year demonstration that has the potential to be a model for future VA and DOD collaborations to deliver high-quality and cost- effective integrated health care services. However, the demonstration has notable problems. The lack of an MTF designation; costly delays in IT implementation and the lack of clear definitions, deliverables, and time frames for certain IT capabilities; and the lack of an overall evaluation plan for the demonstration pose challenges to VA, DOD, and FHCC officials. Because the FHCC does not have an MTF designation, FHCC officials continue to experience additional costs and administrative burden. The FHCC is unable to use DOD drug pricing arrangements for DOD beneficiaries, which has resulted in additional costs for the FHCC, and also cannot use personal services contracts without the need for a workaround. Because of these ongoing problems, we continue to believe that the Secretary of Defense should seek a legislative change to designate the FHCC as an MTF, even if only for the period of the 5-year demonstration. Delays in the implementation of key IT components required by the Executive Agreement to be in place by October 2010 have resulted in the FHCC establishing workarounds in an effort to maintain patient care and safety. In some cases, these workarounds have been costly and inefficient, necessitating the hiring of additional staff or using additional staff time to do manually what the IT systems are intended to automate. After spending more than $122 million on IT capabilities needed for the FHCC, key deliverables remain delayed, resulting in additional costs to the FHCC. For example, officials have spent more than $1 million as of May 2012 on workarounds for the pharmacy component alone, with an additional $750,000 of spending expected through April 2013. Having a clear understanding of the costs associated with workarounds needed when IT systems are not in place is essential in planning any future VA and DOD integration efforts. In addition, the lack of clarity for time frames and deliverables for two other IT requirements included in the Executive Agreement may pose challenges for implementing them during the demonstration. Despite the fact that the demonstration is in its second of 5 years, DOD and VA have yet to develop and implement an overall evaluation plan. Without such a plan, decision makers at all levels lack the information needed to evaluate the FHCC in a transparent way that ensures confidence in the results. Establishing an evaluation plan, including relevant measures and standards, such as target scores for the benchmarks, as early as possible during the demonstration also provides FHCC officials the opportunity to make informed midcourse changes to better ensure the delivery of high-quality and cost-effective care. It also will better facilitate decision making about whether replicating the model in other locations is prudent. Finally, without assessing the cost- effectiveness of the FHCC, VA and DOD decision makers, as well as Congress, will be unable to adequately assess whether the integrated health care delivery model of the FHCC produces sufficient benefits in relation to its costs. To clarify IT requirements within the Executive Agreement, to enable VA and DOD to make an informed recommendation about whether the FHCC should continue after the end of the demonstration, and to provide useful information for other integrations that may be considered in the future, we recommend that the Secretaries of Veterans Affairs and Defense take the following four actions: determine the costs associated with the workarounds required because of delayed IT capabilities at the FHCC for each year of the demonstration, including the costs of hiring additional staff and of managing the administrative burden caused by the workarounds; develop plans with clear definitions and specific deliverables, including time frames for two IT capabilities—documentation of patient care to support medical and dental operational readiness and outpatient appointment enhancements—and formalize these plans, for example, by incorporating them into the Executive Agreement; expeditiously develop and agree to an evaluation plan, including the performance measures and standards, such as target scores, to be used to evaluate the FHCC demonstration, and formalize the plan, for example, by incorporating it into the Executive Agreement; and establish measures related to the cost-effectiveness of the FHCC’s care and operations to be included as a part of the evaluation plan. DOD and VA each provided comments on a draft of this report. In their comments, both agencies generally concurred with each of the four recommendations to the Secretaries of Defense and Veterans Affairs. (DOD’s comments are reprinted in app. II; VA’s comments are reprinted in app. III.) In addition, both VA and DOD provided technical comments which we have incorporated as appropriate. The agencies’ specific responses to each of our recommendations are as follows: To determine the costs associated with the workarounds required because of delayed IT capabilities at the FHCC, DOD indicated that it will collaborate with VA to determine these costs. VA stated the FHCC will convene a workgroup to review these costs and to identify any additional needs associated with IT development delays. VA suggested changing “workaround” to “impacts and changes to business practices.” We maintain that “workaround” is used appropriately in the context of this report because we use it to describe processes that are temporarily in place for the purpose of mitigating IT delays rather than permanent changes to business practices. To develop plans with clear definitions and specific deliverables, including time frames for two IT capabilities, both VA and DOD stated that they are working together through their joint Interagency Program Office to develop and formalize these plans. DOD added that the Interagency Program Office will also consider how these plans relate to the larger effort to implement an integrated electronic health record. Both agencies noted that formalization of these plans does not require incorporation into the Executive Agreement. We offered amending the Executive Agreement as an example of how plans could be formalized and leave it to the agencies’ discretion how best to do so. To expeditiously develop and agree to an evaluation plan, VA and DOD mentioned that although a methodology and framework for a final evaluation have not been determined, they are tracking some measures of performance through the 15 integration benchmarks. In addition, VA stated that the JEC has directed the HEC to outline an evaluation plan to include analysis of personnel, logistics, resources, and regulatory issues. Again, both agencies noted that formalizing of the evaluation plan does not require incorporation into the Executive Agreement. As we noted above, amending the Executive Agreement is one option for how the plan could be formalized and the agencies may determine the most effective way to do so. To establish measures related to the cost-effectiveness of the FHCC’s care and operations to be included as a part of the evaluation plan, VA stated that it will develop a process to expedite creation of an evaluation plan. Both agencies concurred with the recommendation to include cost-related measures. VA provided an additional comment regarding the issue of MTF designation at the FHCC. They suggest that VA and DOD agree on the matter of seeking an MTF designation before any action is taken regarding establishing the FHCC as an MTF. We are sending copies of this report to the Secretary of Defense, Secretary of Veterans Affairs, 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 have any questions about this report, please contact me at (202) 512-7114 or draperd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Appendix I: Federal Health Care Center Integration Benchmarks, by Number of Reported Measures Integration benchmarks 1. Patient satisfaction measures meet Federal Health Care Center (FHCC) targets. Number of individual performance measures to be reported 2 3. Health profession trainee satisfaction measures meet FHCC targets. 4. Stakeholders Advisory Council determination that the FHCC meets both Department of Veterans Affairs (VA) and Department of Defense (DOD) missions. 5. Clinical and administrative performance measures meet FHCC targets. 6. Patient access to care meets FHCC targets. 7. Evidence-based health care measures meet FHCC targets. 8. Clinical/dental productivity meets FHCC targets. Information technology solution timeline is met and has no negative impact on patient safety. 10. Pre-FHCC academic and clinical research missions are maintained. 11. Navy servicemember medical readiness for duty meets Navy targets. 12. Navy advancement/retention meets Navy targets. 14. Validation of FHCC fiscal reconciliation model by an annual independent audit. 15. Satisfactory facility and clinical inspection, accreditation, and compliance outcomes from several external oversight/groups, such as VA and DOD Offices of the Inspector General and The Joint Commission. In addition to the contact named above, Marcia A. Mann, Assistant Director; Jill K. Center; Regina Lohr; and Rasanjali Wickrema made key contributions to this report. Lisa A. Motley provided legal support, and Jennie F. Apter assisted in message and report development. | The NDAA for Fiscal Year 2010 authorized VA and DOD to establish a 5-year demonstration to integrate VA and DOD medical care into a first-of-its-kind FHCC in North Chicago, Illinois. Expectations for the FHCC are outlined in the Executive Agreement signed by VA and DOD in April 2010. The NDAA for Fiscal Year 2010, as amended by the NDAA for Fiscal Year 2012, directed GAO to report on the FHCC demonstration in 2011, 2012, and 2015. This is the second of the three reports and examines (1) to what extent VA and DOD have continued to implement the Executive Agreement to establish and operate the FHCC and (2) what plan, if any, VA and DOD have to assess the provision of care and operations of the FHCC. To conduct its work, GAO reviewed FHCC documents; interviewed VA, DOD, and FHCC officials; and reviewed related GAO work. Officials at the Department of Veterans Affairs (VA) and Department of Defense (DOD) Captain James A. Lovell Federal Health Care Center (FHCC) have continued to make progress implementing provisions of the Executive Agreements 12 integration areas, but delays in the information technology (IT) area have proven costly. Specifically, for 6 integration areas, all provisions have been implemented. Some of these areas were implemented at the time of GAOs 2011 report, including establishing the facilitys governance structure and patient priority system, while 2 areasquality assurance and contingency planningwere more recently implemented. In addition, 5 integration areas, such as property and fiscal authority, remain in progress. However, as previously reported by GAO, there have been delays implementing 1 of the integration areasITwhich have resulted in additional costs for the FHCC, although the FHCC has been unable to quantify the total costs resulting from these delays. Despite an investment of more than $122 million for IT capabilities at the FHCC, VA and DOD have not completed work on all components required by the Executive Agreement, which were to have been in place in time for the FHCCs opening in October 2010. These delays have resulted in additional costs and administrative burden for the FHCC because of the need for workarounds to address them. There also are other IT capabilities required by the Executive Agreement that are ill-defined and for which plans have not been established. Although they are required by the National Defense Authorization Act (NDAA) for Fiscal Year 2010 to assess the FHCC at the end of the 5-year demonstration, VA and DOD officials said the departments have not yet established an evaluation plan. Officials told GAO that in addition to the performance data already being collected from 15 integration benchmarks established by the Executive Agreement, the departments also expect to consider other factors; however, these factors, which may include performance measures, have not yet been established. VA and DOD officials also have not yet established the standards, such as target scores for the benchmarks, the departments will use to evaluate FHCC performance. GAO has previously found that well-defined measures and standards are essential to a sound evaluation plan. Furthermore, without VA and DOD agreement on the measures and standards, FHCC leadership is unable to track progress and make any midcourse adjustments to improve performance in areas VA and DOD have determined are necessary for the FHCCs success. Although including measures of FHCC costs in the evaluation would be consistent with the FHCCs purpose, VA and DOD departmental priorities, and federal financial accounting standards, no such cost measures have been established for evaluating the FHCC. GAO recommends that VA and DOD (1) determine the costs associated with the workarounds required because of delays in implementing IT capabilities laid out in the FHCC Executive Agreement; (2) develop plans with clear definitions, specifications, deliverables, and time frames for IT capabilities required by the Executive Agreement but not yet defined; (3) develop and agree to an evaluation plan, to include all performance measures and standards to be used in evaluating the FHCC demonstration; and (4) establish measures related to the cost-effectiveness of the FHCC as part of their evaluation. VA and DOD generally concurred and noted steps to address GAOs recommendations |
The Federal Employees’ Compensation Act (FECA) and its implementing regulations provide compensation for federal civilian employees who suffer disabilities resulting from work-related injuries or diseases. DOL’s Office of Workers’ Compensation Programs administers the FECA program through its 12 district offices located throughout the United States, and DOL claims examiners are responsible for directly managing cases. While DOL has sole authority to adjudicate all claims for compensation and make other determinations, the employing agency of the beneficiary has a role in the process. In particular, DOL provides FECA compensation—including cash and medical benefits—up front and then charges agencies a “chargeback” for the compensation provided to their employees. Employing agencies subsequently reimburse DOL each “chargeback year” from their next annual appropriation. Table 1 provides an overview of the types of FECA benefits. DOL determines the level and type of FECA benefits based on various factors. For instance, disability benefits are paid to compensate for lost wages if DOL finds that an employment-related injury, disease, or illness impedes an employee’s ability to work. If an employee is unable to perform any gainful employment, then he or she is considered totally disabled, and DOL calculates compensation as a proportion of the beneficiary’s entire income at the time of injury. If an employee is unable to return to his or her previous job but is determined by DOL to be able to work in some capacity, then he or she is considered to be partially disabled, and compensation is based on any loss of wage-earning capacity as compared to the preinjury wages. Total-disability FECA beneficiaries with eligible dependents receive 75 percent of their preinjury wages, and those without dependents receive 66-2/3 percent. Partial-disability FECA beneficiaries with eligible dependents receive a FECA benefit that is 75 percent of the difference between their preinjury and postinjury wage-earning capacity, and those without dependents receive 66-2/3 percent of the difference. Additionally, benefits are adjusted annually for cost-of-living increases and are neither subject to age restriction nor taxed. See figure 1 for an example of how disability benefit payments are calculated. There are certain restrictions or offsets for FECA beneficiaries if they are eligible for or receive other federal benefits, such as from federal retirement plans or other disability benefits. For instance, while beneficiaries who receive medical benefits or schedule awards can receive federal retirement benefits concurrently, such as benefits under the Federal Employees Retirement System (FERS), beneficiaries receiving wage-loss compensation (i.e., disability benefits) must elect to receive one or the other. However, FECA does not require beneficiaries to retire at a certain age and transition to their designated federal retirement program. FECA beneficiaries can continue receiving FECA compensation payments for as long as they remain unable to work due to a workplace injury. Beneficiaries who are eligible for both FECA and disability benefits from the Department of Veterans Affairs or the Social Security Administration face restrictions on concurrent benefits for the same injury. For instance, FECA beneficiaries receiving FECA and Social Security disability payments for the same injury will have their Social Security disability payments reduced by the amount of the FECA compensation. Although DOL administers the FECA program, directly manages claims, and has sole approving authority, each military department and defense agency within DOD has a role in processing its respective FECA claims. Employing agencies like DOD and the military departments have a financial responsibility and other roles in managing claims and the employees’ cases, such as in submitting new injury claims and subsequent wage-loss claims, providing continuation of pay, and identifying job opportunities for employees to return to work where possible. At DOD, the Defense Civilian Personnel Advisory Service is the central DOD entity responsible for civilian human resource management, including workers’ compensation through the Injury and Unemployment Compensation Branch. It provides policies, guidelines, and assistance to each military department and the other DOD agencies, which directly process employee FECA claims in coordination with DOL. The Defense Civilian Personnel Advisory Service also employs DOD injury compensation liaisons across the United States that directly support the military departments and other DOD component agencies when processing claims and coordinating with DOL. The military departments each oversee their FECA claimants. The Department of the Air Force, for example, has a workers’ compensation and claims-management program located at the Air Force Personnel Center that manages all FECA claims across the department. The Department of the Navy—which includes the Marine Corps—oversees its FECA claims with compensation specialists spread across the Navy major commands and with major command program managers reporting to the Navy FECA program manager. Within the Department of the Army, each installation’s Civilian Personnel Advisory Center has an injury compensation specialist who reports to the Civilian Human Resources Agency. In addition to the FECA statute, as well as DOL regulations and procedures, DOD and the military departments follow Department of Defense Instruction 1400.25, volume 810, which establishes policies and procedures, provides guidance, delegates authority, and assigns responsibilities regarding civilian personnel management of injury compensation in DOD. The military departments and other DOD FECA programs may use these documents to guide their FECA programs and, like the Air Force, not publish additional formal policy documents, or they may issue their own instructions or policies to further inform their FECA programs. For example, the Army has documented implementing guidance for its FECA program, and the Navy has a Secretary of the Navy Instruction specific to the FECA program. FECA claims are processed by DOL and employing agencies like DOD using automated systems, including the Employees’ Compensation Operations and Management Portal (ECOMP), as well as some agency- and billing-specific systems. To provide information to DOL, such as medical files or other supporting documentation, claimants and employing agencies like DOD use ECOMP to conduct a variety of tasks related to claims management and to electronically upload documents, which DOL then reviews to make claims determinations and other decisions. The Defense Civilian Personnel Advisory Service and military departments also use the Defense Injury and Unemployment Compensation System—a DOD-wide data application used as the internal source for department-related FECA information. This system gives DOD injury compensation specialists—the DOD counterparts that coordinate with DOL claims examiners—the ability to perform case management and data analysis functions by pulling a variety of DOL and DOD data. The system includes key personnel information and claims data for employees, including DOD payroll data and compensation costs, and regularly updated DOL data. FECA, as with workers’ compensation programs in general, attempts to balance the goals of providing adequate wage-loss benefits for employees injured on the job and also promoting return to work to minimize the need for continued benefits. DOL testified before the House Subcommittee on Workforce Protections in 2015 that over the past 5 years fewer than 2 percent of new injury cases—not all of which involved a significant period of disability—remained on the compensation rolls 2 years after the date of injury. Additionally, to further improve government-wide return-to-work rates, in July 2010 the President introduced the Protecting Our Workers and Ensuring Reemployment (POWER) Initiative, which created a new set of performance metrics toward the achievement of government-wide goals, including targets for returning injured employees to work. In the 2015 testimony, DOL also noted that, as of fiscal year 2014, 88 percent of FECA claimants that suffered a significant period of disability had returned to work within the first year of injury and 91 percent returned to work by the end of the second year. To support this end, DOL provides vocational rehabilitation and other employment assistance. For example, DOL may offer vocational assessments and transferable skills analysis and training for injured employees. While there is no universal agreement on the optimal level of workers’ compensation benefits or incentives for injured workers to return to work, one can consider benefits in relation to take-home pay or retirement benefits for older beneficiaries since overly generous benefits could provide a disincentive to return to work. One possible disincentive is the greater rate of compensation for beneficiaries with at least one dependent. DOL has reported that most FECA beneficiaries fall into this category and receive 75 percent of their preinjury wages tax-free, which can in certain instances result in compensation greater than the injured worker’s usual take-home pay. As FECA benefits do not have an age limit, a second potential disincentive to return to work may exist if FECA benefits are more generous than the retirement benefits that an individual would receive as a federal annuitant. An incentive to return to work within the FECA program is the reduction of benefits for partial-disability beneficiaries, as noted in our prior work. Specifically, benefits for partial disability are reduced based on wage- earning capacity by taking into account the income a beneficiary could earn—whether a beneficiary finds a job or not. As such, in order for an injured worker to maximize total income, he or she has an incentive to find work that meets his or her work capabilities. In our 2012 work, we examined FECA benefit levels in relation to take- home pay and retirement benefits, as some policymakers raised questions about the level of FECA benefits, especially compared to retirement benefits. Using simulated scenarios based on 2010 FECA benefit data, we compared FECA benefits to wages and retirement benefits that would have been earned absent the injury. Our simulations showed that for 2010 total-disability beneficiaries, a median of 80 percent of take-home pay was replaced by FECA for non-U.S. Postal Service employees and a median of 88 percent for Postal employees. Additionally, the median percentage of take-home pay replaced by FECA was 3 percentage points greater for beneficiaries with an eligible dependent than for those without eligible dependents. Our comparison between simulated FECA benefits and retirement focused on the retirement benefits package under the current Federal Employees Retirement System (FERS), which consists of a pension based on years of service and salary, the 401(k)-like Thrift Savings Plan, and Social Security benefits. We conducted two separate analyses: The first represented retirement benefits in 2010 and the second represented retirement benefits in the future, based on employees’ ability to contribute to the Thrift Savings Plan over the course of a more typical federal career of 30 years. According to our simulations focused on 2010, the median FECA benefit package for total-disability retirement-age non-Postal beneficiaries was 32 percent greater than the comparable median retirement benefit package they would have received absent an injury. For Postal employees, the median FECA benefit was 37 percent greater than the retirement package. However, our future-looking simulation found smaller differences. Specifically, in the 30-year-career scenario, we found that the median FECA benefit for total-disability non-Postal employees was on par or slightly below the simulated median FERS retirement package, and for Postal employees ranged from about 13 percent greater than the median retirement benefit to about 4 percent less, depending on how much the employee contributed to the retirement program. In 2015, DOD’s FECA claimants represented 17 percent of all FECA claimants government-wide, and DOD beneficiaries received approximately $553.7 million worth of benefits (see fig. 2). In comparison, DOD’s more than 720,000 employees represented about 35 percent of the federal civilian workforce. Overall in 2015, the FECA program paid more than $3.1 billion in benefits and managed 277,775 claims, including 47,340 from DOD. The U.S. Postal Service had the largest number of claimants—approximately 132,000. FECA claimants were spread across DOD, and the military departments—which represent nearly 80 percent of DOD’s civilian workforce—had the vast majority of claimants. Specifically, the Navy and the Army each had about one-third of all of DOD’s FECA claimants in 2015 (see fig. 3), while the other, nonmilitary DOD entities—which include the Office of the Secretary of Defense and other DOD organizations—had the smallest total percentage of FECA claimants (11 percent). DOD’s beneficiaries receive various types of benefits—such as disability benefits for wage-loss compensation on the daily and periodic roll, direct schedule award payments, or paid medical care, as shown in table 2. For example, in 2015 approximately 35 percent of DOD beneficiaries received medical benefits only, and about 20 percent received partial- or total- disability benefits. About 31 percent of DOD claimants received cash benefits in 2015, compared to 26 percent of non-DOD claimants (see fig. 4). Across both groups, partial- and total-disability beneficiaries on the periodic roll made up the largest proportion of those receiving cash benefits. In 2015, cash benefits totaled about $400 million for DOD beneficiaries and $1.6 billion for non-DOD beneficiaries. The majority of cash benefits were paid to total- and partial-disability beneficiaries on the periodic roll, as illustrated by figure 5. The total percentage of cash payments to these beneficiaries was slightly higher for DOD (75 percent) than for non-DOD agencies (69 percent). Total-disability beneficiaries constitute about 14 percent of all DOD FECA claimants in 2015, as represented in the DOL data (as illustrated earlier in fig. 4). Of these beneficiaries, the Navy and the Army had the highest percentages in DOD (see fig. 6); though, taken together these two military departments also constituted about 60 percent of the total DOD civilian workforce. The Navy had the highest percentage of beneficiaries on the periodic roll, with 36 percent of DOD’s total-disability population and 48 percent of DOD’s partial-disability population. Of DOD’s total-disability beneficiaries, the vast majority—approximately 85 percent—received less than $50,000 in cash benefits in 2015 (see fig. 7). In contrast, about 4 percent received a benefit of $70,000 or more. The median cash benefit in 2015 for total-disability beneficiaries across DOD was just under $36,000. The distribution of cash benefits for DOD’s military departments generally mirrored the benefits for DOD overall, with the majority of all beneficiaries receiving less than $50,000 per year (see fig. 8). The median cash benefit for total-disability beneficiaries in the military departments was approximately $36,000, while the median cash benefit paid to beneficiaries from the other DOD agencies was just under $30,000. A higher proportion of DOD total-disability beneficiaries sustained injuries longer ago than similar non-DOD beneficiaries in 2015. Specifically, as indicated in figure 9, about 60 percent of DOD total-disability beneficiaries sustained their injuries 21 or more years ago, as compared to about 30 percent of non-DOD beneficiaries. While DOD total-disability beneficiaries, as of 2015 data, were injured longer ago than non-DOD beneficiaries, the two populations had similar distributions with respect to age at the time of injury, as shown in figure 10. The median age at time of injury for these populations was 44 for DOD and 45 for non-DOD. As a result of being similar ages as non- DOD beneficiaries at the time of injury but injured longer ago, DOD total- disability beneficiaries in 2015 were substantially older than those from the rest of government (see fig. 11). Specifically, about 60 percent of DOD total-disability beneficiaries were over the age of 65 as compared to about 35 percent of non-DOD beneficiaries. This difference may be attributable to the combination of DOD beneficiaries being injured longer ago but at similar ages to their non-DOD counterparts. In addition, about 56 percent of DOD beneficiaries were at or above their full Social Security retirement age, compared to 32 percent of non-DOD beneficiaries. For more information on the age of DOD and non-DOD beneficiaries, as well as a discussion of total-disability beneficiaries at full Social Security retirement age, see appendix I. Most of the DOD injury compensation specialists, liaisons, and program offices we interviewed reported they had the necessary FECA-related information to effectively conduct their work. Specifically, 10 of the 12 injury compensation specialists and liaisons we spoke with, as well as three of the four program offices, reported that they generally have sufficient access to FECA claims data and information necessary for managing their respective FECA program, including facilitating return-to- work outcomes. ECOMP is DOL’s web-based system for various claim-management tasks and is the source for filing and transmitting FECA claim information and documents. DOD began migrating to ECOMP from past systems in fiscal year 2015 and continues to adjust and increase access across the department, according to Defense Civilian Personnel Advisory Service officials. At the time we interviewed officials, the Defense Civilian Personnel Advisory Service and the military departments had general access to DOL’s ECOMP system, and five injury compensation specialists and liaisons we interviewed specifically highlighted that ECOMP improves the ability to access relevant information and data. For instance, ECOMP allows DOD personnel faster access to claims information, the ability to track the completion of certain documents, to electronically file more types of claims forms, and real-time access to claims documents. DOD has access to other DOL data and information through other systems, including DOD’s internal Defense Injury and Unemployment Compensation System that also provides access to DOL claims information. In addition to case-specific data and information, through the POWER Initiative DOL began providing agency-level FECA program performance metrics, which it continues to make available on its website. Although the POWER Initiative officially ended in fiscal year 2014, as of June 2016 DOL continued to use these metrics to report agencies’ performance. All of the military department FECA program managers we interviewed noted that they continue to monitor their POWER goals and use them as a performance metric. Defense Civilian Personnel Advisory Service officials stated that the data they receive from DOL and other sources is extensive, though they added that there may be additional resources that could be useful for their work. For example, one liaison stated that additional access to certain information, such as data on non-FECA disability benefits managed by the Social Security Administration and the Department of Veterans Affairs, could allow them to more easily identify individuals potentially receiving other disability benefits. Additionally, although the majority of DOD officials we spoke with reported having generally sufficient access to conduct their case-management responsibilities, DOL and DOD officials stated that DOD is still in the process of rolling out ECOMP throughout DOD. For instance, according to Defense Civilian Personnel Advisory Service officials, not all components have had full access to a component of ECOMP that gives increased visibility over claimant documentation such as medical information. For instance, at the time we interviewed officials, Army and Navy injury compensation specialists noted instances when medical documentation provided directly to DOL was not yet accessible to them. In these instances, injury compensation specialists must request hard-copy information directly from DOL claims examiners, such as having the DOD liaison physically retrieve hard-copy information. According to Defense Civilian Personnel Advisory Service officials, as of July 2016 the Army has full access to ECOMP so can determine whether or not updated information has been submitted. Officials expect the Navy to have full access to ECOMP by the end of fiscal year 2016. The Defense Civilian Personnel Advisory Service and all three military department FECA program offices we spoke with reported experiencing challenges when requesting information, decisions, or other actions, such as suitability determinations and second-opinion requests, from DOL during the return-to-work process. However, because DOD does not monitor process timelines associated with such difficulties, the department cannot fully identify the nature, magnitude, or effects of problems it may be experiencing, or whether these issues, if any, are widespread. Moreover, without a full understanding of any issues that may exist, DOD is unable to communicate the scope of any such problems to DOL. Employing agencies are responsible for returning employees to work, but DOL is responsible for determining whether a job offer is suitable to return an employee to work and to obtain a second opinion on an employee’s medical condition or work capacity. Suitability determinations of job offers are needed when a claimant does not accept a job offer or accepts a job offer but does not return to work. According to the DOL FECA Procedure Manual, this process can involve a variety of considerations and information that is submitted by multiple parties including the employing agency, the claimant, often the claimant’s physician, and other medical referrals as necessary. Second opinions may be requested by DOL to obtain an additional medical evaluation to clarify the claimant’s condition, the extent of a disability, work capacity, or other issues. During our review, 9 of the 12 injury compensation specialists and liaisons we spoke with, as well as all four of the program offices, reported experiencing some challenges pertaining to lengthy response times from DOL’s claims examiners, such as when submitting requests to DOL for suitability determinations and second opinions. For instance, according to Defense Civilian Personnel Advisory Service officials, DOD has experienced what they perceive as lengthy periods waiting for suitability determinations from DOL, in some instances over a year. DOL officials told us that the process can take several months due to the exchange of information among each of the parties involved, including DOL, the employing agency (such as DOD), and the claimant. Additionally, the claimant is entitled to due process of between 20 and 45 days depending on the circumstances of the claim, according to DOL officials. Defense Civilian Personnel Advisory Service officials stated that they understand it takes time to make decisions about claims, especially given the claims examiners’ caseloads, and the amount of documentation they must review, including the required information they must collect from doctors and the claimant. However, waiting for such long periods, according to DOD officials, creates a hardship on the employing agency, as it must both keep the position open for the injured employee, as well as continue to pay the claimant until a decision is made. Although officials from the Defense Civilian Personnel Advisory Service and all three military department FECA program offices we spoke to cited the lengthy response times for suitability determinations as a difficulty they experience, officials did not provide further data or information on these instances, and Defense Civilian Personnel Advisory Service officials said such cases are not monitored across the department. Additionally, according to DOL officials, even after DOL has reached a decision there is often continued back and forth between DOL and the claimant to provide additional documentation, or between DOL and the employing agency in order to provide additional or revised documentation. According to DOD and DOL officials, they seek to resolve such delays or other issues at the case-management level—between the DOD injury compensation specialist and the DOL claims examiner—so the reasons for the delay may not be elevated to higher levels, or monitored across the department, if they are ultimately resolved. In addition to concerns with response times for suitability determinations, three of the four FECA program managers we spoke with, as well as five injury compensation specialists, specifically cited the length of time it takes DOL to approve or process second opinions as a key challenge they perceive during the return-to-work process. For example, one program manager stated that when a second opinion medical evaluation is conducted, that evaluation is valid for 1 year, so if DOL does not review and act on the information in a timely manner it may result in the need for an additional medical evaluation. Further, according to that program manager, second-opinion evaluations can cost between $2,000 and $7,000, and this cost is borne by the employing agency, as well as the cost of a subsequent second opinion if the first one expires. However, this official did not provide specific examples or the frequency with which this issue occurred, and Defense Civilian Personnel and Advisory Service officials do not know the extent to which this may be a problem across the department. All three DOD liaisons we spoke with, as well as DOL, said that it is difficult to provide expectations for the amount of time it may take DOL to take action, in part because of elements outside of DOL’s control, such as the scheduling of appointments and submission of medical documentation, and because every claim has its own set of facts and circumstances. DOL procedures require claims examiners to respond to employing agencies within some established time frames, according to DOL officials, but there is no established time frame within which they are required to make suitability determinations, approve a second-opinion request, or complete the review of related medical documentation. There are also instances, according to DOL officials, when a DOL claims examiner may not agree that a second opinion is appropriate. According to the DOL FECA Procedure Manual, however, employing agencies should expect to receive information from DOL relevant to the claim-management process, including prompt determinations on medical issues and the suitability of job offers when needed. DOL officials stated that they generally expect to respond to agency requests from employing agencies within 30 days, and if they are aware of any overdue requests or issues with claims examiner performance they try to resolve them between the claims examiner and the employing agency at the lowest possible level, and the issue is only raised to the district office or higher if it is not resolved. Officials added that it is challenging to establish expected standard time frames for certain requests, such as suitability determinations, given the variability of requests and the specific circumstances and details of each case. One of the ways DOD injury claims specialists seek information on suitability determinations and second-opinion requests, among other claims-related information, is through DOL’s central phone system. Many of the DOD officials we spoke with cited the reliance on this phone system for direct communication as a complicating factor in attempting to discuss these and other information requests with DOL claims examiners. Specifically, 7 of the 12 injury compensation specialists and liaisons identified issues related to DOL’s consistency and timeliness in responding to agency requests using DOL’s centralized phone system. For example, FECA program managers from all three military departments, as well as two injury compensation specialists, noted instances in which DOL either did not respond in a timely manner or never returned the phone call. The DOL FECA Procedure Manual requires that DOL claims examiners respond to phone calls within 2 work days, and DOL officials stated that leaving a voice-mail message is sufficient to meet this deadline. According to DOL officials, agency requests can be submitted to DOL claims examiners through ECOMP or via postal mail, in addition to DOL’s central phone system. One DOD injury compensation specialist stated that, due to the challenges experienced in reaching a claims examiner by phone, it is more efficient to use ECOMP—which allows adding additional notes to previous entries into the system—to ensure the DOL claims examiner receives the updates. However, this specialist added that ECOMP does not convey whether or not the claims examiner has taken action on these follow-up requests. All of the DOD officials we spoke with—12 injury compensation specialists and liaisons, as well as each of the military departments’ FECA program offices, and FECA management at the Defense Civilian Personnel Advisory Service—highlighted difficulties with the communication timelines between DOD and DOL. However, while the military departments’ program offices cover the majority of the FECA beneficiaries, we did not speak to a generalizable sample of the FECA program staff at DOD, and the officials we spoke with could only present their individual experiences. Further according to officials from the Defense Civilian Personnel Advisory Service, DOD has not monitored FECA program processes such as communication timelines and response times between DOD and DOL, nor has it tracked any known reasons or solutions to any related issues, on a department-wide basis across its approximately 800 FECA injury compensation specialist staff. DOL officials stated that if DOD is experiencing ongoing challenges, more information about these challenges would be helpful to find a solution. They added that DOL has an open-door policy, and a number of existing mechanisms are intended to facilitate general communication between the employing agencies and DOL. For example, DOL officials stated that many issues are resolved at the claims examiner level, or after being elevated to the district-office level, and while district offices can track responsiveness and other issues in their district to identify any issues, this is not done across agencies. However, DOL and Defense Civilian Personnel Advisory Service officials noted that there is ongoing staff turnover among the DOD injury compensation specialists and DOL claims examiners. According to Defense Civilian Personnel Advisory Service officials, such turnover can make monitoring the claims process more difficult at the injury compensation specialist level, though they noted that the role of the DOD liaisons can mitigate this by providing continuity across the FECA program. According to DOD officials, the DOD liaisons serve a key function in providing information to DOD injury claims specialists as well as facilitating communication at the DOL district-office level since they are colocated with DOL claims examiners at these offices and are able to be in more immediate contact. Standards for Internal Control in the Federal Government state that ongoing monitoring should occur in the course of normal operations. Monitoring should assess the quality of performance over time and ensure that the findings are promptly resolved. DOD has monitored high-level program metrics such as return-to-work rates and overall timelines, but Defense Civilian Personnel Advisory Service officials stated that particular claims-processing timelines—such as response times between DOD and DOL—are not specifically collected or monitored. According to Defense Civilian Personnel Advisory Service officials, DOD has internal mechanisms through which such monitoring or information gathering of the FECA process could occur, such as the function of liaisons in DOL district offices and installation-level working groups, as well as periodic program office–level meetings. Additionally, Defense Civilian Personnel Advisory Service officials stated that the increased access to ECOMP will provide further visibility of FECA claims and the decisions and actions that DOD is waiting for from DOL. Based on our interviews with FECA program officials at DOD, issues such as difficulties contacting DOL claims examiners and lengthy response times occur between DOD and DOL. However, the extent to which this is a problem across the department is unknown. In our past work we have found that leading practices for results-oriented organizations state that it is important for organizations to have complete, accurate, and consistent information to support decision-making. Further, leading practices for effective interagency collaboration state that frequent communication is a means to work across agency boundaries and prevent misunderstanding. Defense Civilian Personnel Advisory Service officials stated that monitoring information like response times could help them further understand any issues or problems they may experience and help inform future communication with DOL. DOL officials added that if there is an issue within DOD that is not being elevated or reported up their own chain of command, then DOL is likely unaware of the issue as well. Without monitoring or collecting information on issues DOD may experience, including any known reasons for or resolutions to delays, department leadership will not be positioned to identify and assess the nature of any problems, and make any appropriate internal improvements or external improvements in collaboration with DOL. In 2015, DOD employees constituted nearly one-fifth of all FECA beneficiaries across the federal government—the highest number outside the U.S. Postal Service. DOD paid $554 million in FECA medical and compensation benefits in 2015. Given the substantial monetary outlay this represents, DOD needs accurate information on the operation of the FECA program, including the timeliness of its various processes. Facilitating return-to-work outcomes can depend on timely job-suitability determinations. While not generalizable, our discussions with the military departments’ injury compensation specialists, DOD liaisons, and FECA program managers indicate that the department may face challenges in its efforts to work with DOL to effectively manage DOD’s FECA process. However, without monitoring the timelines associated with injury compensation specialists’ processing of FECA claims—particularly the significant claims-management actions over which DOL has approving authority—the department is not positioned to identify the extent to which delays or inefficiencies are present, at what points in the process they occur, or any reasons or resolutions for such issues. Such information would help DOD in managing its FECA responsibilities, and allow the department to communicate any appropriate concerns to DOL. To help support DOD management of its FECA responsibilities, we recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense for Personnel and Readiness, in collaboration with the Secretaries of the military departments and other defense agency leaders, to monitor timelines associated with significant FECA claims- management actions in order to identify the extent to which delays or inefficiencies may be occurring and at what points in the process; to identify any known reasons for the delays; and to communicate this information to DOL as appropriate for consideration and action. We provided a draft of this product to DOD and DOL for comment. In its written comments, reproduced in appendix II, DOD agreed with our recommendation. DOL provided technical comments that were incorporated, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Labor, and other interested parties including the military departments and other defense agencies. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions regarding this report, please contact Brenda Farrell at (202) 512-3604 or farrellb@gao.gov, or Andrew Sherrill 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 III. In 2015, the Department of Defense (DOD) had a higher percentage of beneficiaries over the age of 65 than the rest of the beneficiary population, as illustrated in figure 11. DOD also had a higher proportion of total-disability beneficiaries at or above full Social Security retirement age (see fig.12). About 56 percent of DOD beneficiaries were at or above their full Social Security retirement age, compared to 32 percent of non-DOD beneficiaries. Further, while DOD and non-DOD total-disability beneficiaries had similar median ages at time of injury, a greater percentage of DOD total-disability beneficiaries at or above their full Social Security retirement age were injured at age 50 or younger. As illustrated in figure 13, 65 percent of DOD beneficiaries at or above their full retirement age, and 56 percent of non-DOD beneficiaries, were age 50 or younger when injured. According to the data for 2015, DOD had a higher percentage of retirement age beneficiaries who were injured longer ago compared to beneficiaries in non-DOD agencies. However, these data are only reflective of FECA beneficiaries in chargeback year 2015—the period from July 1, 2014, through June 30, 2015—so no longer-term trends or conclusions may be drawn from these data. Further, DOL’s data system is not designed in a way that allows us to determine the cumulative amount of time a person has received FECA benefits, so we are unable to determine whether these beneficiaries have been on disability continuously since the time of injury. Hence, these data do not account for any possible breaks in benefits, such as if an employee returned to work during this time. In addition to the above contacts, Vincent Balloon, Assistant Director; Nagla’a El-Hodiri, Assistant Director; David Ballard; James Bennett; Melinda Cordero; Michael Kniss; Kirsten Lauber; Tamiya Lunsford; Jonathon Oldmixon; James Rebbe; Sabrina Streagle; Anjali Tekchandani; Patrick Tierney; Jennifer Weber; Erik Wilkins-McKee; and Sally Williamson made key contributions to this report. Disability Insurance: Actions Needed to Help Prevent Potential Overpayments to Individuals Receiving Concurrent Federal Workers’ Compensation. GAO-15-531. Washington, D.C.: July 8, 2015. Federal Employees’ Compensation Act: Analysis of Benefits Associated with Proposed Program Changes. GAO-15-604T. Washington, D.C.: May 20, 2015. Federal Employees’ Compensation Act: Effects of Proposed Changes on Partial Disability Beneficiaries Depend on Employment After Injury. GAO-13-143R. Washington, D.C.: December 7, 2012. Federal Employees’ Compensation Act: Analysis of Proposed Changes on USPS Beneficiaries. GAO-13-142R. Washington, D.C.: November 26, 2012. Federal Employees’ Compensation Act: Analysis of Proposed Program Changes. GAO-13-108. Washington, D.C.: November 26, 2012. Federal Employees’ Compensation Act: Status of Previously Identified Management Challenges.GAO-12-508R. Washington, D.C.: April 27, 2012. Federal Employees’ Compensation Act: Benefits for Retirement-Age Beneficiaries. GAO-12-309R. Washington, D.C.: February 6, 2012. Federal Workers’ Compensation: Questions to Consider in Changing Benefits for Older Beneficiaries. GAO-11-854T. Washington, D.C.: July 26, 2011. | DOD employs more than 720,000 civilians—approximately 35 percent of the federal civilian workforce—in an array of critical positions worldwide. DOD civilians who are injured or ill as a result of a work-related incident are covered under the DOL-administered FECA program. DOL, along with employing agencies like DOD, works to return injured employees to work and provides compensation for work-related disabilities. In 2015, about 90 percent of DOD's injured workers returned to work within 2 years of injury. Senate Report 114-49 included a provision that GAO review DOD's use of the FECA program. This report analyzes (1) characteristics of DOD's 2015 FECA claimants and how they compared to non-DOD claimants and (2) the extent to which DOD experiences any challenges managing its FECA responsibilities and facilitating return-to-work outcomes. GAO analyzed 2015 DOL data to identify characteristics, such as the age and benefit type, of FECA claimants, including those who received benefits that year (beneficiaries). GAO also analyzed relevant law, policies, and guidance on DOL and DOD's management of FECA, and interviewed DOL and DOD officials—including a nongeneralizable sample of DOD program officials. The Department of Defense's (DOD) 47,340 civilian employees who filed claims under the Federal Employees' Compensation Act (FECA) made up 17 percent of FECA claimants in 2015, and DOD total-disability beneficiaries (i.e., with no capacity to work) were generally older than those from the rest of government. About 35 percent of DOD beneficiaries received medical benefits only, and 31 percent received cash payments for injury or death—including the nearly 20 percent receiving partial- or total-disability benefits. About 56 percent of DOD total-disability beneficiaries were at or above their full Social Security Retirement age, compared to 32 percent of non-DOD beneficiaries (see figure). DOD FECA officials that GAO interviewed generally had sufficient access to Department of Labor (DOL) data to manage their FECA responsibilities; however, they reported perceived delays with receiving certain decisions from DOL. As the administrator of FECA, DOL has responsibility and authority for managing all claims, but employing agencies have roles in returning employees to work. DOD FECA program managers, injury compensation specialists, and liaisons GAO interviewed reported experiencing some challenges in instances requiring DOL action or approval, such as determining whether a potential job is suitable in order to return an injured employee to work. According to DOD officials, in some instances such determinations have taken over a year, which could affect DOD as it must both hold the job unfilled and continue to pay compensation until a decision is made. According to DOL, this process can take several months due to the amount of information and communication required among the employing agency, the injured employee, DOL, and other parties, such as an employee's physician. Additionally, DOD has not monitored the timelines associated with requesting DOL action to determine the extent to which delays or related issues may exist across DOD, any known reasons for these issues, and any effect possible delays may have on DOD's return-to-work efforts. DOD officials said that such monitoring could help them understand any issues. DOL officials stated that if DOD experiences challenges, more information could help DOL find a solution. Without monitoring timelines, DOD is not positioned to identify the nature and extent of any problems, make any improvements, or communicate such issues to DOL. GAO recommends that DOD monitor timelines associated with significant FECA claims-management actions to identify the extent to which delays may occur and any known reasons, and communicate with DOL as appropriate. DOD agreed with the recommendation. |
Yemen is an important U.S. partner that faces significant humanitarian, economic, and security challenges. As figure 1 shows, Yemen is strategically located, sharing a land border with Saudi Arabia, a key U.S. ally, and a maritime border with a critical shipping lane connecting the Red Sea and the Arabian Sea. The most impoverished country in the Middle East and North Africa region, Yemen is experiencing a rapidly growing population, which is estimated at about 25 million; increasing scarcity of natural resources, including water, and its primary export— oil—in steady decline; extremely high unemployment; and dwindling revenues that decrease the government’s ability to fund basic operations. Internal conflicts have displaced over 430,000 Yemenis from their communities, and a December 2012 United Nations report found that nearly half of Yemen’s population had limited or no access to sufficient food. Moreover, Yemen is a safe haven for the terrorist group AQAP, which the June 2011 National Strategy for Countering Terrorism identifies as a sustained threat to the United States with both the intent and capability to plan attacks against the U.S. homeland and U.S. partners. Adding to these challenges, Yemen’s history has been marked by serious political tensions, including civil war, secessionist movements, and conflict between the government and various tribes. As shown in figure 2, in early 2011, mass protests began against the 33-year regime of President Ali Abdullah Saleh. Saleh’s government responded by cracking down on protestors and clashing with troops that had defected to side with the protest movement. As the Yemeni government focused on suppressing upheaval in the capital, AQAP was able to take advantage of the situation by seizing control of portions of southern Yemen. In late 2011, after months of political unrest, Saleh signed a Gulf Cooperation Council–proposed agreement outlining a transfer of power to his vice president, Abdo Rabu Mansour Hadi. Hadi was elected president in February 2012, beginning a 2-year transition process that is intended to lay the groundwork for national elections in February 2014. According to State, the overarching objective of U.S. policy in Yemen is a successful democratic transition that promotes political, economic, and security sector reforms that will enable the Yemeni government to respond to the needs and aspirations of the Yemeni people. Following the November 2011 transition agreement, the U.S. government developed a comprehensive new strategy to support the U.S. policy objective for Yemen. U.S. agencies are using this strategy to guide assistance activities during the 2-year transition period (2012–2014) outlined in the Gulf Cooperation Council–sponsored transition agreement. The primary agencies providing assistance to Yemen in support of the U.S. strategy are State, DOD, and USAID. Figure 3 illustrates the five strategic goals of the U.S. strategy and identifies which goals each agency is providing assistance to support. Between fiscal years 2007 and 2012, State, USAID, and DOD allocated more than $1 billion in assistance for Yemen. USAID and State have provided civilian assistance focused on addressing Yemen’s humanitarian, economic, and political needs, while DOD and State have provided security assistance focused primarily on building Yemeni counterterrorism capacity. Overall, civilian assistance has constituted approximately 51 percent ($518 million) of the total $1.01 billion in U.S. assistance, with security assistance constituting the remaining 49 percent ($497 million). As figure 4 shows, overall U.S. assistance funding increased annually between fiscal years 2008 and 2010, declined significantly in fiscal year 2011 because of Yemen’s political turmoil and insecure environment, and then rose again in fiscal year 2012. The three U.S. assistance programs in Yemen receiving the largest amount of allocated funds over the last 6 fiscal years are USAID’s FFP program, which provides emergency food aid, and DOD’s Section 1206 and 1207(n) programs, which provide Yemeni security forces with training and equipment for counterterrorism operations. From fiscal year 2007 through 2012, USAID allocated $110 million for Yemen through the FFP program, while DOD allocated $361 million for its Section 1206 and 1207(n) programs. Together, these programs account for 46 percent ($471 million of $1.01 billion) of total U.S. assistance to Yemen over this period. See appendix II for further information on U.S. funds allocated to these programs. In addition to the United States, bilateral and multilateral donors have provided or pledged billions of dollars in assistance to Yemen. Data from the Organisation for Economic Co-operation and Development show that between 2007 and 2011, more than 35 bilateral and multilateral donors disbursed about $2.7 billion in official development assistance for Yemen. Further, in 2012, donors pledged over $7 billion more in support of Yemen’s transition and development. This included a pledge of about $3.3 billion from Saudi Arabia, which State officials identified as the single largest contributor of aid to Yemen. State officials also noted that Saudi Arabia provided Yemen with approximately $2 billion in petroleum products earlier in 2012 to help ease fuel shortages caused by attacks on key pipelines. Yemeni officials with whom we met stated that coordination of donor contributions is challenging but has improved over time. A senior Yemeni official explained that, of the various bilateral and multilateral donors providing assistance to Yemen, some coordinate and pool their resources with other donors before making contributions, but others do not. To address this, the Yemeni government has developed a mechanism to align donations with Yemen’s priority needs and minimize overlap. Additionally, Yemeni officials stated that the government plans to reallocate its own resources to address needs unmet by donor contributions. Progress toward U.S. strategic goals for Yemen has been mixed, according to agency officials, agency documents, and international organizations. Specifically, in regard to the strategic goals: (1) the government transition in Yemen remains an ongoing process; (2) although there have been some positive developments to strengthen governance, the Yemeni government’s ability to provide basic services is limited; (3) the humanitarian situation remains unstable; (4) the economy has improved somewhat since 2011 but faces major challenges; and (5) the security situation has improved in some respects but remains volatile. The government transition in Yemen remains an ongoing process. As part of the Gulf Cooperation Council–brokered transition agreement signed in November 2011, the Yemeni government committed to hold early presidential elections within 90 days, convene an inclusive national dialogue conference, reform the constitution and electoral system, reorganize the military, and hold general elections within 2 years of inaugurating a new president—which took place in February 2012 with the inauguration of Abdo Rabu Mansour Hadi. President Hadi has since passed several reforms to restructure Yemen’s military and security institutions and removed many former regime elements from power. However, the national dialogue conference—a key step in the transition process—has been delayed from November 2012 to March 2013. This delay has affected other important steps in the transition process that are contingent upon the conference being held, such as the formation of a constitutional committee and the development of a new or revised constitution. Table 1 provides examples of U.S. assistance supporting the government transition in Yemen. Although there have been some positive developments, the Yemeni government’s ability to provide basic services remains limited. According to a 2012 Yemeni government report, there were acute weaknesses in the level of basic services available to Yemenis even prior to the political unrest in 2011, with only 42 percent of the population receiving electricity, 35 percent receiving security and legal services, 26 percent receiving water supplies, and 16 percent receiving sanitation services. The political unrest contributed to further reductions in available government services. State noted that there continue to be severe strains on the Yemeni government’s ability to provide public funds and government services throughout the country. For example, a United Nations report stated that the health of 1 million people has been compromised due to the dysfunctional health system in Yemen—700,000 children under 5 years of USAID officials in Yemen noted that age and 300,000 pregnant mothers.President Hadi has made commitments to respond to citizens’ grievances. For example, in January 2013, he established two committees to address land disputes and resolve cases of early dismissal or retirement of civil, security, and military personnel in the southern provinces, where grievances have persisted since the civil war in 1994. Table 2 provides examples of U.S. assistance to strengthen governance in Yemen. The humanitarian situation in Yemen remains unstable as a result of armed conflict, civil unrest, reduction of basic social services, and rising cost of living. State reported in September 2012 that there were over 550,000 internally displaced persons in Yemen, an increase of nearly 150,000 from the previous year—in part a result of the large number of people fleeing areas experiencing an increase in armed conflict, such as the towns that AQAP had seized in the south. The number of internally displaced persons has since declined to about 430,000 as a result of stabilizing conditions in parts of Yemen, but, according to United Nations officials we spoke with in Yemen, some of those returning home are finding that their property has been damaged and their homes demolished or booby-trapped. Additionally, a December 2012 United Nations report found that over half the Yemeni population was without access to safe water, nearly half the population had limited or no access to sufficient food, and child malnutrition had increased almost 80 percent in 2 years to nearly 1 million children. Table 3 provides examples of U.S. assistance providing humanitarian relief in Yemen. Yemen’s economy has improved somewhat since 2011 but faces continuing challenges. According to the International Monetary Fund, economic activity in Yemen fell by 10 percent and inflation rose to 23 percent in 2011 as a result of the civil unrest, which limited the availability of basic commodities, bank financing, and imports. The International Monetary Fund subsequently reported in December 2012 that the Yemeni economy had improved since 2011 and that the exchange rate had returned to levels experienced prior to the 2011 unrest. Additionally, according to the World Food Program, the inflation rate had dropped to less than 5.5 percent in December 2012. Also, USAID reported that some gains have been made in improving educational opportunities, increasing school enrollment rates, and decreasing dropout rates, though there is still a reported 50 percent adult literacy rate—73 percent for men and 35 percent for women. Other economic challenges include reduced government revenues and disrupted services due to continuing attacks on oil pipelines and electricity transmission lines, as well as the anticipated depletion of oil reserves—the source of 60 percent of the Yemeni government’s revenue—within a decade. Table 4 provides examples of U.S. assistance intended to support economic development in Yemen. The security situation in Yemen has improved in some respects, but remains unstable. Specifically, State, DOD, and Yemeni officials stated that the new administration led by President Hadi has been more aggressive in countering AQAP than the previous administration. Of particular note, in June 2012, a Yemeni military offensive conducted in conjunction with tribal militias in southern Yemen removed AQAP from regions where it had seized control during the civil unrest in 2011. However, DOD officials stated that AQAP continues to conduct attacks against the Yemeni government and remains a threat to the United States, and according to a senior Yemeni MOD official, AQAP’s decision to change tactics from seizing and holding territory to conducting targeted assassinations of Yemeni government officials, including in Sana’a, constitutes a major security challenge. In addition to AQAP, other destabilizing elements are active in Yemen. For example, a senior Yemeni MOD official cited the Houthi tribe based in northern Yemen as another security challenge. Similarly, in January 2013, the U.S. ambassador to Yemen stated that Iran was destabilizing the region by assisting secessionists in southern Yemen. As of November 2012, State described the threat level in Yemen as “extremely high” due to terrorist activities and civil unrest. As indicators of the continuing tenuous security environment in Yemen, State noted the mob attack on the U.S. embassy compound in September 2012, the murders of several U.S. citizens in 2012, a growing trend in violent crime, and continuing piracy near Yemen’s shores. Table 5 provides examples of U.S. assistance supporting improvements to security and combating AQAP in Yemen. Although USAID data indicate that the FFP program in Yemen has generally exceeded annual performance targets, reporting to Congress regarding this program has various weaknesses, and DOD has not yet evaluated its Section 1206 and 1207(n) assistance programs in Yemen. Nearly 50 percent—$471 million of $1.01 billion—of U.S. assistance to Yemen since 2007 has been allocated through FFP and Section 1206 and 1207(n) programs. While USAID data indicate that, between fiscal years 2008 and 2011, FFP exceeded annual performance targets three times for the number of individuals in Yemen benefiting from food donations, reports to Congress about the program have lacked timeliness, accuracy, clarity, and consistency.1206 and 1207(n) programs, DOD has cited security concerns in Yemen as preventing it from evaluating the programs’ progress in building With regard to Section Yemeni counterterrorism capacity. Consequently, limited information exists for decision makers to use in conducting oversight of these assistance programs and making future funding decisions. Data from USAID indicate that FFP—the largest U.S. civilian assistance effort in Yemen—has generally exceeded its targets; however, reports to Congress regarding FFP’s efforts in Yemen have lacked timeliness, accuracy, clarity, and consistency. As noted earlier, USAID allocated $110 million through FFP between fiscal years 2007 and 2012— approximately one-fifth of the $518 million in total civilian assistance to Yemen over this period. Of this $110 million, USAID allocated approximately $90 million (about 81 percent) to support donations of U.S. agricultural commodities. As shown in figure 5, data from FFP indicate that the program exceeded its annual target for the number of beneficiaries in Yemen of food donations funded in fiscal years 2008, 2009, and 2011, while missing its target in fiscal year 2010. These data also show that the donations of food that FFP funded between fiscal years 2008 and 2011 reached a total of about 920,000 beneficiaries in However, we Yemen, exceeding the aggregate target of about 887,000.have reported that obtaining accurate food delivery data in some high-risk areas can be challenging because of security restrictions and limited resources to conduct monitoring. The Food for Peace Act mandates an annual report to Congress no later than April 1 of each year regarding each food donation activity carried out under the globally focused FFP program. USAID addresses this mandate through the annual International Food Assistance Report, which is the primary reporting mechanism for informing Congress of FFP progress made in Yemen. However, these reports lack timeliness, accuracy, clarity, and consistency. Such weaknesses provide Congress with limited information to assist in its oversight of FFP efforts. Timeliness. The 2011 International Food Assistance Report, which was due to Congress on April 1, 2012, has yet to be delivered to Congress, though according to USAID officials they have provided a draft to the Department of Agriculture for final review. Additionally, as of February 2013, the 2012 report, which is due to Congress on April 1, 2013, had not yet been drafted. Accuracy. Some International Food Assistance Reports have not reported targets accurately. Following our request for data on FFP’s performance in Yemen, FFP officials found that the International Food Assistance Reports for fiscal years 2009 and 2010 reported incorrect targets for Yemen. An FFP official attributed these misreported targets to a database error that resulted in the number of planned recipients being double-counted. While FFP provided us with corrected targets for use in our analysis of FFP’s progress in Yemen, it has not yet reported the corrected figures to Congress. Clarity. The International Food Assistance Report includes various types of data that are not clearly defined and could be misinterpreted. For instance, the report includes data on recipients without stating that these data reflect the number of planned recipients in Yemen for the reported year—a target—as opposed to the number of actual recipients. Additionally, although they appear directly next to the number of planned recipients, figures on metric tons of food delivered to Yemen and the associated cost represent actual values, not planned values, but are not marked as such. Consistency. The International Food Assistance Report uses inconsistent measures for reporting planned and actual results. The report uses the number of planned recipients as targets but measures actual performance in metric tons and cost. This makes it impossible to draw an accurate comparison and prevents an evaluation of the extent of progress made in achieving the planned results. Two DOD programs account for the vast majority of U.S. security assistance to Yemen; however, DOD has yet to evaluate their effectiveness in building Yemeni counterterrorism capacity. As noted earlier, of the $497 million in total security assistance allocated to Yemen between fiscal years 2007 and 2012, DOD allocated over 70 percent ($361 million) to its Section 1206 and 1207(n) programs. DOD has used this funding to provide various types of equipment and training to Yemeni security forces. Specifically, through its Section 1206 program, DOD has assisted several components of the Yemeni MOD. For example, DOD has provided vehicles, communications equipment, and other support to the Yemeni Border Security Force to enhance Yemen’s capability to detect and detain terrorists along its borders; helicopters, maintenance, and surveillance cameras to Yemen’s Air Force to support counterterrorism operations; and weapons, ammunition, and boats to Yemen’s special operations forces to build their counterterrorism capacity. Similarly, DOD’s Section 1207(n) program aims to enhance the ability of the Yemeni MOI to conduct counterterrorism activities, providing radios, vehicles, training, and, as shown in figure 6, weapons. See appendix III for a complete list of Section 1206 and 1207(n) efforts in Yemen by fiscal year. According to federal internal control standards, agencies should have control activities in place, such as performance reviews, to ensure that government resources are achieving effective results. In April 2010, we found that DOD had not evaluated the effectiveness of its global Section 1206 program and recommended that DOD develop a plan to monitor and evaluate Section 1206 project outcomes. In 2012, in response to our recommendation, DOD developed and validated an assessment process to determine the effectiveness of its Section 1206 and 1207(n) assistance in building partner capacity. This process involves DOD sending officials and subject-matter experts from Washington, D.C., or the relevant geographic combatant command to the country under evaluation. According to DOD, a key element of the assessment process is observing and interviewing members of the individual units receiving Section 1206 or 1207(n) assistance to determine the extent to which the assistance developed their capability. In fiscal year 2012, DOD piloted its assessment process in Georgia and the Philippines and conducted assessments in Djibouti, Tunisia, and Poland. DOD recognizes that assessing Section 1206 and 1207(n) assistance enables the U.S. government to make better decisions about the types of projects that bring the greatest return on investment in terms of accomplishing counterterrorism missions and achieving the capabilities and performance intended through the assistance. However, although Yemen has received more Section 1206 and 1207(n) assistance than any other country, DOD has yet to evaluate these programs to determine their effectiveness in developing the counterterrorism capacity of the Yemeni security forces receiving assistance. DOD headquarters officials attributed this to safety and security concerns, explaining that, given the unstable security environment in Yemen, it is not feasible at this time to send officials to Yemen to observe or interview members of the individual units receiving Section 1206 or 1207(n) assistance. DOD officials stated that once the security situation in Yemen improves, they plan to evaluate Section 1206 and 1207(n) projects using their newly developed assessment process. U.S. assistance efforts in Yemen face two significant types of challenges.complicated U.S. efforts to train and assess the capability of Yemeni security forces, restricted oversight of civilian assistance projects, and endangered Yemeni staff who play a key role in providing assistance. Second, because of political divisions within the Yemeni government, key recipients of U.S. security assistance made limited use of this assistance until recently to combat AQAP in support of the U.S. strategic goal of improving Yemen’s security. Yemen’s difficult security environment continues to challenge U.S. assistance efforts. Our February 2012 report noted that Yemen’s deteriorating security situation caused DOD to suspend the majority of its security assistance activities in 2011 and restricted the ability of USAID program implementers to access remote sections of the country, thereby leading USAID to shift its focus to providing civilian assistance in large urban areas with a more secure and accessible working environment. According to U.S. and Yemeni officials and implementing partners we met with during our October 2012 fieldwork in Yemen, insecure conditions remain the primary impediment to U.S. assistance activities. U.S. officials cited several areas in which this challenge has affected U.S. efforts: Constrained ability to train and assess capability of Yemeni security forces. We reported in February 2012 that DOD stopped the training component of its assistance in 2011 because it was no longer safe for U.S. instructors to be in Yemen. While security-related constraints on providing training remain, DOD has taken steps to mitigate the effect of the security environment on its training activities by conducting training outside of Yemen. For example, DOD arranged for Yemeni personnel to receive helicopter training in Texas and plans to provide training on a fixed-wing aircraft in Spain in early 2013. DOD officials stated, however, that because of the unstable security environment, the level of DOD staffing in Yemen remains lower than it was prior to the unrest of 2011. As a result, there are currently too few DOD personnel present in Yemen to embed with Yemeni security forces, thereby limiting DOD’s ability to assess the extent to which U.S. security assistance has improved the capability of these forces. DOD officials explained that before the unrest of 2011, DOD personnel were embedded with the Yemeni units receiving U.S. training and equipment, which facilitated their ability to collect real- time information on the units’ capabilities. However, these officials stated that no DOD personnel have been embedded with Yemeni security forces since 2011. Similarly, as noted earlier, officials based in Washington, D.C., who manage DOD’s Section 1206 and 1207(n) programs stated that, because of security conditions in Yemen, they are currently unable to travel there to assess the extent to which this assistance has increased the units’ capacity. Oversight of civilian assistance programs restricted. In March 2011, the USAID Inspector General reported that security-related travel restrictions in Yemen had severely limited the monitoring and oversight of project activities. During our October 2012 fieldwork in Yemen, USAID officials stated that the security situation continues to prevent USAID staff from accessing areas of the country outside of the capital to conduct monitoring and evaluation of civilian assistance activities. To address this challenge, USAID has employed a contractor that hires Yemeni staff to monitor assistance efforts in other urban areas that U.S. officials are unable to access. However, as noted below, Yemeni nationals are also subject to significant security risks, and as the USAID Inspector General reported in March 2011, the tribal affiliations of Yemeni staff may make it difficult for them to travel to parts of the country controlled by rival tribes. Locally employed Yemeni staff endangered. According to senior officials at the U.S. embassy in Sana’a, locally employed Yemeni staff members play a critical role in embassy operations—including in U.S. assistance activities—and provide extremely valuable “institutional memory.” However, these individuals face considerable risks as a result of their association with the U.S. government, as demonstrated by the October 2012 murder of a Yemeni national who was a longtime embassy employee and other instances of intimidation. Locally employed staff with whom we met during our October 2012 trip to Yemen expressed concerns about their safety, with several individuals citing the threats to them and their families as a serious disincentive to continuing their employment at the embassy. According to USAID, the embassy has since provided training in countersurveillance and personal security to several hundred locally employed staff. However, the embassy has deemed other steps proposed by locally employed staff, including telework and the option of working from implementing partners’ offices, to be unsuitable. According to DOD, leadership and coordination challenges in Yemeni security ministries have led to limited use of some U.S. security assistance. DOD officials stated that, until recently, key recipients of U.S. equipment and training in Yemen had conducted few counterterrorism operations since the outbreak of political hostilities in Yemen in early 2011. DOD officials attributed this in part to opposition to the Hadi administration among some leaders at key Yemeni security ministries. Specifically, according to DOD, two counterterrorism units—one each within the Yemeni MOD and MOI—have been among the largest recipients of U.S. security assistance. However, DOD officials noted that MOI’s counterterrorism unit played a limited role in attacking AQAP strongholds in southern Yemen, while MOD’s counterterrorism unit did not make any contribution to those operations. DOD officials stated that this limited involvement was due in part to the nature of the conflict against AQAP—an effort to regain control of territory that was more suited to a response by conventional military forces. However, they added that the MOI and MOD counterterrorism units were under the leadership of the former president’s supporters at the time of the operations against AQAP and were consequently unwilling to strongly support the new president’s counterterrorism initiatives. Coordination challenges between MOD and MOI have further limited MOI’s ability to participate in counterterrorism operations. DOD noted that MOI has had difficulty receiving replacement parts, equipment, and vehicles from the MOD logistics system, hindering its ability to conduct counterterrorism operations outside of the Yemeni capital. For example, although the United States has provided MOD with spare parts for Humvee vehicles to share with MOI, a senior MOI official stated that MOD has not done so, resulting in MOI’s inability to maintain and use its U.S.- provided Humvees as intended, as shown in figure 7. Similarly, U.S. and Yemeni officials stated that although the United States has provided helicopters for both MOD and MOI to use in counterterrorism operations, MOD does not give MOI access to the helicopters in a timely fashion. Specifically, a senior MOI official stated that MOD takes approximately 3 months to respond to MOI requests for access to the helicopters, which are based at an MOD facility. The official explained that the length of time it takes MOD to approve MOI’s requests is not conducive to conducting time-sensitive counterterrorism operations. According to DOD officials, recent actions by the Yemeni government have addressed some of these challenges. In December 2012, President Hadi announced a number of decrees to, among other things, remove several key leaders of Yemeni security forces units—including the heads of the MOD and MOI counterterrorism units—from their current positions. DOD officials stated that, as of February 2013, a new official had taken command of the MOD counterterrorism unit, which had also increased its involvement in counterterrorism operations. In addition, the current head of the MOI counterterrorism unit had agreed to step down. President Hadi’s decrees also called for further reorganization of the Yemeni security ministries—specifically, consolidating the MOD and MOI counterterrorism units under a newly created Yemeni special operations command under MOD. As of February 2013, this new special operations command had been formed, according to DOD, and was overseeing the MOD counterterrorism unit, while planning was under way for the MOI counterterrorism unit to be absorbed under the new command. DOD noted that, as of February 2013, the Yemeni government had yet to develop a timeline to complete the consolidation. AQAP terrorists based in Yemen are a continuing national security threat to the United States—a threat exacerbated by Yemen’s fragile economic, social, and political situation. In response, U.S. agencies have invested more than $1 billion in security and civilian assistance since 2007 in support of U.S. strategic goals for Yemen. While some progress has been made toward these goals, significant uncertainties remain regarding Yemen’s future, underscoring the possibility that Yemen will need further U.S. assistance as it navigates a difficult transition process. However, USAID’s reporting to Congress regarding FFP—the largest U.S. civilian assistance program—has been inaccurate, unclear, and inconsistent. Moreover, despite the $361 million investment in Section 1206 and 1207(n) assistance since 2007, DOD has not yet evaluated the progress these programs have made in building Yemeni counterterrorism capacity and, because of security conditions, has not established a time frame for completing such an evaluation. As a result, decision makers lack the information necessary to adequately assess the three largest U.S. assistance programs in Yemen. This limited information inhibits decision makers’ ability to oversee these programs, assess their contribution to U.S. goals, and consider program performance when making future funding decisions. To enable congressional and agency oversight of U.S. assistance programs in Yemen, inform future funding decisions, and enhance U.S. assistance efforts, we are making the following three recommendations: First, we recommend that the Administrator of USAID improve reporting to Congress on FFP efforts in Yemen, such as by improving the accuracy, clarity, and consistency of data reported. Second, until DOD is able to conduct an assessment of the Section 1206 program in Yemen, we recommend that the Secretary of Defense collect and analyze available data regarding the extent to which Section 1206 assistance has built the capacity of Yemeni security forces, such as information from U.S. personnel posted in Yemen or Yemeni government officials. Third, until DOD is able to conduct an assessment of the Section 1207(n) program in Yemen, we recommend that the Secretary of Defense collect and analyze available data regarding the extent to which Section 1207(n) assistance has built the capacity of Yemeni security forces, such as information from U.S. personnel posted in Yemen or Yemeni government officials. We provided a draft of this report to State, DOD, USAID, the Departments of Homeland Security and Justice, the National Security Staff, the Office of the Director of National Intelligence, and the Central Intelligence Agency for their review and comment. DOD and USAID provided written comments, which we have reprinted in appendixes IV and V, respectively. DOD, USAID, State, and the National Security Staff also provided technical comments, which we incorporated as appropriate. The Departments of Homeland Security and Justice, the Office of the Director of National Intelligence, and the Central Intelligence Agency did not provide comments. DOD concurred with our recommendations to collect and analyze available data on the extent to which Section 1206 and 1207(n) assistance has built the capacity of Yemeni security forces. DOD also noted its intent to develop baseline assessments to accompany its Section 1206 project proposals for fiscal year 2014. USAID concurred with our recommendation to improve reporting to Congress on FFP efforts in Yemen, noting that it has already taken several steps to address the timeliness, accuracy, clarity, and consistency of the International Food Assistance Report. USAID added that it expects the International Food Assistance Report to remain limited in its usefulness for gauging progress in any specific country, stating that such country-specific issues will be addressed through periodic briefings and other updates to Congress. We maintain that any information USAID conveys to Congress on FFP efforts in Yemen, whether through the International Food Assistance Report or other means, should be timely, accurate, clear, and consistent. We are sending copies of this report to the appropriate congressional committees, State, DOD, USAID, the Departments of Homeland Security and Justice, the National Security Staff, the Office of the Director of National Intelligence, and the Central Intelligence Agency. 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) 512-7331 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 key contributions to this report are listed in appendix VI. To determine the extent of progress made toward U.S. strategic goals for Yemen, we reviewed relevant documents from the Departments of State (State) and Defense (DOD) and the U.S. Agency for International Development (USAID), including strategy and planning documents, fact sheets, and progress reporting. Additionally, we examined the Gulf Cooperation Council–negotiated transition agreement for Yemen, as well as relevant documents from U.S. implementing partners, the United Nations, the World Bank, the International Monetary Fund, and the Yemeni government. We did not consider any covert programs that the United States may fund in Yemen. To assess the extent of progress made by USAID’s Food for Peace (FFP) program and DOD’s Section 1206 and 1207(n) programs in Yemen, we analyzed funding data on all U.S. assistance activities in Yemen to determine allocations for these civilian and security assistance programs in Yemen since fiscal year 2007. To assess FFP’s progress in Yemen, we compared USAID data on the number of actual beneficiaries to the number of planned recipients as identified in annual reports jointly submitted to Congress by USAID and the Department of Agriculture regarding U.S. food assistance. Recipients and beneficiaries are related but distinct; specifically, recipients are individuals who receive food assistance rations, while beneficiaries are individuals who benefit from food assistance rations. For example, in a food-for-work program, only one person—the recipient—actually receives targeted food assistance, but other members of the recipient’s family or community may benefit from that individual’s participation in the program, making them all beneficiaries. Given the distinct meanings of the two terms, USAID cautioned that a comparison of actual beneficiaries and planned recipients is generally not advisable for FFP efforts. However, USAID noted that the nature of the FFP programs conducted in Yemen to date is To assess the extent such that the terms can be used interchangeably.of progress made by the Section 1206 and 1207(n) programs in Yemen, we reviewed DOD documents relevant to its new process for assessing Section 1206 and 1207(n) assistance and prior GAO reporting. To identify the key challenges to U.S. assistance efforts in Yemen, we reviewed relevant documents from State, DOD, and USAID, including strategy and planning documents, fact sheets, cables, and progress reporting. We also examined several reports by the USAID Inspector General, including audits and a risk assessment of USAID activities in Yemen, as well as prior GAO reporting. Additionally, we discussed our objectives with State, DOD, USAID, National Security Staff, and intelligence community officials in the Washington, D.C., area. To obtain a more in-depth understanding of U.S. assistance efforts in Yemen, we also conducted fieldwork in Sana’a, Yemen, in October 2012, during which we met with State, DOD, and USAID officials; U.S. implementing partners; and representatives of the Yemeni Ministries of Interior, Defense, and Planning and International Cooperation. To update data on allocations, unobligated balances, unliquidated obligations, and disbursements for the FFP and Section 1206 and 1207(n) programs as reported in appendix II, we collected and analyzed relevant funding data from State and DOD. Differences between FFP funding totals shown in figure 8 of this report and the FFP funding are due to the information presented in our February 2012 reportfollowing factors: Totals in this report are more current and include actual values for fiscal year 2012 rather than estimates. Totals in this report include funds from the International Disaster Account that were programmed by FFP in fiscal years 2011 and 2012. Differences between Section 1206 and 1207(n) funding totals shown in figure 9 of this report and the Section 1206 funding information in our February 2012 report are due to the following factors: Totals in this report are more current and include actual values for fiscal year 2012 rather than estimates. Our February 2012 report included data current as of September 30, 2011. Consequently, it did not include data on the Section 1207(n) program, which was not established until the National Defense Authorization Act for Fiscal Year 2012 was enacted on December 31, 2011. DOD considers Section 1206 funding to be disbursed once it awards a contract. If the final cost of the contract at the time of completion is different than the expected cost of the contract at the time of award, the amount of funding that DOD considers disbursed changes accordingly. To determine the reliability of the data we collected on the amount of U.S. assistance to Yemen and the number of targeted recipients and actual beneficiaries of FFP assistance in Yemen, we compared and corroborated information from multiple sources; checked the data for reasonableness and completeness; and interviewed cognizant officials regarding the processes they use to collect and track the data. We did not audit the funding data and are not expressing an opinion on them. On the basis of checks we performed and our discussions with agency officials, we determined that the data we collected on the amount of U.S. assistance to Yemen and the actual number of beneficiaries in Yemen of FFP assistance were sufficiently reliable for the purposes of this engagement. With regard to the number of targeted recipients of FFP assistance in Yemen, we note in this report that annual reporting to Congress regarding FFP for fiscal years 2009 and 2010 did not accurately communicate FFP’s targets for Yemen. Consequently, we collected corrected data on FFP’s targets for Yemen to use in our assessment of the program’s progress. We determined these corrected data to be sufficiently reliable for the purposes of this engagement. We conducted this performance audit from June 2012 to March 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. From fiscal year 2007 through 2012, the U.S. Agency for International Development (USAID) allocated $110 million for Yemen through its FFP program. Figure 8 shows the increase in annual FFP funding to Yemen over this period. Between fiscal years 2007 and 2012, the Department of Defense (DOD) allocated $361 million for Section 1206 and 1207(n) assistance to Yemen. As shown in figure 9, funding for these programs has fluctuated over the For example, no Section 1206 allocation was made in fiscal year years.2011 because of the political unrest that began in Yemen early that year. In contrast, the Section 1206 allocation for fiscal year 2010 and the combined allocation of Section 1206 and 1207(n) assistance in fiscal year 2012 each exceeded $100 million. Between fiscal years 2007 and 2012, the Department of Defense (DOD) allocated $361 million in counterterrorism training and equipment to Yemeni security forces through its Section 1206 and Section 1207(n) security assistance programs. Table 6 below identifies the efforts that DOD undertook using Section 1206 and 1207(n) funding as well as the specific capabilities DOD planned to build through these efforts. 1. We modified our report to remove all references to the Global Security Contingency Fund. 2. We modified our report to clarify that the discussion of key challenges to U.S. assistance efforts is not specific to Section 1206 or Section 1207(n) assistance but instead applies to all U.S. assistance efforts. In addition to the contact named above, Jason Bair (Assistant Director), Aniruddha Dasgupta, Brandon Hunt, Kendal Robinson, Karen Deans, Mark Dowling, Etana Finkler, Justin Fisher, Bruce Kutnick, Marie Mak, Mary Moutsos, and Jeremy Sebest made key contributions to this report. Cynthia Taylor provided technical assistance. | The terrorist group AQAP, one of the top threats to U.S. national security, is based in Yemena country facing serious economic and social challenges and undergoing a difficult political transition following civil unrest in 2011. Since 2007, State, DOD, and USAID have allocated over $1 billion in assistance to help Yemen counter AQAP and address other challenges. The three largest U.S. assistance programs in Yemen are USAIDs Food for Peace program, which has provided emergency food aid, and DODs Section 1206 and 1207(n) programs, which have provided training and equipment to Yemeni security forces. In response to a Senate report that directed GAO to review U.S. assistance to Yemen, and following up on GAOs February 2012 report on the types and amounts of such assistance, GAO examined (1) the extent of progress made toward U.S. strategic goals for Yemen, (2) the extent of progress made by the Food for Peace and Section 1206 and 1207(n) programs, and (3) key challenges to U.S. assistance efforts. GAO reviewed agency documents and met with U.S. and Yemeni officials and implementing partners in Washington, D.C., and Sanaa, Yemen. Progress toward U.S. strategic goals for Yemen has been mixed. The Departments of State (State) and Defense (DOD) and the U.S. Agency for International Development (USAID) have conducted numerous civilian and security assistance activities in support of these strategic goals. Although some progress has been made since the civil unrest in 2011, obstacles remain to achieving each goal. For example, while there has been an orderly political transition to a new president, key milestonessuch as convening a national dialogue to promote reconciliationhave been delayed. In addition, while Yemeni security forces have retaken territory seized by al Qaeda in the Arabian Peninsula (AQAP) in 2011, the security situation remains unstable. USAID data indicate that the Food for Peace program exceeded most of its annual targets between fiscal years 2008 and 2011 for the number of individuals in Yemen benefiting from food donations. However, reports to Congress about the program have lacked timeliness, accuracy, clarity, and consistency. With regard to the Section 1206 and 1207(n) programs, DOD has developed an evaluation process to assess the programs effectiveness but has not conducted an evaluation in Yemen, citing security concerns. Consequently, limited information exists for decision makers to use in conducting oversight of these assistance programs and making future funding decisions. Security conditions and political divisions in Yemen pose key challenges to U.S. assistance efforts. First, Yemens unstable security situation constrains U.S. training of Yemeni security forces, restricts oversight of civilian assistance projects, and endangers Yemeni nationals who work for the United States. For example, a Yemeni employee of the U.S. embassy was murdered in October 2012, and other Yemeni staff at the embassy, as well as their families, face threats. Second, because of leadership and coordination challenges within the Yemeni government, key recipients of U.S. security assistance made limited use of this assistance until recently to combat AQAP in support of the U.S. strategic goal of improving Yemens security. However, according to DOD officials, recent actions by the Yemeni government to replace key leaders of security force units and reorganize security ministries have addressed some of these challenges. GAO recommends that USAID improve performance reporting on Food for Peace efforts in Yemen and that DOD collect and analyze data on the effectiveness of the Section 1206 and 1207(n) programs in Yemen until security conditions permit an evaluation of these programs. USAID and DOD concurred with GAOs recommendations. |
The F/A-22 is to be an air superiority and ground attack aircraft with advanced features to make it less detectable to adversaries (stealth characteristics) and capable of high speeds for long ranges. It is designed to have integrated avionics that greatly improve pilots’ awareness of the situation surrounding them. The objectives of the F/A-22 development program are to (1) design, fabricate, test, and deliver nine F/A-22 development test aircraft, two non-flying structural test aircraft, six production representative test aircraft, and 37 flight-qualified engines; (2) design, fabricate, integrate, and test the avionics; and (3) design, develop, and test the support and training systems. The F/A-22 is being developed under contracts with Lockheed Martin Corporation, the prime contractor (for the aircraft), and Pratt & Whitney Corporation (for the engine). Following a history of increasing cost estimates to complete the development phase of the F/A-22 program, the National Defense Authorization Act for Fiscal Year 1998 established a cost limitation for both the development and production. Subsequently, the National Defense Authorization Act of 2002 eliminated the cost limitation for the development, but left the cost limit for production cost in place. The production program is now limited to $36.8 billion. The current cost estimate of the development program is $21.9 billion. Currently, the F/A-22 program is in both development and production. Development is in its final stages, and low rate initial production has begun. Since fiscal year 1997, funds have been appropriated to acquire production aircraft, and the F/A-22 acquisition plan calls for steadily increasing annual production rates. The aircraft’s development problems and schedule delays have caused congressional concerns, particularly in light of DOD’s planned increase in production rates. The National Defense Appropriations Act for Fiscal Year 2003 prohibited the obligation of funds for the acquisition of more than 16 production aircraft in fiscal year 2003, until the Under Secretary of Defense for Acquisition, Technology, and Logistics submits the following to the congressional defense committees: (1) a formal risk assessment that identifies and characterizes the potential cost, technical, schedule, or other significant risks resulting from increasing the F/A-22 production quantities prior to the Dedicated Initial Operational Test and Evaluation (DIOT&E) of the aircraft and (2) either a certification that increasing the F/A-22 production quantity for fiscal year 2003 beyond 16 aircraft involves lower risk and lower total program cost than staying at that quantity or implementing a revised production plan, funding, and test schedule. In December 2002, DOD submitted the risk assessment and certification to Congress. The F/A-22 developmental program did not meet key performance goals established for fiscal year 2002 and continues to confront numerous technical challenges. Major technical problems include instability of the avionics software, violent movement, or “buffeting,” of vertical fins, overheating in portions of the aircraft, weakening of materials in the horizontal tail, and the inability to meet airlift support and maintenance requirements. Modifications are being made to some test aircraft to address some of these problems in preparation for operational testing. Nevertheless, these problems continue to restrict the performance and testing of the F/A-22. Software instability has hampered efforts to integrate advanced avionics capabilities into the F/A-22 system. Avionics control and integrated airborne electronics and sensors provide an increased awareness of the situation around the pilot. The Air Force told us that the avionics have failed or shut down during numerous tests of F/A-22 aircraft due to software problems. The shutdowns occur when the pilot attempts to use the radar, communication, navigation, identification, and electronic warfare systems concurrently. Although the plane can still be flown after the avionics have failed, the pilot is unable to successfully demonstrate the performance of the avionics. Therefore, the Air Force has had to extend the test program schedule. The Air Force recognized that the avionics problems pose a high technical risk to the F/A-22 program, and in June 2002 the Air Force convened a special team to address the problem. According to the team, the unpredictable nature of the shutdowns was not surprising considering the complexity of the avionics system. The team recommended that the software be stabilized in the laboratory before releasing it to flight testing. The team further recommended conducting a stress test on the software system architecture to reduce problems and ensure that it is operating properly. The Air Force implemented these recommendations. Further, the Air Force extended the avionics schedule to accommodate avionics stability testing and now plans to complete avionics testing in the first quarter of 2005. However, Air Force officials stated that they do not yet understand the problems associated with the instability of the avionics software well enough to predict when they will be able to resolve this problem. Under some circumstances, the F/A-22 experiences violent movement, or buffeting, of the vertical fins in the tail section of the aircraft. This occurs as air, moving first over the body and the wings of the aircraft, places unequal pressures on the vertical fins and rudders. Unless the violent movement is resolved or the fins strengthened, the vertical fins will break over time because the pressures experienced exceed the strength limits of the fins. In addition, the buffeting problem has restricted the testing of aerial maneuvers of the aircraft. Lockheed Martin has developed several modifications to strengthen the vertical fins and has performed an analysis to test the structural strength of the aircraft. It concluded that no flight restrictions above 10,000 feet are necessary as a result of buffeting. Currently, the Air Force has not begun testing to verify flight operations at or below 10,000 feet; operational limitations at altitudes below 10,000 feet remain in effect, with testing scheduled to begin in June 2003. Overheating in the rear portions of the aircraft has significantly restricted the duration of high-speed flight testing. As the F/A-22 flies, heat builds up inside several areas in of the rear of the aircraft. Continued exposure to high temperatures would weaken these parts of the aircraft. For example, a portion of the airframe that sits between the engines’ exhausts experiences the highest temperatures. This intense heat could weaken or damage the airframe. To prevent this heat buildup during flight testing, the aircraft is restricted to flying just over 500 miles per hour, about the same speed as a modern jet liner, and significantly below the supercruise requirement. Currently, the F/A-22 flies with temperature sensors in those areas of the aircraft, and it slows down whenever the temperature approaches a certain level. The Air Force may add copper sheets to the rear of the aircraft to alleviate the problem. The Air Force began these modifications in January 2003 and plans to complete them by July 2003. F/A-22 aircraft have experienced separations of materials in the horizontal tail and the shaft, which allows the tail to pivot. Because the separations reduce tail strength, the Air Force restricted flight testing of some aircraft until it determined that this problem would not affect flight safety during testing. The Air Force and the contractor initially believed that improvements to the aircraft’s manufacturing process would solve this problem. However, the Air Force has determined that it could only solve this problem by redesigning the tail of the aircraft. The Air Force plans to conduct flight testing of the redesigned tail between February 2004 and April 2004. The Air Force estimates it will not meet the F/A-22 airlift support requirement despite last year’s estimate that it would meet all identified key performance parameters. (Appendix I contains a list of key performance parameters.) The airlift support requirement is that 8 C-141 aircraft or their equivalents would be sufficient to deploy a squadron of 24 F/A-22s for thirty days without resupply. Today the Air Force estimates that 8.8 C-141 equivalents will be necessary. The F/A-22’s performance may also be affected by maintenance needs that exceed established objectives. The Air Force estimates that the F/A-22 should, at this point in its development, be able to complete 1.67 flying hours between maintenance actions and 1.95 flying hours by the end of development. However, aircraft are requiring five times the maintenance actions expected at this point in development. As of November 2002, the development test aircraft have been completing only .29 flying hours between maintenance actions. Therefore, the development test aircraft are spending more time than planned on the ground undergoing maintenance. In addition, the F/A-22 program has not completed the testing required to prove the aircraft can be maintained worldwide without unique support equipment. For example, the Air Force planned to fly the F/A-22 a minimum of 650 hours prior to the start of operational testing to establish that special support equipment is not necessary to maintain the materials on the exterior of the aircraft. These materials are critical to the aircraft’s low observable, or stealthy, nature. However, as of December 2002, the program has only accomplished 191.6 hours. According to the Air Force, the program will not complete testing for this requirement until the completion of the development program, currently planned for July 2004. In 2002, the F/A-22 development program implemented several modifications to development aircraft to improve performance. The majority of modifications were related to installing the necessary upgrades to complete operational testing. The last three development test aircraft have required an average of 63 modifications. The first two production aircraft have required an average of 50 of these upgrades. In addition, the program repaired problems in the aircraft’s arresting gear system that were discovered during development testing. Further, the Air Force has scheduled modifications to address the previously cited problems found with the vertical tail of the aircraft (fin-buffeting). The Air Force included these repairs in its 2002 modification schedule, but did not begin them in 2002. The modifications will begin during fiscal year 2003. Progress in F/A-22 flight testing was slower than expected in 2002 in all test areas, according to Office of the Secretary of Defense (OSD) testing officials. Consequently, the Air Force extended flight test schedules and reduced the number of flight tests. Many tasks originally planned for 2002 were rescheduled for 2003. Further, the Air Force now plans to conduct more developmental flight testing concurrently with operational testing. Continuing technical problems were the primary reasons for the delays in flight testing. In addition, late delivery of development aircraft to the flight test center was a contributing problem; three developmental aircraft were delivered from 9 to 12 months late. Late deliveries were due not only to technical problems, but also to continuing problems associated with the manufacture and assembly of development aircraft by the prime contractor. With the new schedule, the Air Force delayed the beginning of operational testing for 4 months, until the portion of developmental testing required to begin operational testing could be completed. Operational testing is now planned to begin in August 2003. Figure 1 and table 1 show the changes in the FA/-22 flight test schedules. However, according to OSD officials involved in operational testing, there is a high risk of not completing an adequate amount of development flight testing before operational testing is scheduled to begin. Indeed, we believe that it is unlikely that the Air Force will be able to complete all necessary avionics flight testing prior to the planned start of operational testing. Based on F/A-22 flight test accomplishment data and current flight test plans, we project that the start of operational testing might be delayed until January 2004. As a result, operational testing could be delayed by several months beyond the current planned date of August 2003. In December 2002, the Air Force estimated that development costs had increased by $876 million, bringing total development costs to $21.9 billion. This increase was due to the technical problems and schedule delays discussed earlier. In addition, since fiscal year 2001, there have been dramatic increases in planned funding for modernization upgrades that enhance the operational capabilities of the F/A-22, as shown in figure 2. Currently, the Air Force has almost $3.0 billion in funding for modernization projects, which it plans to spend through fiscal year 2009. Most of the recent increase in modernization funding is necessary to provide increased ground attack capability. Other modernization projects include upgrading avionics software, adding an improved short-range missile capability, upgrading instrumentation for testing, and incorporating a classified project. In December 2002, in response to the increase in development costs, the Under Secretary of Defense, Comptroller, approved the restructuring of the F/A-22 program. According to the Comptroller, the cost increase will not require increased funds from Congress. Rather, the estimated $876 million increase for development will be met by a $763 million decrease in production funding and a transfer of $113 million from modernization funds. This restructure eliminates 27 aircraft from the current production program, reducing the total number of aircraft to be acquired from 303 to 276. Despite continuing development problems and challenges, the Air Force plans to continue acquiring production aircraft at increasing annual rates. This is a very risky strategy, because, as we have previously reported, the Air Force may encounter higher production costs as a result of acquiring significant quantities of aircraft before adequate testing. Late testing could identify problems that require costly modifications in order to achieve satisfactory performance. For example, as shown in figure 3, the Air Force plans to acquire 20 aircraft during 2003, rather than the maximum of 16 Congress allowed without DOD’s submittal of a risk assessment and certification. DOD justified this strategy in the December 2002 risk assessment and certification it submitted to Congress. In this document, DOD certified that acquiring more than 16 aircraft involved lower risk and lower total program cost than acquiring only 16. DOD identified the costs associated with acquiring more than 16 aircraft per year as between $7 million and $221 million, depending on the number of aircraft in excess of 16. DOD concluded that this additional cost would be less than the potential cost of modifying production aircraft once operational testing has been completed. Figure 3 shows the Air Force’s acquisition plan. However, DOD’s risk assessment may be overly optimistic because it is grounded in the conclusion that there is a low risk that remaining development and operational testing will identify needs for expensive modifications. The performance capabilities of the F/A-22 and its schedule will remain uncertain until technical problems have been addressed, including testing of modifications or fixes necessary to potentially alleviate these problems. Furthermore, we believe that the amount of development and operational testing and the remaining uncertainties increase the possibility that modifications considered unlikely in DOD’s analysis will, indeed, need to be made. For example, the Air Force has still not completely defined the fin-buffet problem described earlier in this report. The remaining 15 percent of flight testing to help characterize the problem is not scheduled to begin until June 2003. Consequently, there is still the possibility that additional modifications and costs may be necessary to correct this problem on production aircraft. DOD’s risk assessment acknowledges that additional fin buffet testing is needed, but concludes that modifications are not expected. The optimism of DOD’s risk assessment is reflected in the Air Force’s general acquisition strategy. As also shown by figure 3, the Air Force is currently committed to acquiring 73 production aircraft (26 percent) before operational and development testing is complete. We believe that— like the fiscal year 2003 decision to acquire more than 16 aircraft—this is an overly optimistic strategy given the remaining F/A-22 technical problems and the current status of testing. As we have noted, acquiring aircraft before completing adequate testing to resolve significant technical problems increases the risk of costly modifications later. If F/A-22 testing schedules slip further—as we believe is likely—even more aircraft will be acquired before development and operational testing is complete, and the risk of costly modifications will increase still more. Continuing the acquisition of aircraft in increasing quantities when significant development testing and technical problems remain is an acquisition strategy that relies on overly optimistic assumptions regarding the outcome and timing of the remaining testing events. By employing such a strategy, major problems are more likely to be discovered after production has begun when it is either too late or very costly to correct them. At the very least, key decisions are being made without adequate information about the weapon system’s demonstrated operational test results. In its certification, DOD quantified the estimated costs associated with a higher production rate. However, the potential advantage was predicated on the assumption that the risks of modifications are low. As we stated last year, by limiting F/A-22 production quantities and completing development testing, the Air Force could gain information that would reduce uncertainties and the risks of increased costs and delays before committing to additional production aircraft. As we discussed earlier in this report, DOD recently decided to reduce production quantities as part of a program restructure to address F/A-22 development problems and associated cost increases. Based on uncertainties about the resolution of problems found in the past year, we continue to maintain the position that production quantities should be limited. In light of continued uncertainties regarding the resolution of problems found in the past year and notwithstanding the December 2, 2002 certification provided by DOD, we recommend that the Secretary of Defense reconsider the Department’s decision to increase the annual production rate beyond 16 aircraft until greater knowledge on any need for modifications is established through completion of operational testing, and update the 2002 risk assessment and certification with sufficient detail to allow for verification of the conclusions following the completion of operational testing. In written comments on a draft of this report, DOD stated that it agreed, for the most part, with our description of the current state of the F/A-22 program’s content, schedule, and cost. However, DOD did not concur with our recommendation that it not increase its production rate beyond the maximum of 16 aircraft Congress allowed without DOD submitting a risk assessment and certification. DOD said that our recommendation does not sufficiently account for the costs of termination associated with the approval given to funding long-lead items, the manufacturing inefficiencies associated with a reduction in aircraft quantities, or the effects of inflation on the cost of acquiring aircraft at a lower rate. DOD also noted that we had not provided a quantitative assessment to justify limiting production, and it reiterated its reliance on the risk assessment and certification it submitted to Congress in December 2002. DOD also asserted, incorrectly, that our report concludes that minimal cost risk would be realized by slowing production. Following review of DOD’s comments, we clarified the recommendation in our draft report by establishing two recommendations. These recommendations are based on the current state of the program— including the challenges and risks it faces—and on our examination of DOD’s risk assessment and certification. DOD acknowledges the challenges faced by the program but believes the risk of modification is low. As we discussed in this report, until testing has been completed and technical problems have been addressed, the performance capabilities of the F/A-22 and its schedule will remain uncertain; thus, it is not possible to predict that expensive modifications will not be required. For example, as we stated earlier in this report, DOD’s risk assessment concludes that significant costs associated with a more extensive modification to resolve the fin buffet problem may be required, but the probability is low. DOD arrives at this conclusion even though the last phase of testing to help characterize the fin buffet problem has not yet begun. Furthermore, we continue to believe there is still significant risk that the F/A-22 program will not be able to begin operational testing as scheduled in August 2003. Subsequent to our providing the draft of this report to DOD for comment, OSD’s operational test and evaluation office issued a report stating that F/A-22 technical and schedule risk are still high, as is the risk that operational testing will be further delayed. While DOD’s December 2002 risk assessment and certification did provide an indication that manufacturing inefficiencies and inflation as a result of lower production rates would increase costs, sufficient detail was not provided in its risk assessment for us to verify DOD’s conclusion. We requested additional detailed information to help us evaluate and verify the conclusions. However, the information provided to us was not adequate to verify the conclusions contained in the risk assessment. Regardless, even with such verification, still needing to be resolved are the uncertainties to date regarding when development problems can be fixed and the possibility of finding additional problems prior to the completion of operational testing. As a result, we have little confidence that existing problems can be quickly resolved and will not result in further delays. Our work has shown that continuing the acquisition of aircraft in increasing quantities when significant development testing and technical problems remain is risky. By employing such a strategy, major problems are more likely to be discovered after the program has begun production when it is either too late or very costly to correct them. DOD also provided various technical comments, which we have incorporated as appropriate. One of these comments related to the total number of production aircraft to be acquired. The projected number of production aircraft the Air Force plans to or can actually acquire has historically been fluid and elusive. For example, the President’s budget for fiscal year 2003 reflected plans to acquire 333 production aircraft, even though the approved program at the time called for acquiring 295 production aircraft. In its technical comments, DOD stated that the approved program plan is to acquire 295 aircraft. As a result of the recent F/A-22 restructuring to cover development cost increases, the Air Force says that it now plans to acquire 276 aircraft. However, DOD estimates that the cost of production to acquire these 276 aircraft will be $42.2 billion, which exceeds the current production cost limit by $5.4 billion. Consequently, unless the production cost limit is raised or substantial cost reduction plans are achieved, it appears that the number of aircraft that can actually be purchased will have to be lowered from the 276 planned. This is particularly true if production or development costs—or both—continue to rise and no additional funds are provided by the Congress. Last month, we recommended in another report that DOD provide Congress with documentation reflecting the quantity of aircraft that DOD believes can be procured within the existing production cost limit. DOD’s explanation in its technical comments to a draft of this report identifies the likelihood that F/A-22 aircraft quantities will continue to fluctuate. This makes our recent recommendation that much more compelling. To determine whether the development program is likely to meet performance goals, we analyzed information on the status of key performance parameters. We compared performance goals established by the Under Secretary of Defense for Acquisition, Technology, and Logistics with the Air Force’s estimates of performance for completion of development made in December 2002. To identify the status of F/A-22 modifications, we collected updated information on the status of existing aircraft structural problems that have required aircraft modifications. To determine whether the program is expected to meet schedule goals, we reviewed program and avionics schedules and discussed potential changes to these schedules with F/A-22 program officials. We tracked progress in the flight test program and evaluated schedule variances in the contractors’ performance management system and compared planned milestone accomplishment dates with actual dates. We tracked technical problems in manufacturing and assembling the development test aircraft. To determine whether the program is likely to meet the cost goal, we examined (1) the extent to which the development program is likely to be completed within the current cost estimate, (2) the Air Force’s plans to fund the program for fiscal year 2003, and (3) the program’s funding plan compared to the current cost estimate. In examining DOD’s risk assessment, we discussed the various DOD assumptions and approaches used in the assessment with a program official who conducted the assessment. We then analyzed the various DOD assumptions and approaches used to make the assessment conclusions. In making these determinations, assessments, and identifications, we required access to current information about test results, performance estimates, schedule achievements and revisions, costs being incurred, aircraft modifications, and the program’s plans for continued development and initial production. The Air Force and contractors gave us access to sufficient information to make informed judgments on the matters covered in this report. In performing our work, we obtained information or interviewed officials from the Office of the Secretary of Defense, Washington, D.C., and the F/A-22 System Program Office, Wright-Patterson Air Force Base, Ohio. We performed our work from September 2002 through December 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. 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 at (202) 512-4841 or Catherine Baltzell at (202) 512-8001 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Margin Favorable 12% favorable 3% favorable 0 NA 15% favorable 5% favorable (0.8) unfavorable 0 0 0 The acceleration parameter is a measure of the time it takes the aircraft to increase speed to a certain level. If the aircraft is able to increase speed to a certain level in less time than expected, this is considered favorable. Therefore, a measure of less than 100 percent is favorable. Catherine Baltzell, Marvin E. Bonner, Edward Browning, Gary Middleton, Sameena Nooruddin, Madhav Panwar, Karen A. Richey, Don M. Springman, and Ralph White made key contributions to this report. Tactical Aircraft: F-22 Delays Indicate Initial Production Rates Should Be Lower to Reduce Risks. GAO-02-298. Washington, D.C.: March 5, 2002. Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs Within the Congressional Limitation. GAO-01-782. Washington, D.C.: July 16, 2001. Tactical Aircraft: F-22 Development and Testing Delays Indicate Need for Limit on Low-Rate Production. GAO-01-310. Washington, D.C.: March 15, 2001. Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional Limitation. GAO/NSIAD-00-178. Washington, D.C.: August 15, 2000. Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs. GAO/T-NSIAD-00-200. Washington, D.C.: June 15, 2000. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2001. GAO/OCG-00-8. Washington, D.C.: March 31, 2000. F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are Avoided. GAO/NSIAD-00-68. Washington, D.C.: March 14, 2000. Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals. GAO/T-NSIAD-00-58. Washington, D.C.: December 7, 1999. Fiscal Year 2000 Budget: DOD’s Production and RDT&E Programs. GAO/NSIAD-99-233R. Washington, D.C.: September 23, 1999. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000. GAO/OCG-99-26. Washington, D.C.: April 16, 1999. Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering and Manufacturing Development Programs. GAO/T-NSIAD-99-113. Washington, D.C.: March 17, 1999. F-22 Aircraft: Issues in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-99-55. Washington, D.C.: March 15, 1999. F-22 Aircraft: Progress of the Engineering and Manufacturing Development Program. GAO/T-NSIAD-98-137. Washington, D.C.: March 25, 1998. F-22 Aircraft: Progress in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-98-67. Washington, D.C.: March 10, 1998. Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program. GAO/NSIAD-97-156. Washington, D.C.: June 4, 1997. Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections. GAO/T-NSIAD-97-103. Washington, D.C.: March 5, 1997. F-22 Restructuring. GAO/NSIAD-97-100BR. Washington, D.C.: February 28, 1997. Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced. GAO/NSIAD-95-59. Washington, D.C.: April 19, 1995. Tactical Aircraft: F-15 Replacement Issues. GAO/T-NSIAD-94-176. Washington, D.C.: May 5, 1994. Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned. GAO/NSIAD-94-118. Washington, D.C.: March 25, 1994. | The Air Force is developing the F/A-22 aircraft to fly at higher speeds for longer distances, be less detectable, and improve the pilot's awareness of the surrounding situation. The F/A-22 will replace the Air Force's existing fleet of F-15 aircraft. Over the past several years the program has experienced significant cost overruns and schedule delays. Congress mandated that GAO assess the development program and determine whether the Air Force is meeting key performance, schedule, and cost goals. GAO also assessed the implications of the progress of the development program on production. The F/A-22 development program did not meet key performance, schedule, and cost goals in fiscal year 2002, and delays in the flight test program have led to an increase in the development cost estimate of $876 million. In response to this increase, DOD restructured the development program and reduced production aircraft by 27. If additional delays occur, further changes may be required. The program also continues to address technical problems that have limited the performance of test aircraft, including violent movement or "buffeting" of the vertical fins, overheating in portions of the aircraft, weakening of materials in the horizontal tail, and instability of avionics software. Air Force officials cannot predict when they will resolve these problems. These technical problems, along with the late delivery of aircraft to the flight test center, have delayed the development program. Based on F/A-22 flight test accomplishment data and current flight test plans, we believe that operational testing will likely be delayed several months beyond the planned August 2003 start date. The F/A-22 program is in its final stages of development, and low-rate initial production has begun. Since fiscal year 1997, funds have been appropriated to acquire production aircraft, and the F/A-22 acquisition plan calls for steadily increasing annual production rates. However, GAO considers the Air Force's acquisition strategy at high risk for increases in production costs. In past reports, GAO has reported that acquiring aircraft while significant technical challenges remain does not allow for adequate testing of the aircraft. The uncertainties regarding performance capabilities of the F/A-22 aircraft and its development schedule will persist until technical problems have been addressed, including testing of modifications or fixes necessary to potentially alleviate these problems. In light of those uncertainties, steadily increasing annual production rates could result in the Air Force having to modify a larger quantity of aircraft after they are built. |
When Congress passed the Bank Holding Company Act Amendments of 1970, it prohibited tying practices by banks involving products other than those regarded to be traditional products provided by banks. The prohibition, in Section 106(b) of the 1970 amendments, was based on the unique role banks have in the economy, in particular their important role as a source of credit, which Congress feared could allow them to gain a competitive advantage in other financial markets. Section 106(b) applies only to banks and generally prohibits banks from tying any service or product, except for traditional bank products. The tying provisions also allowed the Federal Reserve Board to make exceptions that are not contrary to the purposes of the tying prohibitions. During the first 20 years after the enactment of the tying provisions, the Board received few requests from banking organizations for exceptions to the tying provisions, and it granted none. More recently, however, the Board has decided to use its exception granting authority to allow banks to offer broader categories of packaging arrangements if in its judgment they benefit consumers and do not impair competition. In 1971, the Board adopted a regulation that applied tying rules to bank holding companies and their nonbank subsidiaries, and at the same time it approved a number of nonbanking activities these entities could engage in under the Bank Holding Company Act. The Board recently relaxed the tying restrictions. Citing the competitive vitality of the markets in which nonbanking companies generally operate, the Board rescinded its regulatory extension of the statutory tying provisions to bank holding companies and their nonbank subsidiaries in February 1997. At the same time, the Board broadened the traditional bank products’ exception by expanding it to include those products when offered by the bank’s affiliates. The other federal regulator with key responsibilities related to bank practices, such as tying, is the Office of the Comptroller of the Currency (OCC), which regulates U.S. national banks. In recent years, OCC has increasingly allowed banks to expand the number of products and services they offer. Concerns have been raised by some groups that OCC’s actions allowing national banks to expand into new financial product markets could lead to increased tying. Many financial institutions that compete with banks and bank holding companies, notably securities firms and insurance companies, are not covered by the tying restrictions. However, they, along with banks and their affiliates, are subject to the more broadly applicable antitrust laws, such as the Sherman Act, which prohibit anticompetitive practices such as tying arrangements. In a tying claim under the antitrust laws, a plaintiff must prove, among other things, that the seller had economic power in the market for the tying product, that the alleged tie had an anticompetitive effect in the tied-product market, and that the arrangement did not have an insubstantial effect on interstate commerce. This burden of proof contrasts with the less stringent evidentiary requirements that apply to the bank tying provisions, which do not require proof of any of the above three elements. Congressional hearing records indicate that policymakers made plaintiffs’ burden of proof less stringent for the tying provisions because they believed that proving an antitrust violation involving banks, bank holding companies, and subsidiaries could pose difficulties for plaintiffs. Their reasoning was that few plaintiffs could be presumed able to readily ascertain a bank’s economic power in a particular product or service market and its ability to impose a tying arrangement. Since 1980, increased cross-industry competition in the financial services marketplace has altered the position banks occupy in the nation’s credit market. Some have argued that this change could reduce a bank’s ability to engage in tying activities. Aggregated balance sheet data show that the banking sector’s share of the overall assets of U.S. financial intermediaries declined from about 35 percent in 1980 to about 25 percent in 1994, as shown in figure 1. In the same period, several other financial sector participants, including mutual funds and government sponsored enterprises (GSE), increased their share of those assets. However, other changes in the marketplace, including the growth of new types of credit-related activities that do not appear on the balance sheet, may have had an offsetting effect on the banking industry’s position in the overall U.S. credit market. Two research papers by Federal Reserve staff have suggested that U.S. banks’ share of the credit market is not declining. One paper showed that the proportion of total bank revenues coming from off-balance sheet banking activities, such as backup lines of credit, guarantees to commercial paper issuers, and derivatives, rose from 25.0 percent in 1982 to 36.7 percent in 1995. But a lack of information about the role these new off-balance sheet activities play in the U.S. financial services market complicates attempts to assess recent overall credit market trends or the effect these trends may have on banks’ market power. Interest in the tying provisions has been heightened by regulatory actions and Supreme Court decisions, most recently one in March 1996, that have permitted banks to further expand their marketing activities in annuity and insurance sales. These actions and decisions have added to the insurance industry’s apprehensions about the banking industry’s marketing of annuities and insurance and the possible effect it may have on the banking industry’s ability to engage in tying activities. The future impact of the tying provisions may also be affected by the outcome of proposed reforms to the 1933 Glass-Steagall Act that would allow banks to offer a greater range of services and products. Proposed reforms stem from the belief that the separation of banks from securities firms and insurers incorporated in the U.S. bank regulatory framework are out-of-date in today’s converging credit and capital markets. Although these proposals are viewed as potentially leading to greater efficiencies in the marketplace, concerns have also been raised about their possible effects on banks’ ability to link the services and products they offer by engaging in tying. The objectives of our review were to provide information on (1) evidence of violations of the tying provisions by banks and their affiliates and regulatory efforts to ensure compliance with the provisions, (2) views on the tying provisions expressed by representatives of securities and insurance firms and independent insurance agents, and (3) views expressed by representatives of banks and bank regulators. In addition to reviewing bank regulators’ files for evidence of possible tying abuses, we contacted (1) the Securities Industry Association (SIA) to obtain referrals to securities firms that were concerned about tying activities, (2) groups representing insurance companies and agents who may have knowledge of tying activities, and (3) academic experts. Based on referrals from SIA, we spoke with officials at six securities firms and groups representing securities firms in New York; San Francisco; Washington, D.C.; and Richmond, VA, to obtain their views on the continuing need for the tying provisions. Based on insurance industry referrals, we had similar discussions with officials of eight insurance companies and groups representing insurance companies and agents in New York; Washington, D.C.; San Francisco; and Lynchburg, VA. We also interviewed officials representing 11 state financial regulatorsand representatives of 24 local governments or consumer/small business advocates in Texas, California, North Carolina, and Minnesota to determine if any tying complaints had been directed to them. We interviewed consumer/small business organizations in North Carolina and Minnesota, two states that have allowed state-chartered banks to sell insurance, because we were told that instances of insurance product tying were most likely to show up in such states if they were occurring. In addition, we contacted the Securities and Exchange Commission and the Federal Trade Commission to determine whether they had received tying complaints involving banks. We also reviewed studies of private litigation under the tying provisions and updated this information with our own legal research. We conducted our interviews prior to the Board’s September 1996 proposal to relax the tying restrictions. To identify possible tying abuses and regulatory practices used to detect and prevent such abuses, we interviewed Federal Reserve and OCC examiners and officials about the results of their routine examinations and about their procedures and practices during routine examinations. We focused on the Federal Reserve and OCC because the banks or bank holding companies they regulate are more likely to offer a broader range of products and services, which are believed to be susceptible to tying.To determine how examiners implemented examination procedures for tying, we also judgmentally selected three examinations conducted in 1994 at a large, medium, and small bank by the OCC Dallas office and three inspections conducted at bank holding companies with insurance or securities activities by the Dallas Federal Reserve Bank. We also reviewed examinations conducted by the San Francisco Federal Reserve during 1993 and 1994 of banks identified as not being in compliance with the tying requirements. We spoke with agency attorneys and examiners about the special joint Federal Reserve and OCC investigation of specific allegations involving tying violations and reviewed related workpapers. We also reviewed complaint files at the Board in Washington, D.C., and OCC headquarters to determine the number and type of complaints received about tying violations. In addition, we interviewed representatives from two corporations and eight local government organizations in California whose transactions were identified as being affected by tying in a complaint to the Federal Reserve. To obtain the banking industries’ views on the continued need for the tying provisions, we contacted officials from (1) four banking trade associations located in Washington, D.C., and Austin, TX, and (2) three banks in San Francisco and New York. We also discussed the tying provisions’ effects on the industry with regulators from the Federal Reserve and OCC in Washington, D.C., Dallas, San Francisco, and New York. In addition, we spoke with Federal Reserve officials in Richmond, VA. We also spoke with Federal Reserve economists in Washington, D.C., Richmond, VA, and a former Federal Reserve economist in Minneapolis on changes in the credit market. We conducted our work from April 1995 through November 1996 in accordance with generally accepted government auditing standards. We provided a draft of this report for comment to the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Chairman, FDIC. The resulting written comments are discussed on p. 17 and reprinted in appendixes I, II, and III. We found little evidence of tying by banks. Agency officials we interviewed were aware of only one instance of a tying violation identified during regulators’ routine examinations of banks or inspections of bank holding companies since 1990. Likewise, they said regulators’ investigations of complaints since 1990, including an SIA allegation of tying practices at several banks and bank holding companies, have identified only a few instances of tying. Inquiries with a cross section of state and local officials, academic experts, consumer groups, and small business contacts who we were told were knowledgeable about tying likewise revealed few instances of bank tying. Several bank representatives have argued that the lack of evidence indicates that tying is not occurring, although others believe that it indicates that the tying provisions are having a deterrent effect on such activity. Finally, the limited evidence of tying may be indicative of the difficulty involved in identifying instances of tying or consumers’ general hesitance to report such instances due to their reluctance to jeopardize their credit relationships. During routine examinations, both OCC and Federal Reserve examiners are expected to evaluate a banking organization’s compliance with the tying provisions. They are also expected to investigate potential tying practices that they become aware of during the course of their work. OCC officials said they were not aware of any instances of tying identified through their routine examinations since 1990. Over the same period, Federal Reserve officials cited one instance of tying identified during a bank examination. Officials at both agencies explained that tying violations are difficult to find during examinations because illegal tying arrangements are not clearly evident in loan documentation, and it is difficult to know where to look for evidence of tying without a specific complaint. OCC procedures require examiners to look for tying arrangements among the various types of loans being reviewed, including commercial, real estate, and construction loans. Examiners are expected to address tying practices along with other credit-related bank practices while reviewing credit and collateral files, especially those relating to loan agreements. Federal Reserve procedures also require examiners to review tying policies and to follow an inspection checklist in their examinations. Examiners are required to review bank holding companies’ and state-chartered banks’ written policies and procedures, training programs, and audit practices. These reviews are to look at a bank’s review of pertinent loans where products or services may be susceptible to improper tying arrangements and to include a review of specific transactions if the banking organization is found to be deficient in its antitying policies and procedures. In addition, procedures call for examiners to assess whether employees are aware of tying and of how to prevent tying violations. Finally, examiners are required to determine whether internal audit departments perform any work to detect or prevent tying violations. In the nine OCC and Federal Reserve examinations or inspections we reviewed, we found that examiners followed required examination procedures for monitoring compliance with the tying provisions. Although the portions of these OCC and Federal Reserve examinations or inspections devoted to tying, which typically involved 1 to 2 days of work, were less extensive than other portions, it appeared that examiners performed the required steps to review the adequacy of an institution’s antitying practices. Examiners told us that specific complaints filed with the regulatory agencies were the most effective means of detecting tying violations. However, they said that few complaints have been brought to their attention over the years. Both OCC and the Federal Reserve typically handle complaints from their Washington, D.C., headquarters offices, although consumers can notify the regulators of tying complaints at either the district or headquarters level. From January 1990 through September 1996, records show that the regulators received a total of only 13 tying complaints, of which 7 were handled by OCC and 6 were handled by the Federal Reserve. Records also show that at the time of our review, seven cases were determined to be unfounded, three resulted in actions against the bank or holding company, and the remaining three were unresolved, as shown in table 1. The three cases that resulted in actions against the bank or holding company were resolved through written agreements or orders by the Federal Reserve, one of which included a $10,000 civil penalty. A 1992 complaint by SIA prompted the Federal Reserve and OCC to launch a special investigation of tying abuses that ultimately identified one violation of the tying provisions. The investigation, which represented an extensive joint effort by the two regulators, was undertaken largely as a response to SIA solicitation of its membership that elicited a small number of responses. An SIA official we contacted attributed the low number of responses to members’ reluctance to jeopardize their banking relationships. Nevertheless, one large securities firm responded with a list of transactions involving characteristics that might indicate tying abuses. SIA included this list in its complaint to OCC and the Federal Reserve. In response to the complaint, OCC and the Federal Reserve agreed to jointly investigate seven large bank holding companies and four large banks. During the investigation, the regulators reviewed 344 transactions from a universe of 3,213 transactions that included both credit and underwriting components completed between 1987 and 1992. They reviewed transaction fee structures to determine if fee-splitting was prevalent, interviewed selected customers as well as bank holding company and bank officials, and attempted to determine if the bank and nonbank subsidiary referred customers to one another. The investigation found 24 transactions that were regarded as suspicious out of the 344 transactions reviewed. The examiners found that these suspicious transactions generally involved either aggressive marketing by bank officers or discounts offered by a bank to customers who purchased more than one nontraditional bank product or service. In the one instance in which the team concluded regulatory action was required, regulators found three questionable transactions. One involved a loan officer who included on a terms sheet sent to the customer a condition that the bank’s affiliate be selected for placement of a revenue bond issue. The case was resolved through an agreement reached by Federal Reserve officials and bank officers that required the bank to strengthen its policies, procedures, and internal compliance program relating to compliance with the tying provisions. Our review of legal literature and cases shows that private claims of unlawful bank tying have been relatively infrequent and that the courts seldom have found violations of the tying provisions. Three studies we identified noted limited use of the tying provisions. For example, one study published in 1993, which identified 44 federal court decisions published since 1972 that involved the tying provisions, reported that the courts found violations in only 4 cases. Our research of cases decided after 1992, reviewing 43 federal court decisions and 9 state court decisions involving bank tying allegations, found no decisions in which a bank was found liable for violating the tying provisions. Our discussions with representatives of various groups, including state regulators, academic experts, small business trade organizations, and firms identified as possible sources by SIA, produced little evidence of tying practices by banks. For these discussions, we selected insurance groups, small business trade organizations, and chambers of commerce that we were told had a close relationship with businesses that might be affected if tying were occurring. Financial regulators in 11 states, representatives of 8 local governments, and 16 consumer or small business groups, were generally not aware of or were unable to provide any details on complaints of tying. In a few instances in which we learned of a complaint, the affected parties would not respond to our inquiry or said that they were concerned that the use of their information would affect their relationship with their bank. Some securities and insurance representatives also claimed to be aware of bank tying activities but said they were unable to obtain permission from their customers to release the information to us. Although the limited evidence of tying may indicate that little tying is actually occurring, other explanations that possibly account for the lack of evidence include consumers’ reported reluctance to make formal complaints and the difficulty of detecting tying practices. Some bank representatives maintain that the lack of evidence indicates that tying is not occurring to a significant extent because market forces allow few opportunities, and that the provisions are thus unnecessary. Others, including some regulators and representatives of securities firms, agree that the lack of evidence indicates little tying is occurring but maintain that the absence of tying is a result of the deterrent effects of the tying provisions and the associated regulatory monitoring. It is also possible that the limited evidence of tying may reflect consumers’ reluctance to make formal complaints, as in instances we encountered when borrowers were reportedly reluctant to talk with us for fear of jeopardizing their relationship with a bank. Finally, the possibility cannot be ruled out that the shortage of evidence of tying may indicate the difficulty consumers or regulators have identifying tying violations. The extent of concern about tying varied within the insurance and securities industries. Industry groups that were most concerned about tying by banks included independent insurance agents, who expressed the greatest concern, and some insurance and securities firms that viewed banks as a threat to their share of the market. Representatives of firms and agents that expressed concern about tying advocated maintaining or strengthening the tying provisions, which they said help offset banks’ competitive advantages and ensure adequate consumer protection. Insurance industry representatives we contacted who said tying was a problem were generally concerned about the ongoing expansion of bank services into insurance. One such representative expressed particular concern about the tying of various common types of insurance policies easily linked to bank customers’ preexisting bank-related business. Potential markets she cited included the profitable markets of automobile loans, where she said that banks will likely increasingly take over automobile insurance sales, and mortgages, where she said that banks could be expected to take over title and homeowners insurance sales. She added that basic competitive pressures push banks toward aggressive sales behavior that verges on violating the tying provisions when they influence customers to take products or services or offer discounts. She said that most insurance agents believe that banks at times violate the tying provisions in offering complementary services and products to customers, but that it is difficult to detect such instances. Representatives of a major association of independent insurance agents had initially expressed concerns about OCC actions that have allowed national banks to expand their insurance activities and about court decisions upholding these actions. However, in November 1996, the association changed its position and supported the possible integration of financial services. In doing so, however, it expressed its view that future federal legislation should establish the states as the “functional regulators” responsible for insurance activities along with the continued enforcement of the tying provisions by federal banking regulators. Securities industry representatives have also expressed concern about proposals to eliminate the tying provisions. For instance, a securities firm association and a securities firm we contacted expressed concerns about changes in the laws regarding tying prohibitions in the face of pending reforms to the Glass-Steagall Act. Both said that they opposed any easing of the tying provisions because of their view that such restrictions are necessary for fair competition in the financial market. Proponents of maintaining or strengthening the tying provisions from the insurance and securities industries said that the tying restrictions are needed to offset banks’ economic advantages. They argued that such economic advantages derive from banks’ access to the Federal Reserve’s discount window and their coverage by federal deposit insurance, both of which are perceived as either lowering the cost of funds or reducing the amount of capital banks need to hold as a buffer against risk to satisfy creditors. Although some viewed overall credit market changes occurring since 1980 as an indication that banks may now be less able to engage in anticompetitive tying practices than when the tying provisions were adopted, others, including insurers, securities firms, and academic experts, have suggested that certain specific markets may still be susceptible to the exercise of market power. Instead of focusing on broad measures of banks’ share of the overall U.S. credit market, they suggest that the focus should be on the availability of credit to small businesses in certain geographic areas. Recent economic analyses of changes in the banking industry and in the availability of credit provide differing views on the effects these changes may have on small borrowers. Several papers observe that small borrowers in certain local credit markets may be more likely affected by the exercise of market power by banks than those in other localities. While some agree that consolidation of the banking industry may result in a decline in the number of small banks, the main lender to small businesses, they disagree on the effects this decrease will have on the availability of credit to small businesses. For example, one paper suggests that with the likely decline in the number of small banks, the flow of credit to small businesses will likely decline. Another observes that if small businesses are not being served, large banks will have a strong profit motive to expand their small business lending. Banking industry officials we contacted believed that marketplace changes since the passage of the tying provisions over 25 years ago have significantly reduced the original economic justification for the tying provisions. The officials said that the provisions have been made largely unnecessary by increased competition among credit providers in the financial marketplace. This increased competition, they said, makes it more difficult for any particular bank to exert sufficient credit leverage to force a customer into a tying arrangement. Those holding this view point to the reduction in banks’ share of the overall U.S. credit market. Several bank representatives we contacted expressed a desire to have Congress remove the tying provisions, particularly since they believed there is limited evidence of tying violations. They noted that banks alone are subject to the tying provisions, which do not prevent other financial institutions from combining products that banks are prohibited from linking. An official from one bank noted that securities firms are subject only to the less restrictive antitrust laws applicable to all businesses, which require, among other things, that a plaintiff demonstrate that the firm charged with tying has sufficient economic power to enable it to tie and that a tying arrangement has a substantial effect on interstate commerce. In contrast, the official noted, the tying provisions do not require the plaintiff to demonstrate the bank’s market power. Bank officials we contacted also pointed out that maintaining internal controls to guard against tying within banks adds extra costs that other financial providers do not bear. They said such internal controls limit information, resource, and financial linkages between banks and their holding companies or affiliated entities. According to the officials, the internal control limitations impair economies of scale otherwise possible in the provision of complementary services. In addition, they said customers are adversely affected by banks’ inability to reduce overall prices by offering complementary services as a package. Bank industry representatives we contacted disagreed that banks have a competitive advantage that must be offset by requirements, such as the tying provisions. They acknowledged that banks have access to the Federal Reserve’s discount window and federal deposit insurance, but they do not view these as advantages. They pointed out that banks pay for deposit insurance through premium assessments and are subject to regulatory restrictions and to oversight of their activities that competing firms in other sectors are not subject to. A banking representative also pointed out that, with the passage of the 1991 Federal Deposit Insurance Corporation Improvement Act, it is now easier for the Federal Reserve to lend directly to all types of financial firms with liquidity needs in a crisis—not just banks. Given the ongoing convergence of credit and capital markets, banking officials expressed concerns about potential adverse effects on their industry if the tying provisions are not relaxed or removed. They felt that the existence of the Sherman Act obviates the need for the tying provisions. They did not feel that the banking industry has special characteristics that necessitate a separate set of provisions. In response to our questions about the need for the tying provisions, OCC’s official view emphasized the importance of the provisions that prohibit banks from conditioning the availability of one product on the purchase of another, while the Federal Reserve chose not to provide an official position. OCC observed that the tying provisions increase banks’ awareness of their responsibilities to their customers as they expand the array of products and services offered. For example, OCC, in its October 1996 guidance to national banks regarding sales of insurance and annuities, stated that the agency remained committed to enforcing the provisions and emphasized the need for national banks to maintain procedures to prevent violations. Although the Federal Reserve responded that the agency had no official position on our questions about the need for the tying provisions, it likewise has cited the tying provisions in connection with its recent action to ease restrictions on banks’ marketing activities. For example, in November 1996, the Federal Reserve noted the role of the tying provisions in preventing banks from gaining unfair competitive advantages by tying or otherwise linking their products together. We also discussed the tying provisions with staff at both agencies. In general, the staff were not surprised that we had found limited evidence of bank tying, but they expressed mixed views on the reasons. Several regulators attributed the lack of evidence to the tying provisions’ deterrent effects or to the difficulty involved in finding documentation to support allegations of tying. Other regulators believed that increased competition among credit providers makes it difficult for any particular bank to exert enough economic leverage to force a borrower into a tying arrangement. A Federal Reserve official suggested that the sophistication and price sensitivity of today’s consumers limit banks’ ability or power to tie products. He explained that, although consumers may not realize that tying is illegal, they are able to recognize a bad deal when they see it. The Federal Reserve, OCC, and FDIC reviewed a draft of this report and either agreed with the information presented or had no formal comments. The comment letters are reprinted in appendixes I, II, and III. In its comments, the Federal Reserve suggested that we had found that it had effective examination procedures to review compliance with the tying provisions. Our review, however, did not assess the effectiveness of the Federal Reserve’s examination procedures. As agreed with your office, unless you publicly announce the report’s contents earlier, we plan no further distribution of it until 7 days from the date of this report. We will then send copies to the Chairman of the House Commerce Committee, and to the Chairmen and Ranking Minority Members of the Senate and House Banking Committees. We will also send copies to the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Chairman, FDIC. We will also make copies available to others on request. This report was prepared under the direction of Kane A. Wong, Assistant Director, Financial Institutions and Markets Issues. Other major contributors are listed in appendix IV. If you have any questions, please call me on (202) 512-8678. Paul G. Thompson, Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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 provided information on banks' compliance with the tying provisions of the Bank Holding Company Act Amendments of 1970, focusing on: (1) evidence of tying abuses by banks and their affiliates and regulatory efforts to ensure compliance with the provisions; (2) views on the tying provisions expressed by representatives of securities and insurance firms and independent insurance agents; and (3) views on the tying provisions expressed by representatives of banks and the Federal Reserve and the Office of the Comptroller of the Currency (OCC). GAO noted that: (1) it found limited evidence of tying activity by banks; (2) Federal Reserve and OCC officials GAO interviewed were aware of only one violation identified during routine bank examinations or hold company inspections since 1990; (3) from January 1990 through September 1996, the Federal Reserve and OCC received and investigated 13 tying-related complaints, only 3 of which resulted in actions against the bank or holding company; (4) bank regulators' special investigation of seven large bank holding companies and four large banks in response to a 1992 tying complaint identified only one instance of tying that led to regulatory action; (5) GAO's interviews with state regulators, small business groups, and others identified little evidence of tying violations, although it was suggested that the limited evidence could be based, at least in part, on borrowers' reluctance to report violations for fear of jeopardizing their banking relationships; (6) those representatives of securities and insurance firms and independent insurance agents GAO contacted that expressed concern about tying advocated maintaining or strengthening the tying provisions as a way of offsetting the competitive advantages they believe banks enjoy; (7) some industry representatives and academic experts interviewed said that a more important consideration than the banking industry's share of the credit market is the availability of credit; (8) bank industry representatives viewed the tying provisions as impairing banks' ability to maximize the economic benefits they might otherwise obtain by offering complementary services; (9) some banking representatives also said that banks' evolving role as only one of many providers of credit makes them less able to coerce customers into accepting tied products or services; (10) with regard to banks' access to the discount window and federal deposit insurance, banking representatives pointed out that, with recent legislative changes, it is now easier for the Federal Reserve to lend directly to various financial firms with liquidity needs in a crisis, not just banks; (11) while the Federal Reserve chose not to take an official position on the need for the tying provisions, OCC cited the provisions' importance in making banks aware of their responsibilities to customers as they provide an increasing array of products and services; and (12) some regulatory staff expressed the belief that the tying provisions may have a deterrent effect, but others believed increased competition in the marketplace makes it difficult for banks to force a borrower into a tying arrangement. |
The complexity of the environment in which HCFA operates the Medicare program cannot be overstated. It is an agency within the Department of Health and Human Services (HHS) but has responsibilities over expenditures that are larger than those of most other federal departments. Medicare alone ranks second only to Social Security in federal expenditures for a single program. Medicare spending totaled over $220 billion in fiscal year 2001; covers about 40 million beneficiaries; enrolls and pays claims from nearly 1 million providers and health plans; and has contractors that annually process about 900 million claims. Among Medicare’s numerous and wide-ranging activities, HCFA must monitor the roughly 50 claims administration contractors that pay claims and set local medical coverage policies; set tens of thousands of payment rates for Medicare-covered services from different providers, including physicians, hospitals, outpatient and nursing facilities, home health agencies, and medical equipment suppliers; and administer consumer information and beneficiary protection activities for the traditional program component, the managed care program component (Medicare+Choice plans), and Medicare supplemental insurance policies (Medigap). The providers billing Medicare create, with program beneficiaries, a vast universe of stakeholders—hospitals, general and specialty physicians, and other providers of health care services—whose interests vary widely. HCFA’s responsibility to run the program in a fiscally prudent way has made the agency a lightening rod for those discontented with program policies. In particular, HCFA’s administrative pricing of services has often been contentious. However, when Medicare is the dominant payer for services or products, HCFA cannot rely on market prices to determine appropriate payment amounts because Medicare’s share of payments distorts the market. Moreover, because Medicare is prevented from excluding some providers to do business with others that offer better prices, it is largely impractical for HCFA to rely on competition to determine prices. Medicare’s public sector status also means that any changes require public input. Thus, HCFA is constrained from acting swiftly to reprice services and supplies even when prevailing market rates suggest that payments should be modified. The solicitation of public comment is a necessary part of the federal regulatory process to ensure transparency in decision- making. However, the trade-off to seeking and responding to public interests is that it is generally a time-consuming process and can thwart efficient program management. For example, in the late 1990s, HCFA averaged nearly 2 years between its publication of proposed and final rules. Consensus is widespread among health policy experts regarding the growing and unrelenting nature of HCFA’s work. The Balanced Budget Act of 1997 (BBA) alone has had a substantial impact on HCFA’s workload, requiring, among other things, that the agency develop new payment methods for different post-acute-care and ambulatory services within a short time frame and It also required HCFA to preside over an expanded managed care component that entailed coordinating a never-before-run information campaign for millions of beneficiaries across the nation and developing means to adjust plan payments based partially on enrollees’ health status. Tasked with administering this highly complex program, HCFA earns mixed reviews in managing Medicare. On one hand, HCFA presides over a program that is very popular with beneficiaries and the general public. It has implemented payment methods that have helped constrain program cost growth and has paid claims quickly at little administrative cost. On the other hand, HCFA has difficulty making needed refinements to payment methods. It has also fallen short in its efforts to ensure accurate claims payments, oversee its Medicare claims administration contractors, and ensure the quality of Medicare services. In recent years, HCFA has taken steps to achieve greater success in these areas. However, the agency now faces criticism for imposing payment safeguards that many providers feel constitute an undue administrative burden. HCFA has been successful in developing payment methods that have helped to contain Medicare cost growth. Generally, over the last 2 decades, Congress has required HCFA to move Medicare away from reimbursing providers based on their costs for every service provided and use payment methods that seek to control spending by rewarding provider efficiency and discouraging excessive service use. Some efforts have been more successful than others, and making needed refinements to payment methods remains a challenge. For example, Medicare’s hospital inpatient prospective payment system (PPS), developed in the 1980s, is a method that pays providers fixed, predetermined amounts that vary according to patient need. This PPS succeeded in slowing the growth of Medicare’s inpatient hospital expenditures. Medicare’s fee schedule for physicians, phased in during the 1990s, redistributed payments for services based on the relative resources used by physicians to provide different types of care and has been adopted by many private insurers. More recently, as required by the BBA, HCFA has worked to develop separate prospective payment methods for post-acute care services— services provided by skilled nursing facilities, home health agencies, and inpatient rehabilitation facilities—as well as for hospital outpatient departments. Prospective payment systems can help to constrain the overall growth of Medicare payments. But as new payments systems affect provider revenues, HCFA often receives criticism about the appropriateness and fairness of its payment rates. HCFA has had mixed success in marshalling the evidence to assess the validity of these criticisms and to make appropriate refinements to these payment methods to ensure that Medicare is paying appropriately and adequately. HCFA has also had success in paying most claims within mandated time frames and at little administrative cost to the taxpayer. Medicare contractors process over 90 percent of the claims electronically and pay “clean” claims on average within 17 days after receipt. In contrast, commercial insurers generally take longer to pay provider claims. Under its tight administrative budget, HCFA has kept processing costs to roughly $1 to $2 per claim—as compared to the $6 to $10 or more per claim for private insurers, or the $7.50 per claim paid by TRICARE—the Department of Defense’s managed health care program. Costs for processing Medicare claims, however, while significantly lower than other payers, are not a straightforward indicator of success. We and others have reported that HCFA’s administrative budget is too low to adequately safeguard the program. Estimates by the HHS Inspector General of payments made in error amounted to $11.9 billion in fiscal year 2000, which, in effect, raises the net cost per claim considerably. Taken together, these findings suggest that an investment in HCFA’s administrative functions is a trade-off that could ultimately save program dollars. Moreover, due in part to HCFA’s historically uneven oversight, the performance of some Medicare’s claims administration contractors has been unsatisfactory. Among its failings, HCFA relied on unverified performance information provided by contractors and limited checking of each contractor’s internal management controls. HCFA’s performance reviews and treatment of problems identified were not done using consistent criteria across contractors. In the last year, HCFA has taken significant steps to improve its management and oversight of contractors. Nevertheless, key areas needing improvement remain, such as policies to verify contractor-reported data and controls over contractor accountability and financial management, including debt collection activities. A major aspect of contractor performance—the stewardship activities that contractors conduct to safeguard Medicare dollars—is itself a story of mixed results. In the early 1990s, HCFA’s contractors decreased certain key safeguard activities to maintain claims processing timeliness under constrained budgets. In order to ensure that program safeguards were strengthened, the Congress created the Medicare Integrity Program (MIP), which gave HCFA a stable source of funding for these activities as part of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). In fiscal year 2000, HCFA used its MIP funding to support a wide range of anti-fraud-and-abuse efforts, including provider and managed care organization audits and targeted medical reviews of claims. These audits and reviews, targeted at providers whose previous billings or cost reports have been questionable, have been a cost-effective approach in identifying overpayments. Based on HCFA’s estimates, in fiscal year 2000, MIP saved the Medicare program more than $16 for each dollar spent. As part of its safeguard efforts, HCFA also has begun to measure how accurately its contractors process claims, to determine if individual contractors are effective in safeguarding program payments. Such objective information could provide HCFA with important management information and identify contractors’ “best practices” that could serve as a model for others. While HCFA has strengthened its payment safeguard activities, these efforts have raised concerns among providers about the clarity of billing rules and the efforts needed to be in compliance. Providers whose claims are in dispute have complained about the burden of reviews and audits and about the fairness of some specific steps the contractors follow. However, their concerns about fairness may also emanate from the actions of other health care overseers—such as the HHS Office of Inspector General and the Department of Justice—which, in the last several years, have become more aggressive in pursuing health care fraud and abuse. HCFA faces a difficult task in finding an appropriate balance between ensuring that Medicare pays only for services allowed by law while making it as simple as possible for providers to treat Medicare beneficiaries and bill the program. While an intensive claims review is undoubtedly vexing for the provider involved, very few providers actually undergo them. In fiscal year 2000, HCFA’s contractors conducted complex medical claims reviews of only three-tenths of 1 percent of physicians—1,891 out of a total of more than 600,000 physicians who billed Medicare that year. We are currently reviewing several aspects of HCFA’s auditing and review procedures for physician claims to assess how they might be improved to better serve the program and providers. HCFA’s oversight of health care quality, a resource-intensive activity, has significant shortcomings. The agency is responsible for overseeing compliance with federal quality standards for the services delivered to Medicare beneficiaries. As much of the actual inspection of quality is carried out by the states, HCFA must work with the states to ensure that the inspectors of nursing homes, home health agencies, renal dialysis centers, psychiatric hospitals, and certain Medicare-certified acute care hospitals identify significant care problems. Our findings on nursing home quality present a very disturbing picture: in 1999, we reported that an unacceptably high number of the nation’s 17,000 nursing homes—an estimated 15 percent—had recurring care problems that caused actual harm to residents or placed them at risk of death or serious injury. Our previous findings showed that complaints by residents, family members, or staff alleging harm to residents remained uninvestigated in some states for weeks or months. HCFA’s efforts to oversee state monitoring of nursing home quality were limited in scope and effectiveness, owing, in part, to a lack of expert staff to assess the state inspectors’ performance. Even with this record of weak federal oversight, nursing homes get more scrutiny than other health care providers. States survey nursing homes at least yearly, on average, whereas other facilities are surveyed much less frequently. For example, home health agencies were once routinely reviewed annually, but surveys now vary and can be as infrequent as every 3 years. In addition, our work has shown that the number of HCFA-funded inspections of dialysis facilities declined significantly between 1993 and 1999, dropping the proportion reviewed from 52 percent to 11 percent. Yet, in 1999, 15 percent of the facilities surveyed had deficiencies severe enough, if uncorrected, to warrant terminating their participation in Medicare. In addition to the challenges inherent in running Medicare, other factors associated with HCFA’s structure and capacity diminish the agency’s ability to administer the program effectively. These limitations leave HCFA poorly positioned to operate Medicare as a modern, efficient health care program. HCFA faces several limitations in its efforts to manage Medicare effectively. These include divided management focus, little continuity of leadership, limited capacity, lack of a performance-based management approach, and insufficient flexibility to modernize program operations. HCFA’s management focus is divided across multiple programs and responsibilities. Despite Medicare’s $220-billion price tag and far-reaching public policy significance, there is no official whose sole responsibility it is to run the Medicare program. In addition to Medicare, the HCFA Administrator and senior management are responsible for oversight of Medicaid and the State Children’s Health Insurance Program. They also are responsible for individual and group insurance plans’ compliance with HIPAA standards in states that have not adopted conforming legislation. Finally, they must oversee compliance with federal quality standards for hospitals, nursing homes, home health agencies, and managed care plans that participate in Medicare and Medicaid, as well as all of the nation’s clinical laboratories. The Administrator is involved in the major decisions relating to all of these activities; therefore, time and attention that would otherwise be spent meeting the demands of the Medicare program are diverted. A restructuring of the agency in July 1997 inadvertently furthered the diffusion of responsibility across organizational units. The intent of the reorganization was to better reflect a beneficiary-centered orientation throughout the agency by interspersing program activities across newly established centers. However, after the reorganization, many stakeholders claimed that they could no longer obtain consistent or timely information. In addition, HCFA’s responsiveness was slowed by the requirement that approval was needed from several people across the agency before a decision was final. The recent change from HCFA to CMS reflects more than a new name. It consolidates major program activities: the Center for Medicare Management will be responsible for the traditional fee-for-service program; the Center for Beneficiary Choices will administer Medicare’s managed care program. We believe that this new structure could improve efforts to more efficiently manage aspects of Medicare. At least two other factors weaken agency focus. First, the frequent turnover of the administrator has complicated the agency’s implementation of long-term Medicare initiatives or pursuit of a consistent management strategy. The maximum term of a HCFA administrator is, as a practical matter, only as long as that of the President who appointed him or her. Historically, their actual tenure has been even shorter. In the 24 years since HCFA’s inception, there have been 21 administrators or acting administrators, whose tenure has been, on average, about 1 year. Over 15 percent of the time, HCFA has had an acting administrator. These short tenures have not been conducive to carrying out strategic plans or innovations an administrator may have developed for administering Medicare efficiently and effectively. Of equal concern is the sparseness of HCFA’s senior ranks. Its corps of senior executives is smaller than that of most other civilian agencies having significantly smaller annual expenditures. In fiscal year 1999, HCFA had 49 senior executive officials to manage Medicare, Medicaid, and SCHIP (among other programmatic responsibilities) and nearly $400 billion in expenditures. While some tasks at HCFA are contracted out— thus providing HCFA with purchased executive expertise—contractors’ objectives may not be fully aligned with those of the agency. Indeed, the critical need to oversee contractors effectively to ensure that they are fulfilling their responsibilities has been repeatedly demonstrated. In addition to leadership constraints, the agency’s capacity is limited relative to its multiple, complex responsibilities. Inadequate information systems and human capital hobble HCFA’s ability to carry out the volume of claims administration, payment and pricing, and quality oversight activities demanded of the agency. Ideally, program managers should be able to rely on their information systems to create a feedback loop that allows them to monitor performance, use the information to develop policies for improvement, and track the effects of newly implemented policies. In reality, most of the information technology HCFA relies on is too outdated to routinely produce such management information. Despite major advances in information technology in recent years, HCFA relies on outmoded systems, some of which date back to the 1970s, to pay claims and maintain data on beneficiaries’ use of services. As a result, HCFA cannot easily query its information systems to obtain prompt answers to basic management questions. Using its current systems, HCFA is not in a position to report promptly to the Congress on the effects of new prospective payment policies on beneficiaries’ access to services and on the adequacy of payments to providers. It cannot expeditiously determine the status of debt owed the program due to uncollected overpayments. It cannot obtain reliable data on beneficiaries enrolled in managed care plans and must reconcile one system’s output with data from other systems. Finally, HCFA lacks a set of rules to govern how it will develop, implement, and operate systems to prevent and detect inappropriate access. Staff shortages—in terms of skills and numbers—also beset HCFA. These shortages were brought into sharp focus as the agency struggled to handle the number and complexity of BBA requirements. When the BBA expanded the health plan options in which Medicare beneficiaries could enroll, HCFA’s staff had little previous experience overseeing these diverse entities, such as preferred provider organizations, private fee-for- service plans, and medical savings accounts. Few staff had experience in dealing with the existing managed care option—health maintenance organizations. Half of HCFA’s regional offices lacked managed care staff with clinical backgrounds—important in assessing the appropriateness of a health plan’s denial of services to a beneficiary—and few managed care staff had training or experience in data analysis—key to monitoring internal trends in plan performance over time and assessing plan performance against local and national norms. Staffing constraints have also handicapped HCFA’s efforts to ensure quality of care. In recent years, the agency has made negligible use of its most effective oversight technique for assessing state agencies’ abilities to identify serious deficiencies in nursing homes—an independent survey performed by HCFA employees following the completion of a state survey. Conducting a sufficient number of these comparisons is important because of concerns that some state agencies may miss significant problems, but HCFA lacked sufficient staff and resources to perform enough of these checks. In 1999, the number of HCFA independent surveys averaged about two per state—a frequency totally inadequate to fairly measure any state’s performance. At the same time, HCFA faces the loss of a significant number of staff with valuable institutional knowledge. In February 2000, the HCFA Administrator testified that more than a third of the agency’s current workforce was eligible to retire within the next 5 years and that HCFA was seeking to increase “its ability to hire the right skill mix for its mission.” As we and others have reported, too great a mismatch between the agency’s administrative capacity and its designated mandate could leave HCFA unprepared to handle Medicare’s future population growth and medical technology advances. To assess its needs systematically, HCFA is conducting a four-phase workforce planning process that includes identifying current and future expertise and skills needed to carry out the agency’s mission and analyzing the gaps between them. HCFA initiated this process using outside assistance to develop a comprehensive database documenting the agency’s employee positions, skills, and functions. Once its future workforce needs are identified, HCFA faces the challenge of attracting highly qualified employees with specialty skills. Due to the rapid rate of change in the health care system and HCFA’s expanding mission, the agency’s existing staff may not possess the needed expertise. While the Congress has granted exemptions from the Office of Personnel Management salary rules for information technology staff, these exemptions do not extend to other skills—such as clinical experience and managed care marketing expertise. While HCFA has many resource-related challenges—including rehabilitating its information systems—the agency has not documented its resource needs well. As early as January 1998, we reported that the agency lacked an approach—consistent with the Government Performance and Results Act of 1993 (GPRA)—to develop a strategic plan for its full range of program objectives. Since then, the agency has developed a plan, but it has not tied global objectives to management performance. Moreover, its workforce planning efforts remain incomplete. To encourage a greater focus on results and improve federal management, the Congress enacted GPRA—a results-oriented framework that encourages improved decision-making, maximum performance, and strengthened accountability. Managing for results is fundamental to an agency’s ability to set meaningful goals for performance, to measure performance against those goals, and to hold managers accountable for their results. Last month, we reported on the results of our survey of federal managers at 28 departments and agencies on strategic management issues. The proportion of HCFA managers who reported having output, efficiency, customer service, quality, and outcome measures was significantly below that of other government managers for each of the performance measures. HCFA was the lowest-ranking agency for each measure—except for customer service, where it ranked second lowest. It should therefore be no surprise that HCFA managers’ responses concerning the extent to which they were held accountable for results—42 percent—was significantly lower than the 63 percent reported by the rest of the government. Statutory constraints are another structural issue that at times frustrate HCFA’s efforts to manage effectively. One such constraint involves HCFA’s authority to contract for claims administration services. At Medicare’s inception in the mid-1960s, the Congress provided for the government to use existing health insurers to process and pay physicians’ claims and gave professional associations of hospitals and certain other institutional providers the right to “nominate” their claims administration contractors on behalf of their members. At that time, the American Hospital Association nominated the national Blue Cross Association to serve as its intermediary. Currently, the Association is one of Medicare’s five intermediaries and serves as a prime contractor for member plans that process over 85 percent of all benefits paid by fiscal intermediaries. Under the prime contract, when one of the local Blue plans declines to renew its Medicare contract, the Association—rather than HCFA—chooses the replacement contractor. This process effectively limits HCFA’s flexibility to choose the contractors it considers most effective. HCFA has also considered itself constrained from contracting with non- health insurers for the various functions involved in claims administration because it did not have clear statutory authority to do so. As noted, the Congress gave HCFA specific authority to contract separately for payment safeguard activities, but for a number of years the agency has sought more general authority for “functional contracting,” that is, using separate contractors to perform functions such as printing and mailing and answering beneficiary inquiries that might be handled more economically and efficiently under one or a few contracts. HCFA has been seeking other Medicare contracting reforms, such as giving the agency general authority to pay Medicare contractors on an other-than-cost basis, to provide incentives that would encourage better performance. Although the health care industry has grown and transformed significantly since HCFA’s inception, the agency and Medicare, in particular, have not kept pace. Nevertheless, HCFA is expected to make Medicare a prudent purchaser of services using private sector techniques, improve its customer relations, and be prepared to implement benefit and financing reforms. Private insurance has evolved over the last 40 years and now offers comprehensive policies and employs management techniques designed to improve the quality and efficiency of services purchased. Private insurers have taken steps to influence utilization and patterns of service delivery through efforts such as beneficiary education, preferred provider networks, and coordination of services. They are able to undertake these efforts because many have detailed data on service use across enrollees and providers, as well as wide latitude in how they run their businesses. In contrast, HCFA’s outdated and inadequate information systems, statutory constraints, and the fundamental obligation to be publicly accountable have stymied efforts to incorporate private sector innovations. In a recent study, the National Academy for Social Insurance has concluded that these innovations could have potential value for Medicare but would need to be tested to determine their effects as well as how they might be adapted to reflect the uniqueness of Medicare as both a public program and the largest single purchaser of health care. In addition, HCFA would need enhanced capacity to broadly implement many of these innovations. HCFA is also expected to improve its customer service to the provider community. In seeking answers from HCFA headquarters, regional offices, and claims administration contractors, providers contend that the agency does not speak with one voice, adding frustration to complexity. We are currently studying ways in which communication with providers— including explanations of Medicare rules—could be improved. HCFA has also been expected to improve communications with beneficiaries, particularly as the information pertains to health plan options. As required by the BBA, HCFA began a new National Medicare Education Program. For 3 years the agency has worked to educate beneficiaries and improve their access to Medicare information by annually distributing a Medicare handbook containing comparative health plan information; establishing a telephone help line and an Internet web site with, among other things, comparative information on nursing homes, health plans, and Medigap policies; and sponsoring local education programs. Although funding for these activities previously came largely from user fees collected from Medicare+Choice plans, future funding is less certain. At the same time, such outreach efforts are becoming increasingly important, because in 2002 beneficiaries’ options for switching health plans will be more limited than they are today. The future is likely to hold new challenges for CMS. For example, the agency may be expected to oversee a prescription drug benefit administered by third parties. As we reported to this Committee last year, the administration of a drug benefit would entail numerous challenges, as the strategies now used by the private sector are not readily adaptable to Medicare because of its public sector obligations. Those challenges notwithstanding, the capacity issue remains. The number of prescriptions for Medicare beneficiaries could easily approach the current number of claims for all other services, or about 900 million annually. Today’s processing and scrutiny of drug claims by pharmacy benefit managers (PBM) is very different from Medicare’s handling of claims for other services. PBMs have the ability to provide on-line, real-time drug utilization reviews. These serve a quality- and cost-control function by supplying information to pharmacists regarding such things as whether a drug is appropriate for a person based on his or her age, medical condition, and other medications, as well as whether the drug is covered under the insurer’s benefit and what copayments will apply. If the use of PBMs or other entities were an option in administering a Medicare prescription drug benefit, it is not clear how much they or the others would have to increase current capacity or instead use more of the capacity already built into their information and claims processing systems—a consideration that could significantly affect the administrative costs that may be incurred. To administer this benefit through such contracts would require the agency to increase its managerial ranks with the personnel qualified to oversee such an operation. This would include staff with pharmaceutical industry expertise who could structure performance contracts in line with program goals for beneficiary access and fiscal prudence. To meet these and other expectations will require an agency with adequate capacity to manage the Medicare program. The agency will need sufficient flexibility to act prudently, while being held accountable for its results- based decisions and their implementation. It will also need to devote management attention to the fundamentals of day-to-day operations. Medicare is a popular program that millions of Americans depend on for covering their essential health needs. However, the management of the program has fallen short of expectations because it has not always appropriately balanced or satisfied beneficiaries’, providers’, and taxpayers’ needs. For example, stakeholders expect that Medicare will price services prudently; that providers will be treated fairly and paid accurately; and that beneficiaries will clearly understand their program options and will receive services that meet quality standards. In addition, there are expectations that the agency will be prepared to implement restructuring or added benefits in the context of Medicare reform. Today’s Medicare agency, while successful in certain areas, may not be able to meet these expectations effectively without further congressional attention to its multiple missions, capacity, and flexibility. The agency will also need to do its part by implementing a performance-based approach that articulates priorities, documents resource needs, and holds managers accountable for accomplishing program goals. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other Committee Members may have. For more information regarding this testimony, please contact me or Leslie G. Aronovitz at (312) 220-7600. Other contributors to this statement include Sheila Avruch, Barrett Bader, and Hannah F. Fein. | Medicare is a popular program that millions of Americans depend on for covering their essential health needs. However, the management of the program has fallen short of expectations because it has not always appropriately balanced or satisfied the needs of beneficiaries, providers, and taxpayers. For example, stakeholders expect that Medicare will price services prudently; that providers will be treated fairly and paid accurately; and that beneficiaries will clearly understand their program options and will receive services that meet quality standards. In addition, there are expectations that the agency will be prepared to implement restructuring or added benefits in the context of Medicare reform. Today's Medicare, although successful in some areas, may not be able to meet these expectations effectively without further congressional attention to its multiple missions, capacity, and flexibility. The program will also need to do its part by implementing a performance-based approach that articulates priorities, documents resource needs, and holds managers accountable for accomplishing program goals. |
Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon- intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the effects of domestic emissions pricing for industries in the United States is complex. For example, if the United States were to regulate greenhouse gas emissions, production costs could rise for many industries and could cause output, profits, or employment to fall. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Additionally, if U.S. climate policy was more stringent than in other countries, some domestic industries could experience a loss in international competitiveness. Within these industries, adverse competitiveness effects could arise through an increase in imports, a decrease in exports, or both. For regulated sources, greenhouse gas emissions pricing would increase the cost of releasing greenhouse gases. As a result, it would encourage some of these sources to reduce their emissions, compared with business- as-usual. Under domestic emissions pricing, production costs for regulated sources could rise as they either take action to reduce their emissions or pay for the greenhouse gases they release. Cost increases are likely to be larger for production that is relatively greenhouse gas-intensive, where greenhouse gas intensity refers to emissions per unit of output. Cost increases may reduce industry profits, or they may be passed on to consumers in the form of higher prices. To the extent that cost increases are passed on to consumers, they could demand fewer goods, and industry output could fall. While emissions pricing would likely cause production costs to rise for certain industries, the extent of this rise and the resulting impact on industry output are less certain due to a number of factors. For example, the U.S. emissions price and the emissions price in other countries are key variables that will help to determine the impact of emissions pricing on domestic industries. However, future emission prices are currently unknown. Additionally, to the extent that emissions pricing encourages technological change that reduces greenhouse gas intensity, potential adverse effects of emissions pricing on profits or output could be mitigated for U.S. industries. Several studies by U.S. agencies and experts have used models of the economy to simulate the effects of emissions pricing policy on output and related economic outcomes. These models generally find that emissions pricing will cause output, profits, or employment to decline in sectors that are described as energy intensive, compared with business-as-usual. In general, these studies conclude that these declines are likely to be greater for these industries, as compared with other sectors in the economy. However, some research suggests that not every industry is likely to suffer adverse effects from emissions pricing. For example, a long-run model estimated by Ho, Morgenstern, and Shih (2008) predicts that some U.S. sectors, such as services, may experience growth in the long run as a result of domestic emissions pricing. This growth would likely be due to changes in consumption patterns in favor of goods and services that are relatively less greenhouse gas-intensive. Potential international competitiveness effects depend in part on the stringency of U.S. climate policy relative to other countries. For example, if domestic greenhouse gas emissions pricing were to make emissions more expensive in the United States than in other countries, production costs for domestic industries would likely increase relative to their international competitors, potentially disadvantaging industries in the United States. As a result, some domestic production could shift abroad, through changes in consumption or investment patterns, to countries where greenhouse gas emissions are less stringently regulated. For example, consumers may substitute some goods made in other countries for some goods made domestically. Similarly, investment patterns could shift more strongly in favor of new capacity in countries where greenhouse gas emissions are regulated less stringently than in the United States. Stakeholders and experts have identified two criteria, among others, that are important in determining potential vulnerability to adverse competitiveness effects: trade intensity and energy intensity. Trade intensity is important because international competitiveness effects arise from changes in trade patterns. For example, if climate policy in the United States were more stringent than in other countries, international competition could limit the ability of domestic firms to pass increases in costs through to consumers. Energy intensity is important because the combustion of fossil fuels for energy is a significant source of greenhouse gas emissions, which may increase production costs under emissions pricing. Legislation passed in June 2009 by the House of Representatives, H.R. 2454, 111th Cong. (2009), uses the criteria of trade intensity and energy intensity or greenhouse gas intensity, among others, to determine eligibility for the Emission Allowance Rebate Program, which is part of the legislation. H.R. 2454 specifies how to calculate the two criteria. Trade intensity is defined as the ratio of the sum of the value of imports and exports within an industry to the sum of the value of shipments and imports within the industry. Energy intensity is defined as the industry’s cost of purchased electricity and fuel costs, or energy expenditures, divided by the value of shipments of the industry. Reducing carbon emissions in the United States could result in carbon leakage through two potential mechanisms. First, if domestic production were to shift abroad to countries where greenhouse gas emissions are not regulated, emissions in these countries could grow faster than expected otherwise. Through this mechanism, some of the expected benefits of reducing emissions domestically could be offset by faster growth in emissions elsewhere, according to Aldy and Pizer (2009). Second, carbon leakage may also arise from changes in world prices that are brought about by domestic emissions pricing. For example, U.S. emissions pricing could cause domestic demand for oil to fall. Because the United States is a relatively large consumer of oil worldwide, the world price of oil could fall when the U.S. demand for oil drops. The quantity of oil consumed by other countries would rise in response, increasing greenhouse gas emissions from the rest of the world. These price effects may be a more important source of carbon leakage than the trade effects previously described. Two key indicators of potential vulnerability to adverse competitiveness effects are an industry’s energy intensity and trade intensity. Proposed U.S. legislation specifies that (1) either an energy intensity or greenhouse gas intensity of 5 percent or greater; and (2) a trade intensity of 15 percent or greater be used as criteria to identify industries for which trade measures or rebates would apply. Since data on greenhouse gas intensity are less complete, we focused our analysis on industry energy intensity. Most of the industries that meet these criteria fall under 4 industry categories: primary metals, nonmetallic minerals, paper, and chemicals. However, there is significant variation in specified vulnerability characteristics among different product groups (“sub-industries”). Although our report examined the four industry categories, figures 1 through 4 or the following pages illustrate the variation among different sub-industries within the primary metals industry, as well as information on the type of energy used and location of import and export markets. The data shown in these figures are for the latest year available. As shown by sub-industry examples in figure 1, energy and trade intensities differ within primary metals. For example, primary aluminum meets the vulnerability criteria with an energy intensity of 24 percent and a trade intensity of 62 percent. Ferrous metal foundries meets the energy intensity criteria, but not the trade intensity criteria. Steel manufacturing—products made from purchased steel—and aluminum products fall short of both vulnerability criteria. Iron and steel mills has an energy intensity of 7 percent and a trade intensity of 35 percent and is by far the largest sub-industry example, with a 2007 value of output of over $93 billion. The energy and trade intensity for all primary metal products is denoted by the “x” in figure 1. Among the primary metals sub-industry examples shown in figure 2, the types of energy used also vary. Iron and steel mills uses the greatest share of coal and coke, and steel manufacturing and ferrous metal foundries uses the greatest proportion of natural gas. Since coal is more carbon- intensive than natural gas, sub-industries that rely more heavily on coal could also be more vulnerable to competitiveness effects. The carbon intensity of electricity, used heavily in the production of aluminum, will also vary on the basis of the source of energy used to generate it and the market conditions where it is sold. Data shown for “aluminum” include primary aluminum and aluminum products, and net electricity is the sum of net transfers plus purchases and generation minus quantities sold. Industry vulnerability may further vary depending on the share of trade with countries that do not have carbon pricing. To illustrate this variability, figure 3 provides data on the share of imports by source, since imports exceed exports in each of the primary metals examples. As shown, while primary aluminum is among the most trade-intensive, the majority of imports are from Canada, an Annex I country with agreed emission reduction targets. For iron and steel mills, over one-third of imports are from the European Union and other Annex I countries, not including Canada (“EU plus”). However, for iron and steel mills, almost 30 percent of imports are also from the non-Annex I countries of China, Mexico, and Brazil. While less trade-intensive, steel manufacturing and aluminum products each has greater than one-third of imports from China alone. As shown in figure 4, adverse competitiveness effects from emissions pricing could increase the already growing share of Chinese imports that exists in some of the sub-industries. Among the examples, iron and steel mills, steel manufacturing, and aluminum products exhibit a growing trade reliance on Chinese imports since 2002. This trend has largely been driven by lower labor and capital costs in China, and, according to representatives from the steel industry, China has recently been producing 50 percent of the world’s steel. Mr. Chairman, this concludes my prepared statement. Thank you for the opportunity to testify before the Committee on some of the issues addressed in our report on the subject of climate change trade measures. I would be happy to answer any questions from you or other members of the Committee. For further information about this statement, please contact Loren Yager 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 statement. Individuals who made key contributions to this statement include Christine Broderick (Assistant Director), Etana Finkler, Kendall Helm, Jeremy Latimer, Maria Mercado, and Ardith Spence. 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. | Countries can take varying approaches to reducing greenhouse gas emissions. Since energy use is a significant source of greenhouse gas emissions, policies designed to increase energy efficiency or induce a switch to less greenhouse-gas-intensive fuels, such as from coal to natural gas, can reduce emissions in the short term. In the long term, however, major technology changes will be needed to establish a less carbon-intensive energy infrastructure. To that end, a U.S. policy to mitigate climate change may require facilities to achieve specified reductions or employ a market-based mechanism, such as establishing a price on emissions. Several bills to implement emissions pricing in the United States have been introduced in the 110th and 111th Congresses. These bills have included both cap-and-trade and carbon tax proposals. Some of the proposed legislation also include measures intended to limit potentially adverse impacts on the international competitiveness of domestic firms. Estimating the potential effects of domestic emissions pricing for industries in the United States is complex. If the United States were to regulate greenhouse gas emissions, production costs could rise for certain industries and could cause output, profits, or employment to fall. Within these industries, some of these adverse effects could arise through an increase in imports, a decrease in exports, or both. However, the magnitude of these potential effects is likely to depend on the greenhouse gas intensity of industry output and on the domestic emissions price, which is not yet known, among other factors. Estimates of adverse competitiveness effects are generally larger for industries that are both relatively energy- and trade-intensive. In 2007, these industries accounted for about 4.5 percent of domestic output. Estimates of the effects vary because of key assumptions required by economic models. For example, models generally assume a price for U.S. carbon emissions, but do not assume a similar price by other nations. In addition, the models generally do not incorporate all policy provisions, such as legislative proposals related to trade measures and rebates that are based on levels of production. Proposed legislation suggests that industries vulnerable to competitiveness effects should be considered differently. Industries for which competitiveness measures would apply are identified on the basis of their energy and trade intensity. Most of the industries that meet these criteria are in primary metals, nonmetallic minerals, paper, and chemicals, although significant variation exists for product groups (sub-industries) within each industry. Additional variation arises on the basis of the type of energy used and the extent to which foreign competitors' greenhouse gas emissions are regulated. To illustrate variability in characteristics that make industries vulnerable to competitiveness effects, we include illustrations of sub-industries within primary metals that meet both the energy and trade intensity criteria; examples that met only one criterion; and examples that met neither, but had significant imports from countries without greenhouse gas pricing. |
The requirement for timely, accurate, and useful financial and performance management information is greater than ever. The long-term fiscal pressures created by the retirement of the baby boom generation and new homeland security and defense commitments, including the ongoing Operation Iraqi Freedom, sharpen the need to look at competing claims on federal budgetary resources and new priorities. In previous testimony, I noted that it should be the norm to reconsider the relevance or “fit ” of any federal program or activity in today’s world and for the future. Such a fundamental review is necessary both to increase fiscal flexibility and to make government fit the modern world. Stated differently, there is a need to consider what the proper role of the federal government will be in the 21st century and how the government should do business in the future. The budget and performance integration initiative undertaken as part of the President’s Management Agenda should help provide information for use in conducting such reviews. OMB’s Program Assessment Rating Tool (PART) represents a step toward more structured involvement of program and performance analysis in the budget. PART includes general questions on (1) program purpose and design, (2) strategic planning, (3) program management, and (4) program results. It also includes a set of more specific questions that vary according to the type of delivery mechanism or approach the program uses. As we look ahead, the federal government faces an unprecedented demographic challenge. A nation that has prided itself on its youth will become older. Between now and 2035, the number of people who are 65 years old or over will double. As the share of the population over 65 climbs, federal spending on the elderly will absorb larger and ultimately unsustainable shares of the federal budget. Federal spending on health and entitlement programs for the elderly is expected to surge as people live longer and spend more time in retirement. In addition, advances in medical technology are likely to keep pushing up the cost of providing health care. Moreover, the baby boomers will have left behind fewer workers to support them in retirement, prompting a slower rate of economic growth from which to finance these higher costs. Absent substantive reform of related entitlement programs and/or dramatic changes in tax or discretionary spending policies, we will face large, escalating, and persistent deficits. These trends have widespread implications for our society, our economy, and the federal budget. On March 17, 2003, the Trustees of the Social Security and Medicare trust funds reported on the current and projected status of these programs over the next 75 years. The Trustees report that the fundamentals of the financial status of both Social Security and Medicare remain highly problematic. However, they stated that Medicare faces financial difficulties that are more severe than those confronting Social Security because costs of the Medicare program are projected to rise faster than costs of the Social Security program. The projections show a 20 percent increase to about $6.2 trillion over the prior year in the Present Value of Resources Needed Over the 75-Year Projection Period for Federal Hospital Insurance (Medicare Part A), while the Social Security projection showed an 8 percent increase to about $4.9 trillion. Once again, the Trustees state that action to address the financial difficulties facing Social Security and Medicare must be taken in a timely manner and that the sooner these financial challenges are addressed, the more varied and less disruptive the solutions can be. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to take action entails risks. First, we lose an important window where today’s relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. Second, we lose the opportunity to reduce the burden of interest in the federal budget, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Third, and most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. We prepare long-term budget simulations that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care costs. Our latest long-term budget simulations reinforce the need for change in the major cost drivers—Social Security and health care programs. As shown in figure 1, by midcentury, absent reform of these entitlement programs, projected federal revenues may be adequate to pay little beyond interest on the debt and Social Security benefits. Further, the shift from surplus to deficit means that the nation will move into the future in a weaker fiscal position than was previously the case. Although the need for structural change in Social Security is widely recognized, this change would not be sufficient to overcome the long-term fiscal challenges confronting the nation. For example, the long-term fiscal imbalance would not come close to being eliminated even if Social Security benefits were to be limited to currently projected trust fund revenues, because Medicare and Medicaid—spending for which is driven by both demographics and rising health care costs—present an even greater problem. While addressing the challenges of Social Security and Medicare is key to ensuring future fiscal flexibility, a fundamental review of major programs, policies, and operations can create much-needed fiscal flexibility to address emerging needs. As I have stated previously, it is healthy for the nation periodically to review and update its programs, activities, and priorities. Many federal programs and policies were designed years ago to respond to earlier challenges. Ultimately, the federal government should strive to hand to the next generation the legacy of a government that is effective and relevant to a changing society—a government that is as free as possible of outmoded commitments and operations that can inappropriately encumber the future. A reexamination of existing programs and policies could help weed out items that have proven to be outdated or persistently ineffective or alternatively could prompt us to update and modernize activities through such actions as improving program targeting and efficiency, consolidation, or reengineering of processes and operations. Such a review should not be limited to only spending programs but should include the full range of tools of governance that the federal government uses to address national objectives. These tools include loans and loan guarantees, tax expenditures, and regulations. In the last decade the Congress put in place a series of laws designed to improve information about cost and performance. This framework and the information it provides can help structure and inform the debate about what the federal government should do. In addition, GAO has identified a number of areas warranting reconsideration based on program performance, targeting, and costs. The events of the past few years have served to highlight the benefits of fiscal flexibility. Addressing the long-term drivers in the budget is essential to preserving any flexibility in the long term. In the nearer term, a fundamental review of existing programs and policies can also create much-needed fiscal flexibility. In this regard, the federal government must determine how best to address the necessary structural challenges in a reasonably timely manner in order to identify specific actions that need to be taken. As steward of the nation’s future, the federal government must begin to prepare for tomorrow. Today’s budget decisions shape, in part, the choices and resources available to future decision makers and taxpayers. Accordingly, today’s budget decisions involve tradeoffs between meeting current needs and fulfilling stewardship responsibilities. The government undertakes a wide range of responsibilities, programs, and activities that may call for future spending or create an expectation for such spending. Figure 2 illustrates some of these claims on future federal resources. A better understanding and more transparency about these “fiscal exposures” is needed. The budget needs to employ new metrics and measures and processes—relying more on long-term estimates and present value concepts in making resource allocation decisions. Neither current budget reporting nor financial statements are designed to promote the recognition and explicit consideration of all of these exposures. Our nation’s fiscal exposures cover a wide range: from explicit liabilities to implicit promises embedded in current policy or public expectations. Some, like accounts payable and loan guarantees, are included in both the budget and financial statements and some are not. Others, such as liability for environmental cleanup, are reported in the financial statements, but only a single year’s figures are in the budget. Some implicit exposures, such as future Social Security and Medicare benefits, are not included in the budget or reported as liabilities in the financial statements but are captured in long-range budget projections. Other implicit exposures, such as the risk assumed by insurance programs, may not be captured in either budget or financial reporting. The failure to understand and address these fiscal exposures can have significant consequences, encumbering future budgets and reducing fiscal flexibility. Further, the failure to capture the long-term costs of a proposal or decision limits the Congress’s ability to control fiscal exposures at the time it is being asked to make the decision. As the figure makes clear, there is wide diversity in the nature of these fiscal exposures. This diversity suggests that it would be most useful to look at different types of fiscal exposures and tailor metrics and changes to address each type. We recently recommended that OMB report annually on fiscal exposures, including a concise list and description and cost estimates where possible. We also recommended that, where possible, OMB report the estimated costs associated with certain exposures as a new budget concept—“exposure level”—as a notational item in the President’s budget. These two steps would help alert both the public and policy makers about the long-term implications of programs, policies and activities. It is important to recognize that for trust funds, greater transparency and fuller disclosure means going beyond trust fund balances or solvency measures. For federal trust funds the balances do not provide meaningful information about program sustainability. These balances do not increase the government’s ability to meet long-term commitments. Nor do they necessarily represent the full future cost of existing promises. For example, the projected exhaustion date of the Hospital Insurance (HI) Trust Fund is a commonly used indicator of HI’s financial condition. Under the Trustees’ 2003 intermediate estimates, the HI Trust Fund is projected to exhaust its assets in 2026. Long before that, however, HI’s program outlays will exceed program tax revenues. Under the Trustees’ 2003 intermediate estimates, this will begin in 2013. To finance program cash deficits, HI will need to draw on the special-issue Treasury securities acquired during the years of cash surpluses. For HI to “redeem” its securities, the government will need to obtain cash through some combination of increased taxes, spending cuts, and/or increased borrowing from the public (or, if the unified budget is in surplus, less debt reduction than would otherwise have been the case). HI’s negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program’s ongoing costs. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole and the economy can afford the promised benefits now and in the future and at what cost to other claims on available resources. Extending a trust fund’s solvency without reforms to make the underlying program more sustainable can create a false sense of security and delay needed reform. Because the balances can be misleading, we need to reconsider how trust funds, and the nonmarketable federal government securities contained therein, are treated in both the budget and the federal government’s financial statements. Today the Congress and President Bush face the challenge of sorting out these many claims on the federal budget without the budget enforcement mechanisms or fiscal benchmarks that guided the federal government through the years of deficit reduction. However, it is still the case that the federal government needs a decision-making framework that permits it to evaluate choices against both today’s needs and the longer-term fiscal future that will be handed to future generations. More complete, visible, and transparent reporting of fiscal exposures can better position decision makers to do this. As I mentioned earlier, as has been the case for the past 5 fiscal years, the federal government continues to have a significant number of material weaknesses related to financial systems, fundamental recordkeeping and financial reporting, and incomplete documentation. Several of these material weaknesses (referred to hereafter as material deficiencies) resulted in conditions that continued to prevent us from expressing an opinion on the U.S. government’s consolidated financial statements for the fiscal years ended September 30, 2002 and 2001. There may also be additional issues that could affect the consolidated financial statements that have not been identified. Major challenges include the federal government’s inability to properly account for and report property, plant, and equipment and inventories and related property, primarily at the Department of Defense (DOD); reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities and related costs at DOD, and ensure complete and proper reporting for commitments and contingencies; support major portions of the total net cost of government operations, most notably related to DOD, and ensure that all disbursements are properly recorded; fully account for and reconcile intragovernmental activity and balances; properly prepare the federal government’s financial statements, including fully ensuring that the information in the consolidated financial statements is consistent with the underlying agency financial statements, balancing the statements, adequately reconciling the results of operations to budget results, and eliminating transactions between governmental entities. In addition, we identified material weaknesses in internal control related to loans receivable and loan guarantee liabilities, improper payments, tax collection activities, and information security. I would now like to discuss in more detail the material deficiencies identified by our work. The federal government could not satisfactorily determine that all such assets were included in the consolidated financial statements, verify that certain reported assets actually exist, or substantiate the amounts at which they were valued. A significant portion of the property, plant, and equipment and the vast majority of inventories and related property are the responsibility of DOD. DOD did not maintain adequate systems or have sufficient records to provide reliable information on these assets. Other agencies, most notably NASA, reported continued weaknesses in internal control procedures and processes related to property, plant, and equipment. The federal government could not reasonably estimate or adequately support amounts reported for certain liabilities. For example, the federal government was not able to reliably estimate key components of DOD’s environmental and disposal liabilities and could not support its estimate of military postretirement health benefits liabilities included in federal employee and veteran benefits payable. Further, the federal government could not determine whether commitments and contingencies, including those related to treaties and other agreements entered into to further the U.S. government’s interest, were complete and properly reported. The previously discussed material deficiencies in reporting assets and liabilities, material deficiencies in financial statement preparation, as discussed below, and the lack of adequate disbursement reconciliations at certain federal agencies affect reported net costs. As a result, the federal government was unable to support significant portions of the total net cost of government operations, most notably related to DOD. As it relates to disbursement reconciliations, some federal agencies did not adequately reconcile disbursements to Treasury’s records of disbursements, which is intended to be a key control to detect and correct errors and other misstatements in financial records in a timely manner. We have seen progress in this area over the past 6 years. However, for fiscal years 2002 and 2001 there were unsupported adjustments and unreconciled differences between federal agencies’ and Treasury’s records of disbursements totaling billions of dollars. OMB and Treasury require CFO Act agencies to reconcile selected intragovernmental activity and balances with their “trading partners” and to report on the extent and results of intragovernmental activity and balances reconciliation efforts. However, a substantial number of the CFO Act agencies did not fully perform such reconciliations for fiscal years 2002 and 2001. For both of these years, amounts reported for federal agency trading partners for certain intragovernmental accounts were significantly out of balance. I will discuss these issues further later in this testimony, as well as certain related corrective actions being taken. The federal government did not have adequate systems, controls, and procedures to properly prepare its consolidated financial statements. Specifically, we identified problems with compiling the consolidated financial statements, such as adequately ensuring that the information for each federal agency that was included in the consolidated financial statements was consistent with the underlying agency financial statements. In addition, we identified problems with the elimination of intragovernmental activity and balances. Later in this testimony, these matters are discussed further, along with certain corrective actions being taken. Also, disclosure of certain financial information was not presented in the consolidated financial statements in conformity with U.S. generally accepted accounting principles. In addition to the material deficiencies noted above, we found four other material weaknesses in internal control as of September 30, 2002: (1) several federal agencies continue to have significant deficiencies in the processes and procedures used to estimate the costs of their lending programs and value their loan receivables; (2) most federal agencies have not estimated or reported the magnitude of improper payments in their programs; (3) material internal control weaknesses and systems deficiencies continue to affect the federal government’s ability to effectively manage its tax collection activities; and (4) federal agencies have not yet institutionalized comprehensive information security management programs. Prior to fiscal year 2001, we cited accounting for loans receivable and loan guarantee liabilities as a material deficiency contributing to our disclaimer of opinion because certain key federal credit agencies could not reliably estimate the costs of their lending programs or determine the net loan amounts expected to be collected. In fiscal year 2001, due to significant improvements at USDA, we removed this area from the list of issues contributing to our disclaimer. Nevertheless, several federal agencies continue to have significant deficiencies in the processes and procedures used to estimate the costs of their lending programs and value their loan receivables. In a recent report on SBA's loan asset sale program, we reviewed SBA’s budgeting and accounting for loan sales and found that SBA incorrectly calculated the accounting losses on the loan sales and lacked reliable financial data to determine the overall financial impact of the sales. Further, because SBA did not analyze the effect of loan sales on its remaining portfolio, its reestimates of loan program costs for the budget and financial statements may contain significant errors. In addition, SBA could not explain significant declines in its loss allowance account for disaster loans. SBA’s inspector general and its independent auditor agreed with our findings, and the independent auditor withdrew its unqualified audit opinions on SBA’s fiscal years 2001 and 2000 financial statements. Until SBA corrects these errors and determines the cause of the precipitous decline in the loss allowance account for disaster loans, SBA’s financial statements cannot be relied upon. Further, the reliability of current and future subsidy cost estimates will remain unknown. These errors and the lack of key analyses also mean that congressional decision makers are not receiving accurate financial data to make informed decisions about SBA’s budget and the level of appropriations the agency should receive. In addition, we again noted that certain other federal credit agencies continue to require significant adjustments to the estimates of program costs, net loan amounts to be collected, and related notes. Auditors for these agencies reported related material internal control weaknesses. Across the federal government, improper payments occur in a variety of programs and activities, including those related to health care, contract management, federal financial assistance, and tax refunds. Many improper payments occur in federal programs that are administered by entities other than the federal government. In general, improper payments often result from a lack of or an inadequate system of internal controls. While estimates of improper payments disclosed in federal agency financial statements totaled approximately $20 billion for both fiscal years 2002 and 2001, the federal government did not estimate the full extent of improper payments. The President’s Management Agenda includes addressing erroneous payments (a term we consider synonymous with improper payments) as one of the key elements for improving financial performance. The Department of Health and Human Services (HHS) has been reporting a national estimate of improper Medicare fee-for-service payments as part of its annual financial statements since fiscal year 1996. In fiscal year 2002, HHS reported estimated improper Medicare fee-for-service payments of approximately $13.3 billion, or about 6.3 percent of such benefits. HHS’s Centers for Medicare and Medicaid Services (CMS) has initiated projects to improve the precision of Medicare fee-for-service improper payment estimates and aid in the development of corrective actions to reduce improper payment losses. For example, CMS developed a comprehensive error-testing program that will produce contractor-, provider-, and benefit- specific error rates. These error rates can be aggregated to add greater precision to the national Medicare fee-for-service error rate estimates. However, most federal agencies have not estimated or reported the magnitude of improper payments in their programs and comprehensively addressed this issue in their annual performance plans under the Government Performance and Results Act (GPRA) of 1993. For example, IRS follows up on only a portion of the suspicious Earned Income Tax Credit (EITC) claims it identifies, although the EITC has historically been vulnerable to high rates of invalid claims. In February 2002, IRS estimated that taxpayers filed returns for tax year 1999 claiming at least $8.5 billion in invalid EITCs, of which only $1.2 billion (14 percent) either was recovered or was expected to be recovered through compliance efforts. Although the full extent of refunds resulting from invalid EITCs is unknown, IRS has not routinely estimated the potential magnitude of invalid refunds and has not disclosed an annual estimate of improper payments in its financial reports. As a result, the amount of improper payments included in the almost $28 billion IRS disbursed for EITCs for fiscal year 2002 is unknown. Without systematically measuring the extent of improper payments, federal agency management cannot determine (1) whether problems exist that merit agency action, (2) what mitigation strategies are appropriate and the amount to invest in them, and (3) whether efforts implemented to reduce improper payments are successful. OMB, which has shown leadership in this area, now requires annual submissions on improper payments from 15 federal agencies. Specifically, OMB requires actual and projected information on erroneous payment rates and the status of actions taken to reduce improper payments. Further, the Improper Payments Information Act of 2002 requires federal agencies to (1) annually review programs and activities that they administer to identify those that may be susceptible to significant improper payments, (2) estimate improper payments in susceptible programs and activities, and (3) provide reports to the Congress that include such information as the status of actions to reduce improper payments for programs and activities with estimated improper payments of $10 million or more. Material internal control weaknesses and systems deficiencies continue to affect the federal government’s ability to effectively manage its tax collection activities. This situation continues to result in the need for extensive, costly, and time-consuming ad hoc programming and analyses, as well as material audit adjustments, to prepare basic financial information. As further discussed later in this testimony, this approach cannot be used to prepare such information on a timely, routine basis to assist in ongoing decision making. Additionally, the severity of the system deficiencies that give rise to the need to resort to such procedures for financial reporting purposes, as well as deficient physical safeguards, result in burden on taxpayers and lost revenue. The lack of appropriate subsidiary systems to track the status of taxpayer accounts and material weaknesses in financial reporting affect the government’s ability to make informed decisions about collection efforts. Due to errors and delays in recording activity in taxpayer accounts, taxpayers were not always being credited for payments made on their tax liabilities. In addition, the federal government did not always follow up on potential unreported or underreported taxes and did not always pursue collection efforts against taxpayers owing taxes to the federal government. This could result in billions of dollars not being collected and adversely affect future compliance. The federal government continues to be vulnerable to lost tax revenue due to weaknesses in controls intended to maximize the government’s ability to collect what is owed and to minimize the risk of payment of improper refunds. The federal government identifies billions of dollars of potentially underreported taxes and improper refunds each year. However, due in large part to perceived resource constraints, the federal government selects only a portion of the questionable cases it identifies for follow-up investigation and action. In addition, the federal government often does not initiate follow-up on the cases it selects until months after the related tax returns have been filed and any related refunds disbursed, affecting its chances of collecting amounts due on these cases. Consequently, the federal government is exposed to potentially significant losses from reduced revenue and disbursements of improper refunds. Finally, continued weaknesses in physical controls over cash, checks, and sensitive data received from taxpayers increase both the federal government’s and the taxpayers’ exposure to losses and increases the risk of taxpayers becoming victims of crimes committed through identity fraud. IRS senior management continues to be committed to addressing many of these operational and financial management issues and has made a number of improvements to address some of these weaknesses. Successful implementation of long-term efforts to resolve these serious problems will require the continued commitment of IRS management as well as substantial resources and expertise. GAO has reported information security over computerized operations as a governmentwide high-risk area since February 1997. Information security weaknesses are placing enormous amounts of federal government assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption. The federal government is not in a position to estimate the full magnitude of actual damage and loss resulting from federal information security weaknesses because it is likely that many such incidents are either not detected or not reported. Although progress has been made, federal agencies have not yet institutionalized comprehensive security management programs, which are critical to resolving information security problems and managing information security risk on an ongoing basis. The information security weaknesses continue to cover the full range of information security controls. For example, access controls were not effective in limiting or detecting inappropriate access to information resources, such as ensuring that only authorized individuals can read, alter, or delete data. In addition, software change controls were ineffective in ensuring that only properly authorized and tested software programs were implemented. Further, duties were not appropriately segregated to reduce the risk that one individual could conduct unauthorized transactions without being detected. Finally, sensitive operating system software was not adequately controlled, and adequate steps had not been taken to ensure continuity of operations. Through the recently enacted Federal Information Security Management Act of 2002 (FISMA), the Congress has continued its efforts to improve federal information security by permanently authorizing and strengthening the information security program, evaluation, and reporting requirements established by federal government information security reform legislation. This information security reform legislation has been a significant step in improving federal agencies’ information security programs and addressing their serious, pervasive information security weaknesses, and, among other benefits, has increased management attention to and accountability for information security. FISMA will further strengthen federal information security by requiring the National Institute of Standards and Technology to develop mandatory minimum information security requirements. The administration has also taken actions to improve information security. For example, OMB created an annual reporting process that includes federal agency preparation of corrective action plans to track progress in correcting identified weaknesses. Further, in February 2003, the President issued the National Strategy to Secure Cyberspace, which sets national priorities for reducing threats from and vulnerabilities to cyberattacks and improving the nation’s response to cyberincidents. Over the past year, the JFMIP Principals continued our efforts, begun in August 2001, to accelerate progress in financial management reform. This involved our personal commitment to provide the leadership necessary to address pressing governmentwide financial management issues. Also, President Bush has implemented the President’s Management Agenda to provide direction to, and to closely monitor, management reform across government, which encompasses improved financial performance. Actions such as these are important elements of ensuring the government’s full and effective implementation of the federal financial management reforms enacted by the Congress. Since August 2001, the JFMIP Principals have established an excellent working relationship, a basis for action, and a sense of urgency through which significant and meaningful progress can be achieved. In fiscal year 2002, JFMIP Principals continued the series of regular, deliberative meetings that focused on key financial management reform issues such as defining success measures for financial management performance that go far beyond an unqualified audit opinion on financial statements and include measures such as financial management systems that routinely provide timely, reliable, and useful financial information and no material internal control weaknesses or material noncompliance with laws and regulations and Federal Financial Management Improvement Act of 1996 (FFMIA) requirements; restructuring the Federal Accounting Standards Advisory Board’s (FASAB) composition to enhance the independence of the Board and increase public involvement in setting standards for federal financial accounting and reporting; significantly accelerating financial statement reporting to improve timeliness for decision making and to discourage costly efforts designed to obtain unqualified opinions on financial statements without addressing underlying systems challenges; establishing audit advisory committees for selected major federal addressing difficult accounting and reporting issues, including impediments to an audit opinion on the U.S. government's consolidated financial statements and reporting updated social insurance financial information in the U.S. government’s consolidated financial statements. Continued personal involvement of the JFMIP Principals is critical to the full and successful implementation of federal financial management reform and to providing greater transparency and accountability in managing federal programs and financial resources. At the end of fiscal year 2002, I ended my 2-year term as Chair of the JFMIP Principals, and the Chair rotated to Office of Management and Budget Director Daniels. I look forward to working with the new Chair, Treasury Secretary Snow, and Office of Personnel Management Director James in the upcoming months to continue this important dialogue and build on the strong working relationships that we have established. President Bush has established an agenda for improving the management and performance of the federal government that targets the most apparent deficiencies where the opportunity to improve performance is the greatest. It is no accident that the President’s Management Agenda has a strong correlation to GAO’s high-risk list. This is just one example of how GAO and OMB have worked constructively to identify key issues deserving increased attention throughout government. As stated in the President’s Management Agenda—and we wholeheartedly agree—there are few items more urgent than ensuring that the federal government is well run and results-oriented. The President’s Management Agenda, which is a starting point for management reform, includes improved financial management performance as one of the five governmentwide management goals. Other governmentwide initiatives of the President’s Management Agenda include strategic management of human capital, competitive sourcing, expanded electronic government, and budget and performance integration. In particular, the improved financial management performance initiative is aimed at ensuring that federal financial systems produce accurate and timely information to support operating, budget, and policy decisions. Also, this initiative focuses special attention on addressing erroneous payments, credit card abuse in the federal government, and asset management, areas for which we have reported problems and challenges. Under the improved financial management performance initiative, agencies are expected to improve the timeliness, enhance the usefulness, and ensure the reliability of financial information. The expected result is integrated financial and performance management systems that routinely produce information that is (1) timely, to measure and effect performance immediately, (2) useful, to make more informed operational and investing decisions, and (3) reliable, to ensure consistent and comparable trend analysis over time and to facilitate better performance measurement and decision making. This result is a key to successfully achieving the goals set out by the Congress in the CFO Act and other federal financial management reform legislation. Central to effectively addressing the federal government’s management problems and providing a solid base for successful transformation efforts is recognition that the five governmentwide initiatives cannot be addressed in an isolated or piecemeal fashion from other major management challenges and high risks facing federal agencies. Rather, these efforts are mutually reinforcing and must be addressed in an integrated way to ensure that they drive a broader transformation of the cultures of federal agencies. The administration is using the Executive Branch Management Scorecard to highlight federal agencies’ progress in achieving management and performance improvements embodied in the President’s Management Agenda. The Executive Branch Management Scorecard grades selected federal agencies’ performance regarding the five governmentwide initiatives by using broad standards and a red-yellow-green coding system to indicate the level at which agencies are meeting the standards. In the financial management area, while recognizing the importance of achieving an unqualified opinion from auditors on financial statements, the scorecard focuses on the fundamental and systemic issues that must be addressed in order to generate timely, accurate, and useful financial information. The scorecard also measures whether agencies have any material internal control weaknesses or material noncompliances with laws and regulations, and whether agencies meet FFMIA requirements. The December 31, 2002, scorecard’s results show dramatically the extent of work remaining across government to improve financial and other management areas. For financial performance, most of the selected federal agencies were scored in the red category. This is not surprising, considering the well-recognized need to transform financial management and other business processes at federal agencies such as DOD, the results of our analyses under FFMIA, and the various financial management operations we have designated as high risk. Some of the selected agencies improved their scores from the initial baseline evaluation as of September 30, 2001; however, other agencies’ scores declined, reflecting increased challenges. The focus that the administration’s scorecard approach brings to improving management and performance, including financial management performance, is certainly a step in the right direction. The value of the scorecard is not in the scoring per se, but in the degree to which scores lead to sustained focus and demonstrable improvements. This will depend on continued efforts to assess progress and maintain accountability to ensure that agencies are able to, in fact, improve their performance. It will be important that there be continuous rigor in the scoring process in order for this approach to be credible and effective in providing the proper incentives that produce lasting results. Also, it is important to recognize that many of the challenges the federal government faces, such as improving financial management, are long-standing and complex, and will require sustained attention. Building on the success that has been achieved in obtaining unqualified audit opinions, federal agency management must continue to work toward fully resolving the pervasive and generally long-standing material weaknesses that have been reported for the past 6 fiscal years. The underlying causes of these issues are significant financial management systems weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal control. In identifying improved financial management performance as one of its five governmentwide initiatives, the President’s Management Agenda stated that a clean (unqualified) financial audit opinion is a basic prescription for any well-managed organization. It recognized that “most federal agencies that obtain clean audits only do so after making extraordinary, labor-intensive assaults on financial records.” Further, the President’s Management Agenda stated that without sound internal control and accurate and timely financial information, it is not possible to accomplish the President’s agenda to secure the best performance and highest measure of accountability for the American people. Irrespective of the unqualified opinions on their financial statements, many federal agencies do not have timely, accurate, and useful financial information and sound controls with which to make informed decisions and to ensure accountability on an ongoing basis. While federal agencies have continued to make progress in obtaining unqualified audit opinions on annual financial statements, many of these opinions were obtained by expending significant resources on extensive ad hoc procedures and making billions of dollars in adjustments to derive the financial statements months after the end of a fiscal year. Several examples follow. The need for such resource-intensive procedures primarily results from inadequate financial management systems. After receiving a disclaimer of opinion for fiscal year 2001, NASA was able to produce auditable financial statements for fiscal year 2002; however, the auditors reported that significant weaknesses still existed in NASA’s internal controls related to accounting for the International Space Station and for equipment and materials held by contractors. Because of these control weaknesses, the auditors found numerous errors in property records and had to significantly expand the scope of their testing. To correct auditor-identified errors, NASA had to make about $11 billion of adjustments to its records. The auditors also identified a material weakness related to NASA’s process for preparing its financial statements and performance and accountability report. Deficiencies included errors made in recording significant adjustments to the statements and reports. Auditors attributed the errors to insufficient resources to address the volume of work needed to compile the financial statements, lack of an integrated financial management system, lack of understanding by NASA staff of new federal reporting requirements, and lack of quality controls over financial reporting. After 8 consecutive years of disclaimers of opinion, USDA received an unqualified opinion on its fiscal year 2002 financial statements. While we consider this a positive step toward achieving financial accountability, it took extraordinary efforts outside the normal business processes by the department and its auditors, particularly at the Forest Service. The USDA Office of Inspector General’s transmittal letter for the fiscal year 2002 Forest Service audit report stated that “the Forest Service does not yet operate as an effective, sustainable, and accountable financial management organization. The fiscal year 2002 ending account balances were primarily derived from a 2-year audit effort on beginning balances and numerous statistical samples of fiscal year 2002 transactions. As a result of these efforts, multiple adjustments were processed to the general ledger and/or subsidiary ledgers. For example, the financial statement line item General Property, Plant and Equipment, Net, was reduced by over $1 billion based on audit coverage. The achievement of an unqualified opinion, therefore, did not necessarily result from improvement in underlying financial management systems, but rather as an extensive ad hoc effort.” If USDA is to achieve and sustain financial accountability, it must fundamentally improve its underlying internal controls, financial management systems, and operations to allow for the routine production of accurate, relevant, and timely data to support program management. Our unqualified opinions on IRS’s fiscal years 2002 and 2001 financial statements were made possible by the extraordinary efforts of IRS senior management and staff to develop processes to compensate for serious internal control and systems deficiencies. As noted earlier in this testimony, IRS made significant progress during fiscal year 2002. Nonetheless, it continued to require costly, resource-intensive processes; statistical projections; external contractors; substantial adjustments; and monumental human efforts to derive reliable year-end balances for its financial statements. For example, IRS still does not have a detailed record, or subsidiary ledger, for taxes receivable to allow it to track and manage amounts due from taxpayers. To enable it to report a reliable taxes receivable balance in the absence of a subsidiary ledger, IRS has, for the last 6 years, relied on a complex statistical sampling approach that requires substantial human and financial resources to conduct, takes months to complete, and yields tens of billions of dollars of adjustments. Similarly, while progress has been made, IRS does not have an integrated property management system that appropriately records property and equipment additions and disposals as they occur and links costs on the accounting records to the property records. It will be increasingly difficult for federal agencies to continue to rely on significant costly and time-intensive manual efforts to achieve or maintain unqualified opinions until automated, integrated processes and systems are implemented that readily produce the necessary information. As a result, many federal agencies must accelerate their efforts to improve underlying financial management systems and controls, which is consistent with reaching the financial management success measures envisioned by the JFMIP Principals and called for by the President’s Management Agenda. FFMIA requires auditors, as part of CFO Act agencies’ financial statement audits, to report whether agencies’ financial management systems substantially comply with (1) federal financial management systems requirements, (2) applicable federal accounting standards (U.S. generally accepted accounting principles), and (3) the federal government’s Standard General Ledger (SGL) at the transaction level. For fiscal year 2002, auditors for 19 CFO Act agencies reported that the agencies’ financial management systems did not comply substantially with one or more of these three FFMIA requirements. For the remaining 5 CFO Act agencies, auditors provided negative assurance, meaning that nothing came to their attention indicating that these agencies’ financial management systems did not substantially meet FFMIA requirements. The auditors for these 5 agencies did not definitively state whether these agencies’ systems substantially complied with FFMIA requirements, as is required under the statute. Meeting the requirements of FFMIA has presented long-standing, significant challenges. These challenges will be resolved only through time, investment, and sustained emphasis on correcting deficiencies in federal financial management systems. GAO plans to report to the Congress by October 1, 2003, on CFO Act agencies’ FFMIA implementation for fiscal year 2002, as required by the act. While federal agencies continue to make progress in addressing weaknesses in their financial management systems, the serious shortcomings reported for these systems result in the lack of reliable financial information needed for making operating decisions day to day, managing the federal government’s operations more efficiently and effectively, measuring program performance, executing the budget, maintaining accountability, and preparing financial statements. For example, federal agency financial management systems are required to produce information on the full cost of programs and projects. This is not a new expectation—the requirement for managerial cost information has been in place for more than a decade, since 1990 under the CFO Act and since 1998 stemming from applicable accounting standards. Currently, some federal agencies are only able to provide cost accounting information at the end of the fiscal year through periodic cost surveys. Some federal agencies, such as the Department of the Interior’s Bureau of Land Management, are experimenting with methods of accumulating and assigning costs to obtain the managerial cost information needed to enhance programs, improve processes, establish fees, develop budgets, prepare financial reports, and report on performance. Having such financial information is the goal of FFMIA and the CFO Act, necessary for implementing GPRA, and critical to the transition to a more results- oriented federal government as envisioned in the President’s Management Agenda. To remedy financial management systems weaknesses and carry out the President’s Management Agenda for improving financial management, OMB, and the CFO Act agencies will need to aggressively and rigorously collaborate. Our work to identify financial management best practices in world-class organizations has identified key factors for successfully modernizing financial systems, including (1) reengineering business processes in conjunction with implementing new technology, (2) developing systems that support the partnership between finance and operations, and (3) translating financial data into meaningful data. We identified other financial management best practices as well, such as (1) providing clear, strong executive leadership, (2) making financial management an entitywide priority, and (3) building a culture of control and accountability. The size and complexity of many federal agencies and the discipline needed to overhaul or replace their financial management systems present a significant challenge—not simply a challenge to overcome a technical glitch, but a demanding management challenge that requires attention from the highest levels of the federal government along with sufficient human capital resources to effect lasting change. This will be a particular challenge at the new Department of Homeland Security (DHS), where federal agencies, many of which have ongoing challenges in their systems, processes, or internal controls over financial information, are becoming part of the new department. DHS, along with other federal agencies, has a stewardship obligation to prevent fraud, waste, and abuse, to use tax dollars appropriately, and to ensure financial accountability to the President, the Congress, and the American people. In addition to addressing incoming agencies’ challenges, DHS will need to focus on building future systems as part of its enterprise architecture approach to ensure an overarching framework for the agency’s integrated financial management processes. Plans must be developed and implemented to bridge the many financial environments in which incoming agencies currently operate to an integrated DHS system. We recognize that it will take time, investment, and sustained emphasis on correcting deficiencies to improve federal financial management systems at DHS and other federal agencies to the level required by FFMIA. The JFMIP Principals’ leadership, commitment, and oversight will be important to provide the needed impetus to meet this challenge. As I mentioned earlier, for the past 6 fiscal years, the federal government has been required to prepare, and have audited, consolidated financial statements. Successfully meeting this requirement is tightly linked to the requirement for the 24 CFO Act agencies to also have audited financial statements. This has stimulated extensive cooperative efforts and considerable attention by agency chief financial officers, inspectors general, Treasury and OMB officials, and GAO. With the benefit of several years’ experience by the federal government in having the required financial statements subjected to audit, the time has come to focus even more intensified attention on the most serious obstacles to achieving an opinion on the U.S. government’s consolidated financial statements. In this regard, the JFMIP Principals have discussed plans and strategies for addressing impediments to an opinion on the U.S. government’s consolidated financial statements. Three major impediments to an opinion on the consolidated financial statements are (1) serious financial management problems at DOD, (2) the federal government’s inability to fully account for and reconcile billions of dollars of transactions between federal entities, and (3) the federal government’s inability to properly prepare the consolidated financial statements. Essential to achieving an opinion on the consolidated financial statements is resolution of the serious financial management problems at DOD, which we have designated as high risk since 1995. In accordance with provisions of the National Defense Authorization Act for fiscal year 2002, DOD reported that the department’s financial management systems were not able to provide adequate evidence supporting material amounts in its fiscal year 2002 financial statements. DOD asserted that it is unable to comply with applicable financial reporting requirements for (1) property, plant, and equipment, (2) inventory and operating materials and supplies, (3) military retirement health care actuarial liability, (4) environmental liabilities, (5) intragovernmental eliminations and related accounting adjustments, and (6) cost accounting by suborganization/responsibility segment and major program. Based largely on DOD’s assertion, the DOD inspector general again disclaimed an opinion on DOD’s financial statements for fiscal year 2002 as it had for the previous 6 fiscal years. To date, none of the military services or major DOD components has passed the test of an independent financial audit because of pervasive weaknesses in DOD’s financial management systems, operations, and internal control, including an inability to compile financial statements that comply with generally accepted accounting principles. The department has made progress in a number of areas but is far from solving a range of serious financial management problems. Their resolution, however, is key to having auditable consolidated financial statements because DOD had budget authority of $385 billion for fiscal year 2002, or about 18 percent of the entire federal budget; is accountable for a vast amount of government assets worldwide; and incurs a substantial amount of the reported liabilities. DOD’s financial management deficiencies adversely affect not only the department’s ability to prepare auditable financial statements, but also its ability to control costs, ensure basic accountability, anticipate future costs and claims on the budget (such as for health care, weapons systems, and environmental liabilities), measure performance, maintain control of funds, prevent fraud, and address pressing management issues. For example, we recently reported on fundamental flaws in DOD’s systems, processes, and overall internal control environment, such as those related to pervasive purchase and travel card breakdowns that resulted in numerous instances of potentially fraudulent, improper, and abusive transactions and increased DOD’s vulnerability to theft and misuse of government property; adjustments to DOD’s closed appropriations that resulted in about $615 million in adjustments that should not have been made, including $146 million that were illegal; and accountability over critical items, such as chemical and biological protective garments, that resulted in DOD’s excessing and selling unused garment sets for about $3 each, while simultaneously procuring hundreds of thousands of similar garment sets for over $200 per set. As discussed in our recent reporting on the management challenges facing the government, overhauling DOD’s financial management operations represents a major challenge that goes far beyond financial accounting to the very fiber of the department’s range of business operations and management culture. In prior years, DOD expended significant resources and made material amounts of adjustments to derive its financial statements. However, such statements were determined to be unauditable. In this regard, as previously mentioned, section 1008 of the National Defense Authorization Act for fiscal year 2002 provides a framework for redirecting the department’s resources from the preparation and audit of financial statements to improving DOD’s financial management systems and financial management policies, procedures, and internal controls. Administrations over the past 12 years have attempted to address these problems in various ways but have largely been unsuccessful despite good intentions and significant effort. As we testified in March 2002 and highlighted in our more recent reports, four underlying causes of problems have impeded past reform efforts at DOD: The lack of accountability and sustained top-level leadership hinders DOD’s ability to meet its performance goals. Major improvement initiatives must have the direct, active support and involvement of the Secretary and Deputy Secretary of Defense to ensure that daily activities throughout the department remain focused on achieving shared, agencywide outcomes and success. Furthermore, sustaining commitment by top leadership to performance goals is a particular challenge for DOD because the average tenure of DOD’s top political appointees is only 1.7 years. Based on our survey of best practices of world-class financial management organizations, it is clear that strong executive leadership is essential to (1) making financial management an entitywide priority, (2) redefining the role of finance, (3) providing meaningful information to decision makers, and (4) building a team of people that delivers results. Cultural resistance to change and stovepiped operations have impeded DOD’s ability to implement broad-based management reforms. We found that the effectiveness of the Defense Management Council, established in 1997, was impaired because members were not able to put aside their particular military services’ or DOD agencies’ interests to focus on departmentwide approaches. DOD’s stovepiped approach is most evident in its current financial management systems environment, which DOD recently estimated to include 1,800 systems and system development projects—many of which were developed in piecemeal fashion and evolved to accommodate different organizations, each with its own policies and procedures. Lack of clear, linked goals and performance measures impedes DOD’s ability to attain strategic goals with the risk that units are operating autonomously, rather than collectively. In our assessment of DOD’s fiscal year 2000 Financial Management Improvement Plan—its most recent plan—we found that it presented the military services’ and DOD components’ individual improvement initiatives but did not clearly articulate how their individual efforts would result in a collective, integrated DOD-wide approach to financial management improvement. In addition, the plan did not include performance measures to assess DOD’s progress in resolving financial management problems. Furthermore, while DOD plans to invest billions of dollars in modernizing its financial management systems, it is in the initial stages of developing an overall blueprint, or enterprise architecture, to guide and direct these investments. Lack of incentives to change existing “business-as-usual” processes, systems, and structures contributes to DOD’s inability to carry out needed fundamental reform. Traditionally, DOD has focused more on justifying its need for more funding and moving programs and operations through the process than on achieving better program outcomes. It does not (1) reward behaviors that contribute to DOD- wide and congressional goals, (2) develop motivational incentives for decision makers to guide them toward better program outcomes, or (3) provide congressional focus on more results-oriented and resource allocation decisions. On September 10, 2001, Secretary of Defense Rumsfeld recognized the far- reaching nature of DOD’s financial management problems and announced a broad, top-priority initiative intended to “transform the way the department works and what it works on.” This new broad-based business transformation initiative, led by DOD’s Senior Executive Council and the Business Initiative Council, incorporates a number of defense reform initiatives begun under previous administrations but also encompasses additional fundamental business reform proposals. In announcing his initiative, Secretary Rumsfeld recognized that transformation would be difficult and expected the needed changes would take 8 or more years to complete. The Secretary’s initiative is consistent with the findings of an independent study he commissioned that concluded that DOD would have to undergo “a radical financial management transformation” and that it would take more than a decade to achieve. Secretary Rumsfeld recently included improving DOD’s financial management as one of his top 10 priorities, and DOD has already taken a number of actions intended to address its serious financial management problems. In addition, as I previously mentioned, DOD has a major effort under way to develop a DOD enterprise architecture that is intended to prescribe a blueprint for operational and technological changes in its financial and related business systems operations. While DOD has a long way to go, its efforts over the past year represent important progress. The level of top leadership that has been brought to bear on this challenge will have to be sustained with a goal of achieving lasting improvement that truly transforms DOD’s business systems and operations and enables the department to meet the mandate of the CFO Act and achieve the President’s Management Agenda’s goal of improved financial management performance. OMB and Treasury require CFO Act agencies to reconcile selected intragovernmental activity and balances with their “trading partners” and to report on the extent and results of intragovernmental activity and balances reconciliation efforts. The inspectors general reviewed these reports and communicated the results of their reviews to OMB, Treasury, and GAO. A substantial number of the CFO Act agencies did not fully perform the required reconciliations for fiscal years 2002 and 2001, citing reasons such as (1) trading partners not providing needed data, (2) limitations and incompatibility of agency and trading partner systems, and (3) human resource issues. For both of these years, amounts reported for federal agency trading partners for certain intragovernmental accounts were significantly out of balance. In addition, significant differences in other intragovernmental accounts, primarily related to appropriations, will need to be resolved. As we reported last year, the heart of the intragovernmental transactions issue is that the federal government lacked clearly articulated business rules for these transactions so that they would be handled consistently by agencies. To address certain issues that contributed to the out of balance condition for intragovernmental activity and balances, OMB has established a set of standard business rules for governmentwide transactions among trading partners and is requiring quarterly reconciliations of intragovernmental activity and balances beginning in fiscal year 2003. For example, in accordance with one of the business rules, beginning in fiscal year 2003 for intragovernmental investments with Treasury’s Bureau of the Public Debt (BPD), BPD and trading partner agencies are required to use the same method for recording amortization on market-based notes, bonds, and zero coupon securities. In the past, differences in the amortization methods being used have caused out of balance conditions for related intragovernmental activity and balances. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a commitment by the CFO Act agencies and continued strong leadership by OMB. The federal government did not have adequate systems, controls, and procedures to properly prepare its consolidated financial statements, as described below. Also, disclosure of certain financial information was not presented in the consolidated financial statements in conformity with U.S. generally accepted accounting principles. Due to the current financial statement compilation process, the federal government could not adequately ensure that the information for each federal agency included in the consolidated financial statements was consistent with the underlying agency financial statements. This process also requires significant human and financial resources and does not adequately leverage the existing work and work products resulting from federal agencies’ audited financial statements. The problems are further compounded by the need for broad changes in the structure of the government’s SGL accounts and the process for maintaining the SGL. The net position reported in the consolidated financial statements is derived by subtracting liabilities from assets, rather than through balanced accounting entries. To make the fiscal years 2002 and 2001 consolidated financial statements balance, Treasury recorded a net $17.1 billion and $17.3 billion decrease to net operating cost, respectively, on the Statement of Operations and Changes in Net Position, which it labeled unreconciled transactions. An additional net $12.5 billion and $3.9 billion of unreconciled transactions were improperly recorded in net cost for fiscal years 2002 and 2001, respectively. Treasury attributes these net unreconciled transaction amounts primarily to the federal government’s inability to properly identify and eliminate transactions between governmental entities, federal agency adjustments that affected net position, and other errors. Treasury was unable to adequately identify and explain the gross components of such amounts. Unreconciled transactions also may exist because the federal government does not have effective controls over reconciling net position. The federal government did not have an adequate process to reconcile the operating results, which for fiscal year 2002 showed a net operating cost of $364.9 billion, to the budget results, which for the same period showed a unified budget deficit of $157.7 billion. Treasury is currently developing a new system and procedures to prepare the consolidated financial statements beginning with fiscal year 2004. These actions are intended to, among other things, directly link information from federal agencies’ audited financial statements to amounts reported in the consolidated financial statements and facilitate the reconciliation of net position. Resolving the consolidated financial statement compilation process issues will require continued strong leadership by Treasury management. Consolidated financial statements are intended to present the results of operations and financial position of the components that make up a reporting entity as if the entity were a single enterprise. When preparing the consolidated financial statements, the preparer must eliminate intragovernmental activity and balances between the federal agencies. Because of federal agencies’ problems in handling their intragovernmental transactions, Treasury’s ability to eliminate these transactions is impaired. Significant differences reported in intragovernmental accounts, as noted above, have been identified. To help federal agencies better perform their reconciliations, Treasury recently began providing agencies with detailed trading partner information. Intragovernmental activity and balances are “dropped” or “offset” in the preparation of the consolidated financial statements rather than eliminated through balanced accounting entries. This contributes to the federal government’s inability to determine the impact of these differences on amounts reported in the consolidated financial statements. The continued strong leadership of Treasury will be important to resolving the issues surrounding the elimination of intragovernmental activity and balances from the consolidated financial statements. Two audit matters have come to the fore and are key to protecting the public interest. One matter involves auditors’ responsibilities for reporting on internal control, and the other concerns auditor independence. We have long believed that auditors have an important responsibility to provide an opinion on the effectiveness of internal control over financial reporting and compliance with laws and regulations. Currently, this is not required by American Institute of Certified Public Accountants (AICPA) auditing standards or by OMB in its guidance to auditors conducting federal agency financial statement audits. For financial statements audits that we conduct—which include the U.S. government’s consolidated financial statements, the financial statements of the IRS, the Schedules of Federal Debt managed by the Bureau of the Public Debt, and the financial statements of the Federal Deposit Insurance Corporation Funds and numerous small entities’ operations and funds—we issue a separate opinion on the effectiveness of internal control over financial reporting and compliance with laws and regulations. For years we have provided opinions on internal control effectiveness because of the importance of internal control to protecting the public’s interest. Our reports have engendered major improvements in internal control. As you might expect, as part of the annual audit of our own financial statements, we practice what we recommend to others and contract with an independent public accounting firm for both an opinion on our financial statements and an opinion on the effectiveness of our internal control over financial reporting and compliance with laws and regulations. Although OMB requires testing of these internal controls, auditors are not required to provide an opinion on internal control effectiveness. However, we found that 3 of the 24 CFO Act agency auditors (those for the General Services Administration, SSA, and the Nuclear Regulatory Commission) provided an opinion on the effectiveness of internal control as of September 30, 2002. Our hope is that all CFO Act agencies and the new DHS will follow suit in future years. In this regard, last year, in response to major breakdowns in corporate accountability, auditing, and corporate governance in the private sector, the Congress passed the Sarbanes-Oxley Act of 2002 to, among other things, improve quality and transparency in financial reporting and independent audits of publicly traded companies (“issuers”). In the area of internal control reporting, issuers are required to establish and maintain adequate internal control structure and procedures for financial reporting and include in the annual report a statement of management’s responsibility for and management’s assessment of the effectiveness of those controls and procedures. In addition, an issuer’s auditor is required to attest to, and report on, the assessment made by the management of the issuer on the effectiveness of internal control over financial reporting. In other words, an issuer’s auditor will provide an attestation, or opinion, on management’s assertions about the effectiveness of internal controls over financial reporting. “Internal controls and procedures for financial reporting” is generally defined as controls that pertain to the preparation of external financial statements that are fairly presented in conformity with generally accepted accounting principles. Specifically, controls over financial reporting include the objectives of ensuring that transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in conformity generally accepted accounting principles. GAO strongly believes that auditor reporting on internal control is a critical component of monitoring the effectiveness of an organization’s internal control and accountability. By giving assurance about internal control, auditors of federal financial statements can better serve their clients and other financial statements users and better protect the public interest by having a greater role in providing assurances of the effectiveness of internal control in deterring fraudulent financial reporting, protecting assets, and providing an early warning of internal control weaknesses. The independence of auditors—both in fact and appearance—is critical to the credibility of financial reporting. Auditors have the capability of performing a range of valuable services for their clients, and providing certain nonaudit services can ultimately be beneficial to federal entities. However, in some circumstances, it is not appropriate for auditors to perform both audit and certain nonaudit services for the same client. In these circumstances, the auditor, the client, or both will have to make a choice as to which of these services the auditor will provide. These concepts, which I continue to strongly believe are in the public interest, were reflected in the revisions to auditor independence requirements for government audits, which GAO issued last year as part of Government Auditing Standards. The standard, among other things, strengthens the rules associated with providing nonaudit services and includes a principle-based approach to addressing this issue, supplemented with certain safeguards. The two overarching principles in the standard for nonaudit services are that auditors should not perform management functions or make auditors should not audit their own work or provide nonaudit services in situations where the amounts or services involved are significant or material to the subject matter of the audit. In making judgments on independence under Government Auditing Standards and applying the independence standard’s principles and safeguards, audit organizations should take a “substance over form” approach and consider the nature and significance of the services provided to the audited entity—the facts and circumstances. Before an audit organization agrees to perform nonaudit services, it should carefully consider the need to avoid situations that could lead reasonable third parties with knowledge of the facts and circumstances to conclude that the auditor is not able to maintain independence in conducting audits. It is imperative that auditors always be viewed as independent in fact and appearance. Understandably, GAO received many inquiries about the new independence standard due to its significant effect on auditors in connection with audits of those who are required to use or have adopted the use of Government Auditing Standards. Working with the Comptroller General’s Advisory Council on Government Auditing Standards and other interested parties, we issued further guidance in the form of questions and answers related to the independence standard’s implementation time frame, underlying concepts, and application in specific nonaudit circumstances. The independence standard and the recently issued question and answer document are the initial steps in GAO’s continuing efforts to enhance Government Auditing Standards and educate auditors on revisions to these standards and on implementation issues surrounding the independence standard. Within the next several months, GAO will issue revisions to Government Auditing Standards to help ensure that the standards continue to meet the needs of the audit community and the public it serves. The revision will expand and change (1) the types of audits and services that can be performed under the standards and (2) the application of the standards, where relevant, to be consistent with the various types of audits. Changes are also being made to enhance the understandability of the standards. To educate the audit community about the revised standards as well as the independence standard, GAO continues to provide many presentations to government auditors and private practitioners, in addition to answering hundreds of questions regarding implementation issues. Our report on the U.S. government’s consolidated financial statements for fiscal years 2002 and 2001 highlights the need to continue addressing the government’s serious financial management weaknesses. Looking beyond current progress by federal agencies in attaining unqualified opinions on financial statements, it will be essential for the federal government to begin moving away from the extraordinary efforts many federal agencies continue to use to prepare financial statements and toward giving prominence to strengthening the government’s financial systems, reporting, and controls. This approach becomes even more critical as the federal government progresses to an accelerated financial statement reporting time frame, and it is the only way the government can meet the end goal of making timely, accurate, and useful financial information routinely available to the Congress, other policymakers, and the American public. The requirement for timely, accurate, and useful financial and performance management information is greater than ever, as the Congress and the administration prepare to meet tomorrow’s fiscal challenges. This type of financial information is central to managing the federal government’s operations more efficiently, effectively, and economically and in supporting GPRA. Moreover, meaningful financial and performance information can form the basis for reconsidering the relevance or “fit” of any federal program or activity in today’s world and for the future. In closing Mr. Chairman, I want to underscore the importance of the additional impetus provided by President Bush through his President’s Management Agenda and the Executive Branch Management Scorecard for coming to grips with federal financial management problems, indeed management problems across the board. Regarding DOD in particular, Secretary of Defense Rumsfeld’s vision and approach for transforming the department’s full range of business processes is serious and encouraging. These efforts will be key to fulfilling the President’s Management Agenda and addressing the largest obstacle to an opinion on the U.S. government’s consolidated financial statements. The cooperative efforts spearheaded by the JFMIP Principals have been most encouraging in developing the short- and long-term strategies and plans necessary to address many of the problems I have discussed this morning. In addition, GAO has probably never had a better working relationship with OMB and cabinet level and other key officials on a range of “good government issues” that are of critical importance and are inherently non-partisan in nature. While these and other factors provide an enhanced likelihood for success, in the end it is results that count. Finally, I want to reiterate the value of sustained congressional interest in these issues, as demonstrated by this hearing and those the former Subcommittee on Government Efficiency, Financial Management, and Intergovernmental Relations held over the past several years to oversee financial management reform. It will also be key that the appropriations, budget, authorizing, and oversight committees hold agency top leadership accountable for resolving these problems and that they support improvement efforts. For further information regarding this testimony, please contact Jeffrey C. Steinhoff, Managing Director, and Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-2600. R. Navarro & Associates, Inc. | GAO is required by law to audit the consolidated financial statements of the U.S. government. Timely, accurate, and useful financial information is essential for making informed operating decisions day to day, managing the federal government's operations more efficiently and effectively, meeting the goals of federal financial management reform legislation, supporting results-oriented management approaches, and ensuring accountability on an ongoing basis. The importance of such information is heightened by the unprecedented demographic challenge of an aging population. Federal spending on the elderly, health care, and new homeland security and defense commitments increases the need to look at competing claims on the budget and at new priorities. Over the past year, the Principals of the Joint Financial Management Improvement Program continued efforts to accelerate progress in financial management reform. Also, President Bush has implemented the President's Management Agenda to provide direction to, and closely monitor, management reform across government, which encompasses improved financial management performance. To effectively implement federal financial management reform, sustained leadership and oversight are essential. As in the 5 previous fiscal years, the federal government continues to have a significant number of material weaknesses related to financial systems, fundamental recordkeeping and financial reporting, and incomplete documentation. Several of these material weaknesses resulted in conditions that continued to prevent us from expressing an opinion on the U.S. government's consolidated financial statements for the fiscal years ended September 30, 2002 and 2001. Three major impediments to an opinion on the consolidated financial statements are (1) serious financial management problems at DOD, (2) the federal government's inability to fully account for and reconcile billions of dollars of transactions between federal entities, and (3) the federal government's inability to properly prepare the consolidated financial statements. Federal agencies have continued to make progress in obtaining unqualified audit opinions--21 of 24 Chief Financial Officers (CFO) Act agencies for fiscal year 2002, up from 6 for fiscal year 1996. Irrespective of the unqualified opinions, many federal agencies do not have timely, accurate, and useful financial information and sound controls with which to make informed decisions and to ensure accountability on an ongoing basis. Building on the success achieved in obtaining unqualified audit opinions, federal agency management must continue to work toward fully resolving the pervasive and generally long-standing material weaknesses that have been reported for the past 6 fiscal years. The President's Management Agenda stated that without sound internal control and accurate and timely financial information, it is not possible to accomplish the President's agenda to secure the best performance and highest measure of accountability for the American people. |
The main mission of the MHSS, which spends more than $15 billion a year, is medical readiness. This mission requires the MHSS to (1) provide medical support to active-duty military personnel in preparation for and during combat and (2) maintain the health of the active-duty force during peacetime. The Army, Navy, and Air Force all maintain uniformed health care providers to fill their MHSS medical readiness needs. To the extent that military space, staff, and other resources are available, the MHSS may also support DOD’s mission to care for nonactive-duty beneficiaries (dependents of active-duty members, retired members and their dependents, and survivors of deceased members). Whenever nonactive-duty beneficiaries’ need for health care exceeds the MHSS’ resources available to them, DOD purchases services for them from the civilian health care sector. The role of psychiatrists and clinical psychologists in meeting the MHSS medical readiness mission is to provide mental health care that helps military active-duty personnel perform their duties before, during, and after combat or some other military operation. Both psychiatrists and clinical psychologists, whether in the military or civilian sector, provide a variety of mental health services, some of which are similar. Both can diagnose mental conditions and treat these conditions with psychotherapy. A degree in medicine is required to practice psychiatry, however, so psychiatrists may treat mental disorders medically, that is, with medication. Because medical training is not required to practice clinical psychology, psychologists are not qualified to prescribe medication. To practice medicine, psychiatrists complete 4 years of medical school and a 1-year clinical internship during which they are trained to evaluate and treat all types of organic conditions and to perform general surgery. After this, they complete a 3-year psychiatric residency during which they learn to evaluate and treat mental conditions and the organic conditions associated with them. Because psychiatrists practice medicine, they can diagnose organic as well as mental conditions and treat each with medication. They consider a full range of possible organic causes for abnormal behavior when diagnosing a condition. Therefore, they can distinguish between mental conditions with an organic cause, such as schizophrenia and bipolar disorder, and organic conditions, such as diabetes and thyroid disease, which have symptoms that mimic a mental disorder. Organic mental disorders are best treated through a combination of medication and psychotherapy, according to DOD officials. Clinical psychologists, on the other hand, practice psychology, not medicine. Typically, they complete 6 years of graduate school leading to a doctoral degree and 1 to 2 years of postdoctoral clinical experience. Clinical psychologists are trained in theories of human development and behavior, so their general approach to diagnosing and treating mental illness is psychosocial rather than medical. They are trained to diagnose and treat all mental conditions and rely on the behavior a patient displays to diagnose these conditions. The MHSS created the PDP to increase the scope of practice of clinical psychologists in the military so they could treat their patients with psychotropic medication when needed. DOD established this project in response to a conference report dated September 28, 1988, which accompanied the fiscal year 1989 DOD Appropriations Act (P.L. 100-463). The report specified that, “given the importance of addressing ‘battle fatigue,’ the conferees agreed that the Department should establish a demonstration pilot training program in which military psychologists may be trained and authorized to issue appropriate psychotropic medications under certain circumstances.” The Army’s Office of the Surgeon General was tasked with designing and implementing the PDP. A blue ribbon panel was formed by the Army Surgeon General in February 1990 to determine the best method for implementing the PDP. After considering various models, the panel endorsed a training model that included course work at the Uniformed Services University for the Health Sciences (USUHS). In February 1991, the Chairmen of the Senate and House Subcommittees on Defense of the respective Committees on Appropriations then recommended that DOD develop a 2-year training model for the PDP in accordance with the panel’s recommendations. DOD later formed a committee to develop a suitable training program to provide clinical psychologists with the knowledge required for safely and effectively using a limited list or formulary of psychotropic medication. This committee recommended a special 3-year postdoctoral fellowship program for the PDP with (1) 2 years of course work at USUHS, followed by (2) 1 year of clinical experience at Walter Reed Army Medical Center. This training began in August 1991 with four participants. For subsequent classes, however, the PDP consisted of 2 years of training—1 year of classroom and 1 year of clinical training. Classroom training included courses at USUHS in subjects such as anatomy, pharmacology, and physiology. PDP participants’ clinical experience took place on inpatient wards and outpatient clinics at Walter Reed Army Medical Center in Washington, D.C., or the Malcolm Grow Medical Center at Andrews Air Force Base in Maryland. There, participants were trained to take medical histories and incorporate them into treatment plans and to prescribe medication for patients with certain types of mental disorders. After their clinical year, participants received a certificate of “Fellowship in Psychopharmacology for Psychologists” and became known as “prescribing psychologists.” Once PDP participants graduated from training, they completed 1 year of supervised or proctored practice; their respective services assigned participants to military medical facilities for this 1 year of practice. These facilities authorized participants to prescribe a specified formulary of psychotropic drugs. Although the medical education received under the PDP qualified clinical psychologists to treat mental conditions with medication, it was less extensive than psychiatrists’ medical training. Therefore, the MHSS limits prescribing psychologists’ scope of practice. They may only treat patients between the ages of 18 and 65 who have mental conditions without medical complications as determined by their supervisors. ACNP helped develop and evaluate the PDP. ACNP is a professional association of about 600 scientists from disciplines such as behavioral pharmacology, neurology, pharmacology, psychiatry, and psychology. ACNP’s principal functions are research and education. It conducted several assessments of the PDP under contract to the Army and made a number of recommendations on the project’s goals and implementation. One of them was for DOD to establish a PDP Advisory Council to help develop criteria and procedures on implementing the PDP. DOD established this council in 1994. The American Psychiatric Association, American Psychological Association, and literature on this topic have noted the possible advantages or disadvantages of allowing psychologists in the civilian sector to prescribe medication. One article has suggested that training psychologists to prescribe psychotropic medication could be particularly beneficial if they were permitted to practice this skill in clinical settings such as nursing homes, mental institutions, or medically underserved areas. Some have suggested that using prescribing psychologists could reduce the cost of care and maintain the continuity of patient care by eliminating the need to switch patients from psychologists to psychiatrists when drug therapy is indicated. On the other hand, because prescribing psychologists would receive only partial training in medicine, some are concerned about the quality of care these psychologists would be able to provide. No state licensing authority allows psychologists to prescribe medication. A few states are considering legislation, however, that would allow those already licensed by the state’s psychologist licensing board to be certified to prescribe medication after completing certain courses in medicine and gaining clinical experience. Under legislation introduced in Hawaii in 1997, psychologists seeking authority to prescribe would have to pass a standard examination. Legislation proposed in Missouri would require the development of a specified formulary of drugs for certified prescribing psychologists. None of the services needs additional mental health providers capable of prescribing medication to meet either current or upcoming medical readiness requirements, according to our review of DOD’s health care needs. Each service has more than enough psychiatrists, as well as clinical psychologists, to care for its anticipated wartime psychiatric caseload. Given this surplus, spending resources to provide psychologists with additional skill does not seem justified. Each of the three services has a model and procedures to determine the number of specific types of health care providers needed to support its MHSS medical readiness mission. These are based on the types and number of casualties anticipated under a wartime scenario. About one out of eight casualties would involve combat stress, according to an Army official.Caring for combat stress requires skill in (1) diagnosing combat stress, including the ability to distinguish it from neurological or other psychological disorders with like signs and symptoms, and (2) treating a range of severity levels of combat stress. Psychologists have many but not all of the skills necessary to treat combat stress and are therefore included, along with psychiatrists, in the services’ staffing of those who treat anticipated wartime casualties. Psychologists cannot be substituted for psychiatrists, however. Even if trained to prescribe drugs, psychologists are not as equipped as psychiatrists to distinguish between actual combat stress and certain neurological disorders that appear to be combat stress. Psychiatrists are also better able to treat more severe or complicated combat stress cases. The services have separate requirements for psychiatrists and clinical psychologists. None of the services has a separate readiness requirement for prescribing psychologists. Table 1 shows the number of MHSS psychiatrists each service has determined it needs and the number assigned or on board for fiscal years 1995 through 1998. Table 2 shows the number of clinical psychologists each service has determined it needs and the number assigned for fiscal years 1995 through 1998. As these tables show, the MHSS has at least as many uniformed psychiatrists and clinical psychologists as it needs to meet its current and upcoming readiness requirements. Our discussions with psychiatry consultants to the Surgeons General of the three services confirm the picture these numbers portray, and testimony of DOD officials at congressional hearings is consistent with the views expressed by these consultants. At a March 1995 Senate Armed Services Committee hearing, the Assistant Secretary of Defense for Health Affairs stated that on the basis of DOD staffing guidelines, the MHSS has no shortage of active-duty physicians in general. The Navy Surgeon General also testified at this hearing that the Navy has no shortage of psychiatrists. In addition, an official from the DOD Office of Health Affairs said that DOD has a surplus of psychiatrists. Although training psychologists to prescribe medication enables them to perform functions they do not normally perform, it does not give them all the skills needed to enable them to substitute for psychiatrists. Furthermore, the MHSS’ current staffing level of psychiatrists and psychologists is more than enough to meet its readiness requirements for caring for psychiatric cases without adding to some psychologists’ capabilities. Therefore, the MHSS seems to have no current or upcoming need for psychologists who may prescribe drugs. Although DOD met the mandate to establish a demonstration project to train military psychologists to prescribe psychotropic medication for mental illness, the PDP implementation faced several problems. Some of these problems have been resolved. The problems include the lack of a clearly defined purpose for prescribing psychologists in the MHSS, difficulty recruiting the desired number of participants per class, unspecified participant selection criteria, repeated changes in the classroom curriculum, delays in granting prescribing privileges, and unresolved issues involving supervision. The lack of precedent and experience with authorizing psychologists to prescribe medication, according to some officials at locations where PDP participants are stationed, is partly to blame for some of these problems. These include delays in granting prescribing privileges and disagreements over the extent of supervision. The PDP did not clearly define the role of prescribing psychologists in the MHSS. The ACNP’s PDP evaluation panel noted in 1992 that the project’s goal “to train psychologists to issue appropriate medication under certain circumstances” was “rich with ambiguities.” The project was structured and revised periodically without specifying the (1) prescribing psychologists’ duties and responsibilities, (2) types of clinical settings or facilities their skills would be best suited for, (3) types of psychotropic medication psychologists would be qualified to prescribe, and (4) level of supervision they would require. In September 1995, after the project had operated for 4 years, the ACNP panel suggested that DOD define clearly how PDP graduates could be used; this did not take place. DOD had difficulty recruiting PDP participants throughout the project. The recruiting goal, which was not met, was six psychologists for each PDP class. Since the project started in 1991, 13 psychologists have participated. Seven have completed it. Three have dropped out, and three are expected to finish their clinical experience in June 1997 (see table 3). Those who dropped out did so for various reasons: One left the military. Another enrolled in the medical school at USUHS. The third left because of dissatisfaction with the program. Because the PDP did not attract enough military psychologists, the program was opened to civilian clinical psychologists willing to enter the military. Two of the five PDP participants who began the program in 1994 were civilians who joined the military to participate in the PDP. Finally, only two psychologists entered the PDP in 1995. The MHSS established no formal candidate selection criteria for the PDP. Four classes of candidates had entered the PDP before prerequisites for participation were first addressed in February 1995. At that time, the PDP Advisory Council recommended that a candidate for the PDP (1) be on active duty, in good standing as a psychologist, and have an active state license to practice clinical psychology; (2) have a minimum of 2 years of active-duty experience as a clinical psychologist in one of the uniformed services; (3) agree to meet the service’s payback obligations for postdoctoral training; and (4) volunteer for the program. The duration, content, and sequencing of PDP training continued to change after the project began. Originally, PDP training was intended to last for 2 years and consist of both course work and clinical experience during each year. An additional year of clinical experience was added for the first class after it began the program, however, because the participants were not receiving enough clinical experience. Subsequent classes received 2 years of training as originally planned: the first dedicated exclusively to course work at USUHS, the second, to clinical practice. In addition, the curriculum content and sequencing of the courses changed after the project began. Courses such as neuroscience and psychopharmacology were added, while others were dropped. In 1995, the ACNP panel noted that the curriculum for those who started the PDP in 1994 was “markedly different” from the curriculum for participants who started the PDP in 1991. The panel said at that time that the curriculum needed to be thought through more thoroughly, using the final scope of practice and formulary as a starting point. The panel also noted that assessing the adequacy of the curriculum was difficult because it changed frequently. The panel saw a need for a well-organized, structured approach to the design of courses as well as the selection of participants. It recommended at that time that unless the MHSS addressed these concerns satisfactorily, the project should end. The first psychologists who completed the PDP faced delays of up to 14 months in getting prescribing privileges at the facilities where they were assigned possibly due to the facilities’ lack of experience with this type of provider. Two recent graduates, however, received privileges within 2 months of arriving at their facilities. In each of these cases, PDP officials visited the facilities where these psychologists had been assigned to explain the project and training and provide information about the graduates to facility officials. Facility officials cited these visits as helpful in resolving their concerns about psychologists’ prescribing privileges. The MHSS has not decided who should supervise prescribing psychologists. In 1994, the MHSS decided that after prescribing psychologists had completed their clinical year, they would spend the next year practicing under a psychiatrist’s supervision. The MHSS originally anticipated that these psychologists would ultimately function independently. All of the PDP graduates, however, continue to practice under the supervision of a psychiatrist, and whether they will ever prescribe independently is unclear. The PDP Advisory Council’s February 1995 scope of practice statement, which has been used as guidance for allowing prescribing privileges for some PDP graduates, states that prescribing psychologists should prescribe psychotropic medication only under the direct supervision of a physician. According to the Advisory Council that developed this statement, PDP graduates’ prescribing practice should be closely supervised. These psychologists should then gradually be permitted to practice under less supervision as they demonstrate their competence. Even if the MHSS had a need for additional mental health care providers to prescribe medication, the cost of meeting this need by training clinical psychologists to prescribe drugs is substantial. Furthermore, although the PDP produced additional providers who can prescribe and some facilities have reported positive experiences with them, determining the PDP’s cost-effectiveness is impossible at this time. The total cost of the PDP will be about $6.1 million through the completion of the proctored year for those currently in the program—or about $610,000 per psychologist who completes the program (see table 4). On the basis of our previous estimates of the cost of a USUHS medical education, we estimate that the cost of the classroom training for PDP participants provided by USUHS was about $110,028 per participant per year. Most of this amount consisted of faculty cost and costs for operating and maintaining USUHS. The remainder included the cost of research, development, testing and evaluation, military construction, and other miscellaneous costs. Our estimate of total cost for PDP training includes the cost of 12 classroom years of training for 10 PDP graduates as well as 3 years of training for three psychologists who dropped out of the program. Our estimates of psychologists’ salaries while participating in the PDP are based the assumption that those entering the project would receive a salary of $56,071 during their first year in the PDP, $57,571 during their second year, and $58,985 during their third year. Student salaries totaled $844,065 during the classroom training portion of the PDP, according to our estimate. This included the salaries of 11 participants for 1 year of classroom training each, 3 of whom ultimately dropped out of the PDP, and 2 participants for 2 years each. Because PDP participants treated patients during their clinical and proctored years, we reduced our salary estimates for these years by a productivity factor representing the time they spent treating patients. We used a productivity factor of 50 percent for the clinical year and 100 percent for the proctored year. On the basis of these productivity factors, total participant salary costs for the clinical portion of the PDP were $333,154, according to our estimates. This accounts for one participant who dropped out approximately halfway through the clinical year and another who received an additional year of clinical training. To estimate faculty and supervisor salaries for the PDP for the clinical and proctored years, we assumed that one faculty member per psychologist would devote 40 percent of his or her time per clinical year of training. Likewise, we assumed that during the proctored year, one supervisor would spend 20 percent of his or her time supervising each prescribing psychologist. On the basis of these assumptions, the total cost of lost faculty productivity due to training the 10 graduates for 11.5 years of clinical training was $475,810, according to our estimate; the total cost of lost supervisor productivity was $206,874 for 10 participants for 10 proctored years of practice. The lost productivity cost is based in each case on an annual salary of $103,437. Total PDP overhead cost was $2.58 million, according to our estimate.This included the cost of the evaluation contracts ($1.75 million) and personnel support costs ($830,000) for a PDP Director and a Training Director for fiscal years 1992 (when the PDP began) through 1998, when those currently in training are expected to complete their proctored year. Also included in overhead costs are smaller amounts for invited lecturers, travel and per diem expenses, supplies, and other miscellaneous expenses during this time. If the PDP had attracted a total of 24 participants and all of them had graduated, the cost would have been about $365,000 per prescribing psychologist. In addition, the cost per graduate would have been about $94,000 less than this if the project had progressed beyond the developmental stage and external evaluations could have been discontinued. After operating for 7 years, however, the project was only able to attract about half the number of participants considered optimal and had not progressed beyond the stage for which external evaluations were needed. The PDP increased the number of MHSS mental health care providers who may prescribe drugs to treat certain mental conditions. This may reduce psychiatrists’ workloads. Psychiatrists, psychologists, and primary care physicians, however, have different opinions on the effect of allowing psychologists to prescribe drugs on the quality of mental health care and collaboration among these providers. As a result of the PDP, seven psychologists are prescribing medication at DOD military facilities, and three more are expected to complete clinical training in the summer of 1997 and receive prescribing privileges some time after that. The first three participants are seeing mainly patients who require medication, and one of these temporarily filled a vacancy created by the departure of a psychiatrist. Having prescribing psychologists on staff has certain benefits to facilities where they are assigned. One of these facilities had been experiencing unusually heavy psychiatrist workloads because it did not have enough psychiatrists to fill all its psychiatry positions. In the interim, this facility specifically requested a prescribing psychologist to fulfill some of the responsibilities of a psychiatrist, reducing the psychiatry workload. Another prescribing psychologist temporarily saw the patients of a psychiatrist who transferred to another facility until the facility brought in another psychiatrist. VRI obtained perceptions of the PDP by surveying MHSS psychiatrists, primary care physicians, and psychologists about the possible effects of allowing psychologists to prescribe medication. The most frequent responses to the survey’s open-ended questions about the potential benefit of this practice were that it would (1) increase the number of mental health care providers in the MHSS and (2) reduce psychiatrists’ workloads. The most frequently noted limitation to allowing psychologists to prescribe medication was their perceived lack of knowledge about medicine, physiology, and adverse drug interactions and effects. Survey results also indicated that psychiatrists, psychologists, and primary care physicians differed about whether adding prescribing psychologists to the MHSS was beneficial. Most psychologists responded that training psychologists to prescribe would improve the quality of mental health care in the military. Conversely, most psychiatrists believed quality of care would decline. Furthermore, psychiatrists thought this would undermine their working relationships with MHSS psychologists; most primary care physicians responded that this would improve their collaboration with psychologists. Most psychologists agreed that the authority to prescribe would enhance their collaboration with MHSS primary care physicians. But as far as their collaboration with MHSS psychiatrists was concerned, about half the psychologists believed this would improve such collaboration; the other half thought it would interfere with it. The cost-effectiveness of having MHSS psychologists prescribe psychotropic medication is unclear at this time. Determining the cost-effectiveness of this effort would require information on the (1) proportion of the time remaining in the military that prescribing psychologists would have to perform functions that psychiatrists would normally perform and (2) extent to which having psychologists prescribe medication would result in fewer psychiatrists in the MHSS. The results of analyses designed to predict the relative cost-effectiveness of training and employing psychologists to prescribe compared with other providers with this authority differ depending on the cost estimates used. VRI’s analysis concluded that the PDP would prove cost-effective under certain circumstances. Additional analyses using different cost estimates, however, suggest that the PDP would not be cost-effective under these same circumstances. VRI found that the annual life cycle cost of a prescribing psychologist was potentially lower than that of a psychiatrist-psychologist combination, which is typically required to treat an MHSS patient with a mental condition requiring medication. As table 5 indicates, VRI’s analysis accounted for acquisition costs (the cost of recruiting people into the military), training costs, basic and special pay and benefits (such as housing allowances), health care costs, risk management expenses (for potential malpractice claims), and retirement costs. It assumed various pay levels for different types of providers at different stages in their military careers as well as for different career lengths. It also assumed that PDP enrollees would enter the project after 6 years as DOD clinical psychologists. VRI estimated the annual life cycle cost of prescribing psychologists given two scenarios, a start-up case scenario and an optimal case scenario. To predict the conditions under which the PDP would be cost-effective, VRI compared the annual life cycle cost of a prescribing psychologist under the start-up scenario with the life cycle cost of what it refers to as the “base” scenario. It used the start-up scenario rather than the optimal scenario because the former accounts for the nonrecurring, fixed (or start-up) costs actually associated with developing and implementing the PDP. The base scenario is the annual life cycle cost of the current psychiatrist-psychologist combination required to treat MHSS mental health care patients who need medication. Given the difference in annual life cycle costs between the base and the start-up scenarios, VRI predicted that the PDP would be more cost-effective than the base scenario if PDP participants in the start-up period functioned as prescribing psychologists, rather than traditional clinical psychologists, for more than 92.6 percent of their time remaining in the military. For this estimate, VRI assumed that (1) each PDP class would have three psychologists, (2) prescribing psychologists would be supervised for the remainder of their military service, (3) supervisory costs after the proctored year would amount to 5 percent of a physician’s annual salary per prescribing psychologist per year, and (4) prescribing psychologists would remain in the military an average of 10.2 years after completing the PDP. The validity of VRI’s predictions about the circumstances under which the PDP would be cost-effective depends on how realistic VRI’s cost estimates are as well as the other assumptions it used to estimate the annual life cycle cost of MHSS psychiatrists, psychologists, and prescribing psychologists. Some of VRI’s estimates were based on scant MHSS experience in training and employing psychologists to prescribe. Information about the PDP’s overhead cost that we collected after VRI completed its work, for example, indicated that overhead cost was lower than originally thought. Also, VRI’s estimate of the cost of training at USUHS was lower than our estimate of the cost of this training. For a more realistic prediction of the circumstances under which the PDP would be cost-effective, we asked VRI to redo its analysis, replacing its estimate of $2.89 million for total overhead cost during the start-up period with an updated estimate of $2.58 million. We also asked VRI to substitute the $39,969 it used per participant per year for PDP classroom training and related overhead with $110,028, our estimate of the per student per year cost of USUHS training, which includes training overhead. See table 6 for the results of this analysis. On the basis of our overhead and training cost estimates, PDP graduates under the start-up scenario could not be cost-effective because they would have to function as prescribing psychologists more than 101.85 percent of their time remaining in the military. This prediction is based on the same assumptions that VRI made about PDP class size, prescribing psychologists’ supervision, supervisory costs, and prescribing psychologists’ remaining time in the military. In DOD’s mental health care system, the main function of prescribing psychologists is to care for patients with certain types of mental conditions that require certain psychotropic medications. According to DOD’s needs assessments, the MHSS has more psychiatrists to care for these patients than needed to meet medical readiness requirements. Therefore, the MHSS has no current or upcoming need for clinical psychologists who may prescribe medication. In addition, the cost of producing 10 prescribing psychologists was substantial. Regardless of the cost, spending resources to produce more providers than the MHSS needs to meet its medical readiness requirement is hard to justify. The PDP has demonstrated that training psychologists to prescribe drugs, which increased the number of MHSS providers with this skill, reduced psychiatrists’ workloads in some cases. A potential benefit of the PDP, therefore, is the savings associated with prescribing psychologists delivering some of the services that psychologists in conjunction with psychiatrists have traditionally provided. These savings result because a prescribing psychologist can deliver this care with lower personnel-related costs than the combination of a psychologist and a psychiatrist. To realize these savings, however, DOD must (1) use a prescribing psychologist to treat patients who normally would have been treated by a psychiatrist and a psychologist and (2) replace higher priced providers in the MHSS with prescribing psychologists. Otherwise, the PDP cannot save DOD money. Even if the 10 prescribing psychologists from the PDP do, in certain situations, function as psychiatrists, the PDP is still not guaranteed to save money. Although prescribing psychologists cannot totally replace psychiatrists, DOD does not account for the introduction of prescribing psychologists in the MHSS when determining its readiness needs for psychiatrists. Therefore, it is uncertain whether DOD will reduce its readiness requirement for psychiatrists in response to shifting some of a psychiatrist’s functions to a prescribing psychologist. Concerning the PDP’s implementation, DOD has demonstrated that it can train clinical psychologists to prescribe psychotropic medication, and these psychologists have shown that they can provide this service in the MHSS. The implementation faced several problems, however, that persisted for the PDP’s duration. Given DOD’s readiness requirements, the PDP’s substantial cost and questionable benefits, and the project’s persistent implementation difficulties, we see no reason to reinstate this demonstration project. In the future, should prescribing psychologists be needed to meet DOD’s medical readiness requirements, the Congress should require DOD to (1) clearly demonstrate that the use of those MHSS psychologists who have been trained to prescribe has resulted in savings, (2) clearly define a prescribing psychologist’s role and scope of practice in the MHSS compared with other psychologists and psychiatrists, (3) design a curriculum appropriate to this role and scope of practice, and (4) determine the need for and the level of supervision that prescribing psychologists require. In comments received March 26, 1997, in response to a draft of this report, the Assistant Deputy Assistant Secretary of Defense (Clinical Affairs) stated that, on the basis of the methodology employed in this study, DOD has no objections to its results and recommendations. Department officials did provide a few technical corrections to the report. We modified the report as appropriate. Copies of this report will also be sent to other interested congressional committees and the Secretary of Defense. Copies will also be made available to others upon request. This report was prepared under the direction of Stephen P. Backhus, Director, Veterans’ Affairs and Military Health Care Issues, who may be reached at (202) 512-7101 if you or your staff have any questions or need additional assistance. Other major contributors to this report include Clarita Mrena, Assistant Director; William Stanco, Senior Evaluator; and Deena El-Attar and Gregory Whitney, Evaluators. DOD. To accomplish the first objective, VRI compared the annual life cycle cost of various types of MHSS mental health care providers with the annual life cycle cost of a prescribing psychologist. To address the remaining two objectives, VRI conducted what it referred to as a feasibility analysis of the PDP. VRI issued a report on this work on May 17, 1996. To determine the relative cost-effectiveness of training and employing prescribing psychologists relative to other DOD health care providers, VRI compared its estimate of DOD’s average annual life cycle cost of a prescribing psychologist with its estimate of this cost for clinical psychologists, psychiatrists, physicians specializing in internal medicine, and physicians specializing in family practice. It calculated these costs on the basis of three scenarios: the “base” case scenario, which is the status quo, a combination of psychologists and psychiatrists, with no prescribing psychologists in the MHSS; the “start-up” case scenario for prescribing psychologists, which had all the same elements of the base scenario but accounted for the introduction of prescribing psychologists into the MHSS; and the “optimal” case scenario for prescribing psychologists, which represented a modification of the start-up scenario. Costs in the start-up scenario included the nonrecurring, fixed costs associated with the PDP development and initial implementation as well as other costs for the PDP that VRI also believed would diminish or disappear in the long run. The optimal scenario represents the PDP in a long-term, steady state, during which no recurring costs associated with start-up and optimal class size would accrue. In this scenario, VRI set the cost of supplies and training to levels that indicate long-term efficiency. The following are the main steps in VRI’s cost-effectiveness analysis: 1. Calculate life cycle costs for active-duty military psychiatrists, family practitioners, internists, and clinical psychologists; then calculate the cost per full-time equivalent (FTE) for each of these by dividing their respective life cycle cost by their respective expected length of service (length of service minus unproductive time while in training). 2. Calculate life cycle costs for prescribing psychologists using actual and anticipated costs for a PDP sized at six and at three psychologists per class; and then, under both the start-up and base scenarios, calculate the cost per FTE for prescribing psychologists assuming that they (1) serve as clinical psychologists before entering the PDP and (2) after which they prescribe psychotropic medication. 3. Calculate the cost per FTE for the combination of clinical psychologists and psychiatrists that could be replaced by a prescribing psychologist. 4. Compare the annual life cycle cost per FTE of prescribing psychologists under start-up and optimal scenarios with the cost per FTE of the psychologist-psychiatrist combination. VRI’s estimates of the annual life cycle cost per FTE of various types of providers accounted for the cost of acquiring each type of provider, training costs, “force” costs, and retirement costs associated with each. Acquisition cost is DOD’s cost of recruiting someone into the military. Training costs include the cost of providing DOD-sponsored training to military health care providers. Force costs cover basic pay and allowances, special pay, miscellaneous expenses, and health care benefits of health care providers during their active-duty careers. Finally, retirement costs include the cost of retirement pay and retiree health care benefits. VRI’s overall estimates of the annual life cycle cost per FTE for different health care providers were based on a number of cost estimates and assumptions about these four cost categories that varied somewhat by provider and scenario. Following are the major assumptions VRI made when calculating life cycle cost for prescribing psychologists: For cost savings to be realized, the introduction of prescribing psychologists into the MHSS reduced FTEs for psychiatrists or other physicians. PDP participants had at least 6 years of experience as clinical psychologists when they entered the PDP. The PDP lasted 3 years—1 year for classroom training, 1 year for clinical experience, and 1 year for proctored practice. Each PDP class had three or six psychologists. PDP participants required 40 percent of a faculty member’s time during their clinical year of training and 20 percent of a faculty member’s time during their proctored year, which took time from faculty members’ patient care. After completing the PDP, graduates were able to “safely and effectively” prescribe medication and were assigned to “utilize their new prescription skills along with their clinical psychology skills to treat patients that otherwise would have had to be treated by physicians for their mental health care.” PDP participants continued to practice as prescribing psychologists for the rest of their military career. Prescribing psychologists required supervision amounting to 5 percent of a psychiatrist’s time for the rest of their military career. PDP graduates posed no more of a malpractice risk to DOD than any other mental health providers delivering the same treatment to the same types of patients. PDP graduates did not receive special pay otherwise paid to psychiatrists and other physicians in the military. Pension rates were based on an average service time for military pensioners of 22.5 years as determined by a DOD actuarial study. The objectives of VRI’s feasibility analysis were to assess the barriers to employing prescribing psychologists in the DOD health care system and how prescribing psychologists would be used in the DOD health care system. To address the first objective, VRI conducted two surveys. It conducted telephone interviews of about 400 DOD health care providers, including psychiatrists, primary care physicians, psychologists, and social workers to obtain their views on the PDP. This survey measured their awareness of the PDP, attitudes toward allowing psychologists to prescribe drugs, participant training, and ultimate ability of psychologists to prescribe medication. VRI also surveyed DOD medical beneficiaries to determine their awareness of the relative scope of practice of psychiatrists and psychologists and the PDP and to measure their attitudes toward allowing psychologists to prescribe drugs. To address its second objective, VRI reviewed DOD medical regulations, records of the PDP Advisory Council, and military health care utilization data and interviewed PDP graduates and officials familiar with the PDP. VRI acknowledged that its conclusions about the use of prescribing psychologists were “conjectures” because of DOD’s lack of experience with prescribing psychologists. The objectives of our evaluation were to assess the need for prescribing psychologists in the Military Health Services System (MHSS), provide information on the implementation of the PDP, and provide information on the PDP’s cost and benefits. To address the first objective, we used the need for MHSS psychiatrists as a proxy for the need for prescribing psychologists because psychiatrists are the only mental health care providers with full prescribing authority for which the military determines a readiness need. To assess the need for additional MHSS psychiatrists, we reviewed the Army, Navy, and Air Force methods for determining the number they need to fulfill their medical readiness mission and the results of their determinations. We compared the number of psychiatrists each branch of the service determined it needed, both now and in the future, with the number each currently has. To collect information on the PDP’s implementation, we reviewed many documents, annual reports, and assessments of the project. These included periodic evaluations conducted by the American College of Neuropsychopharmacology under contract to DOD and others done by the Army Surgeon General’s blue ribbon panels as well as the Army’s annual reports on the PDP. We based our estimate of the PDP’s cost on (1) information on cost in the Army’s annual reports on the PDP, (2) our estimates of the cost of training provided by the Uniformed Services University of the Health Sciences (USUHS), and (3) estimates of military salaries and benefits and the productivity of PDP participants and their supervisors found in Vector Research, Inc.’s (VRI) cost-effectiveness analysis of the PDP. This cost was calculated in constant 1996 dollars. To identify the qualitative benefits of the PDP, we interviewed all PDP participants who completed the PDP and others at the facilities where they were practicing and representatives of the American Psychiatric Association and the American Psychological Association. We reviewed articles that addressed the advantages and disadvantages of allowing clinical psychologists to prescribe medication. We also examined the results of a VRI survey of DOD health care providers that collected information on providers’ perceptions of PDP’s benefits. To determine what cost savings or quantitative benefit, if any, might be realized by enabling clinical psychologists to prescribe medication, we reviewed VRI’s cost-effectiveness analysis of the program done under contract to DOD. We compared the results of this analysis with those of a subsequent analysis VRI did at our request using different assumptions. In this subsequent analysis, VRI replaced its original assumptions on the number of participants and level of supervision with information we had collected about actual program experience. It also replaced its USUHS training cost estimates with our estimates noted above. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Military Health Services System's (MHSS) Psychopharmacology Demonstration Project (PDP), focusing on the: (1) need for prescribing psychologists in the MHSS; (2) implementation of the PDP; and (3) PDP's costs and benefits. GAO noted that: (1) the MHSS has more psychiatrists than it needs to meet its current and upcoming readiness requirements, according to GAO's analysis of the Department of Defense's (DOD) health care needs; (2) therefore, the MHSS needs no prescribing psychologists or any other additional mental health care providers authorized to prescribe psychotropic medication; (3) moreover, DOD does not even account for prescribing psychologists when determining its medical readiness needs; (4) although DOD met its goal to train psychologists to prescribe drugs, it faced many difficulties in implementing the PDP; (5) not all of these were resolved; (6) for example, the MHSS never had a clear vision of the prescribing psychologist's role, did not meet recruitment goals, and repeatedly changed the curriculum; (7) consequently, the American College of Neuropsychopharmacology recommended in 1995 that unless these issues were addressed, the PDP should end; (8) the total cost of the PDP, from start-up through the date the last participants will complete the program, is about $6.1 million or about $610,000 per prescribing psychologist, according to GAO's estimate; (9) ultimately, the PDP will have added 10 mental health care providers who can prescribe drugs to an MHSS that already has a surplus of psychiatrists; (10) opinions differ on the effect of adding these prescribing psychologists to the MHSS concerning such issues as quality of care and collaboration between psychologists and physicians; (11) without a clear purpose or role for prescribing psychologists and given the uncertainty about the extent to which they would replace higher cost providers, GAO cannot conclude that the benefits gained from training prescribing psychologists warrant the costs of the PDP; and (12) training psychologists to prescribe medication is not adequately justified because the MHSS has no demonstrated need for them, the cost is substantial, and the benefits are uncertain. |
I will briefly review, and in some cases update, our report’s findings on progress made in achieving the Bosnia peace operation’s four key objectives. These objectives were to (1) provide a secure environment for the people of Bosnia; (2) create a unified, democratic Bosnia that respects the rule of law and internationally recognized human rights, including cooperating with the war crimes tribunal in arresting and bringing those charged with war crimes to trial; (3) ensure the rights of refugees and displaced persons to return to their prewar homes; and (4) rebuild the economy. The Bosnian people are more secure today than before the Dayton Agreement was signed. Bosnia’s Serb, Croat, and Bosniak armies have observed the cease-fire, allowed NATO’s Implementation Force and later the Stabilization Force, known as SFOR, to monitor their weapons sites and troop movements, and have reduced their force levels by a combined total of 300,000. The U.S.-led “train and equip” program intended to help stabilize the military balance in the region and integrate the Bosniak and Bosnian Croat armies into a unified Federation army is progressing, albeit slower than anticipated. Nonetheless, Bosnian Serb political leaders have not fully lived up to arms reduction agreements. According to a State Department official, the United States could increase assistance under the Federation train and equip program to provide a military balance if the Bosnian Serbs do not comply with the arms control agreements. Bosnian Croat and Bosniak political leaders have made some progress in reforming their civilian police so that they provide security for Bosnians of all ethnic groups and do not commit human rights abuses; however, Bosnian Serb political leaders have refused to cooperate with the International Police Task Force (IPTF) in reforming their police force in accordance with democratic policing standards. Moreover, many international observers, including some in the State Department, believe that keeping an international military force in place is still the only deterrent to major hostilities in Bosnia. A unified, democratic state that respects the rule of law and adheres to international standards of human rights has yet to be achieved. Elections for institutions of Bosnia’s national and two entity governments (Republika Srpska and the Federation) were held in September 1996, and many national joint institutions intended to unify Bosnia’s ethnic groups have met at least once. However, most of these institutions are not yet functioning; Bosnia’s three separate, ethnically-based armies continue to be controlled by their wartime political leaders; and many Bosnian Serbs and Croats and their political leaders retain their wartime goal of establishing ethnically pure states separate from Bosnia. Moreover, the human rights situation worsened in the months after the election, particularly in Bosnian Serb-controlled areas. And ethnic intolerance remains strong throughout Bosnia, in large part because Bosnia’s political leaders control the media and use it to discourage reconciliation among the ethnic groups. Additionally, as of July 10, 1997, 66 of the 74 people publicly indicted by the war crimes tribunal remained at large, some openly serving in official positions and/or retaining their political power. While the Bosniaks had surrendered all indicted war criminals in their area of control to the war crimes tribunal, Bosnian Serbs and Croats had not surrendered to the tribunal any indicted war criminals in their areas. U.S. and other officials view progress on this issue as central to the achievement of the Dayton Agreement’s objectives. On July 10, 1997, NATO-led troops in Bosnia for the first time attempted to arrest people indicted for war crimes, specifically two Bosnian Serb suspects who had been charged under a sealed indictment for complicity with commitment of genocide. British SFOR soldiers arrested one suspect and, in self-defense, shot and killed the other after he fired at them. U.S. officials have stated that this action does not represent a change in policy regarding SFOR’s mandate to apprehend indicted war criminals. The policy remains that SFOR troops will arrest indicted war criminals when they come upon them in the normal course of their duties if the tactical situation allows. Despite guarantees in the Dayton Agreement and extensive international efforts to resolve the issue, the return of refugees and displaced persons to their homes has barely begun in Bosnia. The returns that did take place in 1996 and 1997 were mainly people going back to areas controlled by their own ethnic group because returns across ethnic lines proved nearly impossible. Of the estimated 2 million people who were forced or fled from their homes during the war, in 1996 about 252,000 returned home (88,000 refugees and 164,000 displaced persons), while at the same time over 80,000 others fled or were driven from their homes. Almost all of these people returned to areas in which they would be in the majority ethnic group. For 1997, the United Nations High Commissioner for Refugees (UNHCR) decided to give priority to majority returns and projected that 200,000 refugees would return to their homes, all to majority areas. As of March 1997, the pace of refugee returns exceeded UNHCR’s target as about 17,000 refugees returned to Bosnia. In mid-June 1997, however, UNHCR officials in Bosnia told us that this pace had recently fallen off, and, if the current trend continued, the number of refugee returns for 1997 would be lower than projected. A number of factors have combined to hinder returns, such as fear, stemming from lack of personal security; violence triggered by attempted cross-ethnic returns; poor economic prospects; and lack of suitable housing. Further, political leaders of all ethnic groups have used nonviolent means to resist returns, including the retention of existing, discriminatory property laws and continuing other policies that place insurmountable barriers to returns. For example, according to UNHCR officials, Bosnian Croat political leaders, as directed by Croatia, have moved 5,000 to 6,000 displaced persons—including Bosnian Croat army members and their families—into the formerly Serb-populated city of Drvar, a policy designed to prevent Serbs from returning and to cement the ethnic separation of Bosnia. This policy has been implemented by all three ethnic groups during and after the war. Recent efforts to address the return problem involved many aspects of the Bosnia peace operation. For example, in spring 1997 UNHCR, with support from the U.S. government, announced the “Open Cities” project that is designed to provide economic incentives to those areas that welcome and actively integrate refugees and displaced persons into local communities. In April, the Federation refugee minister provided UNHCR with a list of 25 cities and towns for participation in the project. As of mid-June 1997, UNHCR was evaluating the level of commitment of these and other communities that had indicated an interest in the project. According to a U.N. official, in early June the Republika Srpska Minister of Refugees was going to submit a list of nine cities in Republika Srpska that wanted to take part in the project. At the last minute, however, the minister was directed not to participate by Radovan Karadzic, who effectively retains control of Republika Srpska. According to a State Department official, the U.S. embassy and UNHCR in early July 1997 officially recognized the first three communities to receive assistance under the “Open Cities” project. The U.S. government is also funding minority return programs in two other communities. Of these five communities, three are in Bosniak-controlled areas, one is in a Bosnian Croat-controlled area, and one is in Republika Srpska. Economic conditions have improved somewhat since the end of the war, particularly in the Federation. Economic reconstruction has begun, and about $1.1 billion in international assistance was disbursed in 1996 as part of the 3- to 4-year reconstruction program. Most of this money has gone to the Federation. The U.S. government, primarily through the U.S. Agency for International Development (USAID), committed $294.4 million during the program’s first year. This money went to, among other things, repair municipal infrastructure and services, provide small business loans, and give technical assistance for the development of national and Federation economic institutions. By the end of 1996, there were many signs of economic recovery, primarily in the Federation. At the end of 1996, however, economic activity was still at a very low level, and much reconstruction work remained to be done. Furthermore, many key national and Federation economic institutions—such as Bosnia’s central bank—were not yet fully functioning. The biggest obstacle to progress in economic reconstruction and economic institution building has been the lack of cooperation among Bosnia’s political leaders in implementing infrastructure projects and economic institutions that would unite the ethnic groups within the Federation and across the two entities. The international community has made many attempts to use economic assistance to encourage compliance and discourage noncompliance with the Dayton Agreement. For example, during 1996, according to a State Department official, all major bilateral donors had withheld economic assistance from Bosnian Serb-controlled areas because Bosnian Serb political leaders failed to comply with key human rights and other provisions of the Dayton Agreement. Further, on May 30, 1997, the Steering Board of the Peace Implementation Council, the organization that provides political guidance for the civilian aspects of the operation, reiterated previous Council statements on this issue, tied assistance for housing and local infrastructure to acceptance of returns, and gave priority to UNHCR’s “Open Cities” project. Moreover, an international donors’ conference, originally planned to be held at the end of February 1997, was postponed because Bosnia’s council of ministers had not yet adopted key economic laws. On June 19, 1997, the donors’ conference was again postponed because the government of Bosnia, although it had made progress in passing economic laws, had not made sufficient progress toward developing an economic program with the International Monetary Fund. As of July 15, 1997, the donors’ conference had not been rescheduled. Some international officials in Bosnia have questioned the effectiveness of threatening to withhold economic assistance from Bosnian Serb- and Croat-controlled areas in this conditional manner, partly because these areas have received little international assistance to date. According to a State Department official, when the U.S. government decided on its conditionality policy toward Republika Srpska, it knew from analysis that there would be no quick results from the denial of this assistance. State now believes there is increasing evidence that elected officials of Republika Srpska are under mounting political pressure to make the necessary concessions to qualify for reconstruction assistance. In March 1997, State and USAID officials told us that some Bosnian Serb political leaders, including the President of Republika Srpska, had shown a willingness to accept economic assistance that includes conditions such as employing multiethnic work forces. These leaders, according to State, are willing to accept conditional assistance because they see the growing gap in economic recovery between the Federation and Republika Srpska. As of July 1997, there were no tangible results in this area, primarily because attempts to work with these leaders were blocked by Radovan Karadzic. During our June 1997 visit to Bosnia, numerous U.S. and international officials involved in trying to help implement the Dayton Agreement emphasized four areas as being critically important to the agreement’s success: (1) the urgent need to arrest Radovan Karadzic; (2) the upcoming municipal elections, specifically the potentially contentious installation of municipal governments in areas that had a different ethnic composition before the war; (3) the outcome of the arbitration decision over control of Brcko; and (4) the need for a continued international military force, along with a U.S. component, in Bosnia after SFOR’s mission ends in June 1998. As we previously reported, in 1996 and 1997 the international community made some attempts to politically isolate Karadzic and remove him from power. For example, under pressure from the Organization for Security and Cooperation in Europe (OSCE) and the international community, Karadzic stepped down as the head of the ruling Bosnian Serb political party on July 18, 1996. According to international observers, however, these efforts to remove Karadzic from power did not work; instead, he has effectively retained his control and grown in popularity among people in Republika Srpska. U.S. Information Agency polls showed that between April 1996 and January 1997, the percentage of Bosnian Serbs who viewed Karadzic very favorably increased from 31 percent to 56 percent, and the percentage who viewed him somewhat favorably or very favorably rose from 68 percent to 85 percent. During our June 1997 fieldwork in Bosnia, many officials with whom we spoke were unequivocal in their opinion that Radovan Karadzic must be arrested or otherwise removed from the scene in Bosnia as soon as possible. They told us that Karadzic, a leader who is not accountable to the electorate, is blocking international efforts to work with the more “moderate” Bosnian Serb political leaders in implementing the Dayton Agreement. For example, he has not allowed other political leaders, including elected ones, to abide by agreements they have made with the international community on small-scale attempts to link the ethnic groups politically or economically. Observers also told us that Karadzic still controls Republika Srpska police and dominates Bosnian Serb political leaders through a “reign of terror.” According to a U.S. embassy official, the arrest of Karadzic is a necessary—but insufficient—step to allow Dayton institutions to function effectively and to encourage more moderate Bosnian Serbs to begin implementing some provisions of the Dayton Agreement. Although the arrest alone would not assure full implementation of Dayton, without the arrest Dayton would have almost no chance to succeed. Bosnia’s municipal elections are scheduled to be held on September 13 and 14, 1997. OSCE and other officials with whom we spoke were concerned about the volatile environment that will likely surround the installation of some newly elected municipal governments, specifically those in municipalities that had a different ethnic composition before the war. Because people will be able to vote where they lived in 1991, the election results in such municipalities could be very difficult to implement. For example, it is possible that a predominantly Bosniak council could be elected to Srebrenica, a city that had a prewar Bosniak-majority population but was “ethnically cleansed” by Serbs in 1995; and Bosnian Serbs could win the majority on the municipal council of Drvar, a town with a predominantly Serb majority before and during much of the war but now populated in large part by Bosnian Croats. To address these potential “hotspots,” an interagency working group led by OSCE is developing an election implementation plan for the municipal elections. An early version of this plan calls for a final certification that confirms which municipal councils have been duly installed by the end of 1997. This plan recognizes that candidates who win office must be able to travel to municipal council meetings and to move about their municipality without fear of physical attack or intimidation. It calls for local police to provide security for council members and for IPTF and SFOR to supervise the development of the security plan and, together with OSCE and other organizations, monitor its implementation. According to OSCE and SFOR officials, SFOR’s current force level of 33,000 will be augmented by 4,000-5,000 troops in Bosnia around the time of the municipal elections; it is unclear, however, what SFOR’s force levels will be during the potentially contentious installation period. To support the augmentation, as of July 10, 1997, the Department of Defense (DOD) planned to increase the number of U.S. troops in Bosnia from about 8,000to about 10,250 during August and September 1997. According to a DOD official, on October 1, 1997, SFOR troop levels would be drawn down to either the current force level or a lower number, depending on decisions that may be reached before that date. OSCE and other officials in Bosnia told us that a further drawdown of SFOR below its current force level should not occur until the end of the installation process. Many international observers in Bosnia told us that the final arbitration decision on which ethnic group will control Brcko will likely be a major determinant of the ultimate success or failure of the Dayton Agreement. This decision will not be made until March 1998 at the earliest. Without a final decision, an interim supervisory administration will remain in Brcko. In June 1997, the High Representative, the coordinator of the civilian aspects of the peace operation, stated that Brcko will signal to the rest of the world the extent to which progress is being made in the implementation of the Dayton Agreement. First, some background on the Brcko arbitration process. At Dayton, Bosnia’s political leaders were unable to agree on which ethnic group would control the strategically important area in and around the city of Brcko. The Dayton Agreement instead called for an arbitration tribunal to decide this issue. At the end of the war, Brcko city was controlled by Bosnian Serb political leaders and populated predominately by Serbs due to “ethnic cleansing” of prewar Muslims and Croats, who had then accounted for about 63 percent of the city’s population, and settlement of Serb refugees there. We were told that an arbitration decision that awarded control of the area to either the Bosniaks or Bosnian Serbswould lead to civil unrest and possibly restart the conflict because the location of Brcko makes it vitally important to both parties’ respective interests. In February 1997, the arbitration tribunal decided to postpone a final decision as to which of the parties would control Brcko. Instead, the tribunal called for the designation of a supervisor under the auspices of the Office of the High Representative, who would establish an interim supervisory administration for the Brcko area. The tribunal decision noted that (1) the national and entity governments were not sufficiently mature to take on the responsibility of administering the city and (2) Republika Srpska’s disregard of its Dayton implementation obligations in the Brcko area had kept tensions and instability at much higher levels than expected. On March 7, 1997, the Peace Implementation Council Steering Board announced that the High Representative had appointed a U.S. official as Brcko supervisor, and the interim supervisory administration began operating on April 11, 1997. The interim administration was designed to supervise the implementation of the civil provisions of the Dayton Agreement in coordination with SFOR, OSCE, IPTF, and other organizations in the Brcko area: specifically, it was to allow former Brcko residents to return to their homes, provide freedom of movement and other human rights throughout the area, give proper police protection to all citizens, encourage economic revitalization, and lay the foundation for local representative democratic government. According to the Brcko supervisor, known as the Deputy High Representative for Brcko, the implementation process has just begun. The Deputy High Representative and his staff have been working hard and are developing a plan to return refugees and displaced persons in a phased and orderly manner, but progress will take a long time and be difficult. From January 1, 1997, through June 17, 1997, only 159 displaced families from the Bosnian Serb-controlled area of Brcko had returned to their prewar homes; all of these homes are located in the zone of separation. We were told that as many as 30,000 Bosniaks and Bosnian Croats were driven from their homes in what is now Serb-controlled Brcko. Further, freedom of movement does not yet exist in the area, primarily due to the fear that Bosniak and Bosnian Serb police have instilled in people from other ethnic groups. As in other parts of Republika Srpska, Bosnian Serb political leaders refuse to cooperate with IPTF in restructuring their police in accordance with democratic policing standards. And the Deputy High Representative told us that he has no “carrots or sticks” either to reward compliance or punish non-compliance of the parties, particularly the Bosnian Serbs. Brcko has also experienced implementation problems related to the upcoming municipal elections that go beyond those of other areas of Bosnia. For example, in June 1997 OSCE took action after it investigated cases of alleged voter registration fraud by Bosnian Serbs in Brcko. After finding that Bosnian Serbs were engaging in wholesale fraud, OSCE attempted to correct the situation by (1) firing the chairmen of the local election commission and voter registration center, (2) reregistering the entire Brcko population and political candidates, and (3) suspending and later reopening and extending voter registration there, which ultimately ran from June 18 to July 12, 1997. The interim supervisory administration is scheduled to operate for at least 1 year. The arbitration tribunal may make a further decision on the status of the Brcko area by March 15, 1998, if the parties request such action between December 1, 1997, and January 15, 1998. In December 1996, the North Atlantic Council, the body that provides political guidance to NATO, concluded that without a continuation of a NATO-led force in Bosnia, fighting would likely resume. Thus, NATO that month authorized a new 18-month mission, SFOR, which is about half the size of the previous Implementation Force. SFOR’s mission is scheduled to end in June 1998. According to the SFOR operation plan, the desired NATO end state is an environment adequately secure for the “continued consolidation of the peace” without further need for NATO-led military forces in Bosnia. The plan lists four conditions that must be met for the desired end state objective to be realized: The political leaders of Bosnia’s three ethnic groups must demonstrate a commitment to continue negotiations as the means to resolve political and military differences. Bosnia’s established civil structures must be sufficiently mature to assume responsibilities for ensuring compliance with the Dayton Agreement. The political leaders of Bosnia’s three ethnic groups must adhere on a sustained basis to the military requirements of the Dayton Agreement, including the virtual absence of violations or unauthorized military activities. Conditions must be established for the safe continuation of ongoing, nation-building activities. The SFOR operation plan asserts that these objectives will be achieved by June 1998. However, international officials in Bosnia recently told us that the likelihood of these end-state objectives being met by June 1998 is exceedingly small. They based this projection on their assessments of the current pace of political and social change in Bosnia. In their view, an international military force would be required after June 1998 to deter renewed hostilities after SFOR’s mission ends. They said that to be credible and maintain international support, the force must be NATO led and include a U.S. military component, and it must be based in Bosnia rather than “over the horizon” in another country. Many participants of the operation told us that without the security presence provided by such a follow-on force to SFOR, their organizations would be unable to operate in Bosnia; a U.N. official said that IPTF—which consists of unarmed, civilian police monitors—could not function and would leave Bosnia under those conditions. As one international official put it, the follow-on force—including a U.S. military presence—needs to be “around the corner” rather “over the horizon” to provide the general security environment in which the rest of the peace process could move forward. The executive branch initially estimated that U.S. military and civilian participation in Bosnia would cost about $3.2 billion through fiscal year 1997: $2.5 billion in incremental costs for military-related operations and $670 million for the civilian sector. These estimates assumed that U.S. military forces would be withdrawn from Bosnia when the mission of NATO’s Implementation Force ended in December 1996. The executive branch’s current cost estimate for fiscal years 1996 and 1997 is about $5.9 billion: about $5 billion in incremental costs for military-related operations and about $950 million for the civilian sector. Almost all of the increase was due to the decision to extend the U.S. military presence in and around Bosnia through June 1998. In fiscal year 1998, the United States plans to commit about $1.9 billion for the Bosnia peace operation: about $1.5 billion for military operations and $371 million for civilian activities. Under current estimates, which assume that the U.S. military participation in Bosnia will end by June 1998, the United States will provide a total of about $7.8 billion for military and civilian support to the operation from fiscal year 1996 to 1998. Some State and Defense Department officials agreed that an international military force will likely be required in Bosnia after June 1998. U.S. participation in such an effort could push the final cost significantly higher than the current $7.8 billion estimate. Mr. Chairman and Members of the Subcommittee this concludes my prepared remarks. I would be pleased 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 international efforts to promote an enduring peace in Bosnia and Herzegovina through the implementation of the 1995 Dayton Agreement. GAO noted that: (1) the internationally-supported peace operation in Bosnia, part of a longer-term peace process, has helped that country take important first steps toward achieving the Dayton Agreement's goals; (2) progress has been made in establishing some political and economic institutions, and economic recovery has started in the Federation; (3) nevertheless, the transition to a unified, democratic government that respects the rule of law has not occurred, due principally to the failure of Bosnia's political leaders to fulfill their obligations under the Dayton Agreement and to promote political and social reconciliation; (4) very few refugees and displaced persons have crossed ethnic lines to return to their prewar homes, primarily due to resistance from political leaders of all three major ethnic groups; (5) virtually all of the limited progress on the civil aspects has resulted from strong international pressure on these often resistant political leaders; (6) during GAO's June 1997 visit, nearly every international and U.S. official with whom GAO spoke, including senior North Atlantic Treaty Organization (NATO) officers, were adamant that Radovan Karadzic, a Bosnian Serb who was indicted by the war crimes tribunal, must be arrested or otherwise removed from Bosnia; (7) most were unequivocal on this matter, and stated that he retains political power and influence over political figures in Republika Srpska, the Bosnian Serb entity; (8) so far, according to these officials, he has seen fit to block every significant move toward reconciliation; (9) other key issues identified as being critically important to the Dayton Agreement's success include the municipal elections scheduled for September 13 and 14, 1997, specifically the potentially contentious installation of some newly-elected municipal governments, the outcome of the arbitration decision concerning which ethnic group will control the strategically important city of Brcko in Republika Srpska, and the issue of whether an international military force, including the U.S. military, should remain in Bosnia after the current NATO-led mission ends in June 1998; (10) however, even if President Plavsic wins the political struggle with more hardline Bosnian Serb political leaders, GAO believes that full implementation of the Dayton Agreement--in other words, full political and social reconciliation in Bosnia--will remain a long and difficult process; and (11) the total estimated cost for U.S. participation in the operation has risen to $7.8 billion. |
Natural gas is a crucial source of energy in the United States. It is used in five sectors: residential, commercial, industrial, electric generation, and transportation. The United States used about 23.5 trillion cubic feet (tcf) of natural gas in 2000. Figure 2 shows the percentages of total gas usage by each of the five sectors. EIA expects the country’s consumption of natural gas will increase to 33.8 tcf per year by 2020. More than half of this increase is predicted to come from gas-fired electric generation. Eighty-four percent of the natural gas used in the United States is produced domestically, 15 percent comes from Canada, and about 1 percent comes from other countries. Almost 8,000 companies produce natural gas from wells located in 37 states and offshore. The producing companies range in size from small, family-owned businesses to large international corporations. According to the Independent Petroleum Association of America, small companies, most of which employ fewer than 20 people, produced 65 percent of the natural gas consumed by Americans in 2001. Over the years, the natural gas market has undergone major changes, and it is still growing and evolving. However, perhaps the most significant change in the gas market—the transition from a regulated to a competitive natural gas market—has already occurred. Under the regulated market, producers sold their gas directly to interstate pipeline companies at prices set by federal regulation. Although this system ensured stable prices, it also caused severe gas supply shortages. These shortages occurred because, with artificially low prices, producers had no incentive to increase production and consumers had no reason to curtail their demand. Ultimately, the gas shortages led to delivery curtailments during cold winters for many customers in the northern United States. Responding to these supply problems, the Congress passed the Natural Gas Policy Act of 1978, which began the phased deregulation of natural gas producer prices. This act established a pricing arrangement that encouraged increased production of natural gas, but producer price deregulation was not completed until after passage of the Natural Gas Wellhead Decontrol Act of 1989. This act mandated that federal controls over natural gas wholesale prices end by 1993, allowing the price to be set freely in the marketplace. In addition, FERC issued a series of orders during the 1980s and early 1990s to address the inability of natural gas users to gain access through the pipeline systems to competitive natural gas suppliers. The two most notable were Order 436 and Order 636. Order 436, issued in 1985, instituted open-access, nondiscriminatory pipeline transportation. In 1992, Order 636 was issued requiring pipeline companies to completely separate or “unbundle” their transportation, storage, and sales services. As a result, natural gas as a commodity was separated from gas transportation. Pipeline companies were required to treat other parties wishing to use the pipeline to transport natural gas the same as they would their own affiliated sales services. These laws and regulatory changes led to the competitive and more complex natural gas market that exists today. In today’s market, instead of selling natural gas strictly to the pipeline companies, producers now sell their gas to a variety of purchasers located across the United States. With the removal of federal price controls, producers’ prices are determined in the marketplace. Natural gas is bought and sold at many different locations, to numerous parties, and under different sales and transportation arrangements. Numerous entities, including utilities and marketers, can buy, sell, re-buy and re-sell gas in a variety of ways. The prices paid for natural gas can vary among the different buying arrangements. For example, before deregulation, many gas utilities’ supply contracts were long-term—often for 20 years or more—with little variability in price. As deregulation unfolded in the 1980s, gas utilities attempted to obtain better gas prices for their customers by developing a portfolio of long-term and short-term supply contracts and purchasing some gas on the spot market. However, while generally lower on average than previously regulated prices, the prices for short-term gas supply contracts and purchases on the spot market can be highly volatile. As shown in figure 1, several prices spikes occurred over the 9-year period ending in 2001, but with one exception, during 2000-2001, the price of natural gas quickly returned to previous levels. Natural gas prices also vary depending on location because of the importance of factors such as proximity to gas production, pipeline capacity, and local supply and demand conditions. In addition, prices vary depending upon the step in the natural gas distribution process during which the gas is sold. Wholesale natural gas prices reflect the basic costs for the commodity itself and are reported daily at a number of production market centers throughout the country. Unless otherwise specified, the wholesale prices cited in this report are for gas at the Henry Hub, a natural gas market center located in Louisiana. The Henry Hub is one of the largest gas market centers in the United States and often serves as a benchmark for wholesale natural gas prices across the country. City gate prices are the prices at which gas is delivered from an interstate pipeline to a utility or large consumer. These prices are higher than wholesale prices because they reflect transportation costs in addition to commodity cost. Finally, the retail prices paid by residential and other small-end users are typically the highest gas prices because these customers must pay for not only the gas itself, but also the costs of transporting the gas to their city and the utility company’s costs for providing full service delivery. Full service is more expensive because it requires a utility company to meet customers’ full requirements, which can vary significantly depending on the weather. State regulatory agencies, such as public utility commissions, usually regulate the retail gas prices charged by generally larger, investor- owned gas utility companies, and local bodies, such as city councils, usually regulate the prices charged by generally smaller, municipally owned companies. Figure 3 shows the cost components for the residential price of natural gas. Another development in the deregulated natural gas market is the use of natural gas derivatives—financial tools for managing risk that are based on natural gas prices. NYMEX introduced natural gas derivatives, in the form of futures and options contracts in 1990 and 1992, respectively. Using these derivatives, gas utilities, along with electric power generators, other large industries, and gas marketers, can hedge against price risk by locking in or setting an upper limit on the prices they will pay for future gas purchases. In the 1990s, the development of electronic trading systems and the Internet added another layer of complexity to the natural gas market. At that time, natural gas derivatives began to be bought and sold in the off- exchange OTC markets, such as the Intercontinental Exchange and the former EnronOnline. These OTC markets expanded both the terms (the size, maturity, and price) and types (OTC markets introduced swaps) of hedging instruments available to natural gas marketplace participants. Although the federal government has deregulated natural gas producer prices, three key agencies still maintain some role in ensuring that a competitive and informed natural gas market exists. FERC was established in 1977 as a successor to the Federal Power Commission and has responsibility for ensuring “just and reasonable rates” for the interstate transportation of natural gas, certain sales for resale of natural gas, and the wholesale price of electricity sold in interstate commerce. CFTC’s mission is, in part, to oversee the nation’s commodity futures and options markets, including natural gas markets, and to protect market users and the public from fraud, manipulation, and abusive practices. Finally, EIA is responsible for providing energy information (including natural gas) to meet the requirements of government, industry and the public that promotes sound policymaking, efficient markets, and public understanding. EIA was established by the Congress in 1977 and is charged with providing unbiased, professional analyses of energy issues and does not advocate policy. EIA’s role is as a depository for energy information and it has no direct influence on natural gas prices or policy. However, the data that the EIA collects are used to address significant energy industry issues. EIA’s natural gas data collection program is part of its National Energy Information System, a system created by the Federal Energy Administration Act of 1974, as amended, to help fulfill the agency’s mandate to collect data that adequately describes the energy marketplace. According to EIA, adequate evaluation of the industry requires production, processing, transmission, distribution, storage, marketing, consumption, and price data. The Securities and Exchange Commission (SEC), the Department of Justice (DOJ), and the Federal Trade Commission (FTC) also play roles in maintaining competitive energy markets through their regulation of firms participating in these markets. SEC administers and enforces federal securities laws to protect investors and to maintain fair, honest, and efficient markets. DOJ investigates and prosecutes illegal activities such as price fixing, insider trading, and wire fraud. Both agencies have ongoing investigations into the financial activities of energy companies. DOJ also enforces the Sherman Antitrust Act, which prohibits all contracts, combinations and conspiracies that unreasonably restrain interstate and foreign trade. FTC shares authority with DOJ under section 7 of the Clayton Act to prohibit mergers or acquisitions that may substantially lessen competition or tend to create a monopoly. In addition, section 5 of the Federal Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive acts or practices,” thus giving FTC responsibilities in both the antitrust and consumer protection areas. Available market evidence suggests that the inability of gas supplies to meet surging demands contributed to the natural gas price spike that occurred in 2000-2001. Specifically, natural gas supplies were constrained because of unusually low storage levels and the inability to quickly increase production levels. At the same time, demand during 2000-2001 was high because of extremely cold weather in the beginning of the winter and continuing strong economic growth. The price spike of 2000-2001 is consistent with the overall volatile nature of natural gas prices, which is driven by the short-term inelasticity of supply and demand that neither quickly nor easily adjusts to meet changes in the natural gas market. In addition, a lack of timely and accurate data about the overall natural gas market can create uncertainty about supply and demand conditions and further exacerbate price volatility. As a result, the combination of inelastic supply and demand means that shifts in natural gas supply or demand, real or perceived, can and are likely in the future to continue to cause volatility in the price of natural gas. While these market factors result in an inherent susceptibility to price volatility, there are indications that market manipulation may have occurred as well in the winter of 2000-2001. Several federal investigations looking into the possibility of such price manipulation in the natural gas market are currently ongoing. However, because these investigations are ongoing, a final determination of whether natural gas prices were manipulated, and if so, where and to what extent prices were further affected, has not yet been determined. Based on our analysis of EIA data and interviews with EIA and other energy analysts, constrained natural gas supplies, caused by unusually low levels of gas in storage on the part of gas utilities and gas marketers, and the considerable time required for gas from new production to reach the marketplace, contributed to the increases in natural gas prices in 2000- 2001. EIA data show that as of November 1, 2000, the volume of natural gas in storage was at the lowest level recorded for the beginning of a winter heating season since 1976: only 2,732 billion cubic feet (bcf). In 4 of 5 months during the 2000-2001 winter heating season, the volumes of natural gas in storage were at record low levels. And at the end of March 2001, the volume of gas in storage dropped to 742 bcf, the lowest level ever recorded by EIA, or 36 percent below the level in March 2000. These low storage levels resulted primarily because wholesale gas prices from April through September 2000 were higher than normal, climbing from around $3 to over $5 per mmBtu. According to EIA, these prices caused some storage users to postpone buying gas to inject into storage in the hope that prices would eventually decrease before the winter. However, instead of decreasing, gas prices generally stayed high and the volume of gas placed into storage for the winter heating season did not reach normal levels. According to industry experts, natural gas prices were high in the summer of 2000 because of the increased use of natural gas for electric generation. The increased demand for electric generation was compounded by the warmer-than-normal weather in the South and West, which increased the demand for gas-fired electricity to run air conditioning units. In addition, some companies and marketers that had put gas into storage earlier in the year reportedly sold it for profit when gas prices increased later that year, further depleting the already low storage reserves. In late September and October 2000, the industry did put more gas into storage at rates higher than the previous 5-year average for this period to prepare for the coming heating season; however, this late surge of injections of gas into storage did not bring storage volumes up to their usual levels. Adding to the supply constraints caused by low storage levels was the fact that producers could not quickly increase their production levels to meet the increasing demand for natural gas. During the winter of 2000-2001, almost all of the gas that could be produced from existing natural gas wells was being produced and sent into the marketplace. According to EIA analysts, when over 90 percent of the maximum possible gas productive capacity from wells is being utilized, the natural gas market is at greater risk for price spikes. Data supplied by EIA show that this was true during the winter of 2000-2001, when the nation’s natural gas utilization rate was above 90 percent and reached levels close to 100 percent in certain areas of the country. Therefore, new gas production was needed to respond to increased demand, but this new production could not be developed fast enough to keep prices from rising. Prior to 2000, drilling activity was lower as supply was sufficient and prices were lower. However, in response to the higher prices in 2000, natural gas producers took action to increase their production by increasing the number of new gas wells they drilled. As shown in figure 5, the number of drilling rigs began increasing in the April to May 2000 time frame, when gas prices first rose above $3 per mmBtu and continued to increase for more than a year. However, the number of drilling rigs in operation stopped increasing around July 2001, when gas prices again fell below $3 and producers no longer had the economic incentive to increase production. Although the number of new natural gas wells being drilled in 2001 decreased when gas prices decreased, the monthly average number of rigs in use that year was the highest recorded since natural gas prices were deregulated in 1993. Figure 6 compares the number of natural gas rigs in operation for the years 1993 through 2001. The effect of this increased drilling activity was not immediately felt in the supply of natural gas available in the marketplace because there is a lag time of 6 to 18 months before gas produced from new wells reaches the market. Furthermore, according to EIA, there is an inherent delay between gas price changes and changes in drilling activity. Gas prices began to increase around May 2000 and peaked around January 2001, but rig counts did not peak until July 2001 (see fig. 5). Therefore, the increased drilling in 2000 and 2001 did not result in an immediate increase in the production of natural gas, and the new production that did occur did not reach the marketplace in time to respond to the growing demand and slow the rising prices. Moreover, industry officials told us that the typical delay associated with getting newly produced gas to the marketplace was exacerbated by the low number of gas drilling rigs that were in operation before the price increase in 2000. According to these officials, low natural gas prices beginning in late 1998 and continuing through 1999 had caused producers to greatly reduce the number of drilling rigs in operation. In fact, as figure 6 shows, the number of natural gas drilling rigs operating in 1999 averaged only 496 per month and hit an almost 4-year low in April when the average number of operating rigs dropped to 371. Therefore, natural gas producers faced more than a normal delay in increasing their natural gas drilling activity because of limited equipment availability. At the same time the country was facing constrained gas supplies, a surging increase in demand, caused chiefly by cold weather and a strong economy, also contributed to the increases in natural gas prices in the winter of 2000-2001. Nationwide, extremely cold weather early in the winter heating season was a key reason for the peak in natural gas demand. This increased demand came primarily from the residential and commercial customers who use natural gas for heating. According to data from the National Climatic Data Center, November 2000 was the coldest November recorded for almost 90 years, with temperatures below normal or much below normal across most of the country. In December 2000, temperatures continued to remain cold, with 40 of the 48 contiguous states showing temperatures below or much below normal (see fig. 7). According to EIA data, these frigid temperatures caused record natural gas withdrawals from storage in November 2000, followed by the highest level of withdrawals in 11 years for the month of December. These relatively large withdrawals, coupled with the low storage levels at the beginning of the winter heating season, caused some people in the natural gas industry to believe that storage levels in some areas would not be sufficient to last through the winter if the cold weather continued. In fact, gas supplies did not run out because the high gas prices motivated some consumers to reduce consumption or use substitute fuels when possible, especially in the industrial and electric generation sectors. In addition, gas supplies did not run out because the weather was milder during the rest of the winter. However, even with this eventual decrease in demand, by the end of the winter heating season on March 31, 2001, the volume of natural gas in storage was at its lowest level since EIA began its complete monthly data series beginning in September 1975. In addition, continuing economic growth throughout the 1990s and into 2000 expanded the potential demand for natural gas and contributed to the price spike that occurred in 2000-2001. This growth occurred in major sectors of natural gas consumption: residential, commercial, industrial, and electric generation. The strong economy during the 1990s had boosted new home construction, and most of these homes were heated with natural gas. Housing data that we reviewed show that from 1991 to 1999, two-thirds of the new homes and more than one-half of the new multifamily buildings constructed were heated with natural gas. Further, many of these new houses tended to be larger, thus increasing the potential for high natural gas consumption during colder weather. The number of commercial gas customers also increased from 4.6 million in 1995 to 5.1 million in 2000, while natural gas consumption in this sector rose by 6 percent. Gas consumption in the industrial sector remained high, although it has decreased slightly since 1997 in part because of more efficient equipment. Because of its clean burning properties, natural gas is now the preferred source of energy for most new electric generation capacity. Gas-fired electric generation facilities accounted for only about 23 percent of natural gas consumption in the United States in 2001, but account for a greater percentage during the summer, when electricity demand goes up because of the use of air conditioning. Natural gas price volatility, as occurred during the winter of 2000-2001, is driven by inelastic supply and demand, which means neither can quickly nor easily adjust to meet changes in the natural gas market. The supply of gas from new production wells cannot quickly increase to meet higher demand because of the lag time required to get the newly produced gas into the marketplace. Similarly, the demand for natural gas does not quickly drop in response to higher prices: some consumers do not have easy access to alternative fuels, so their demand does not decrease significantly even when natural gas prices increase. In addition, a lack of timely and accurate data about the overall natural gas market can create uncertainty about supply and demand conditions and further exacerbate price volatility. As a result, the combination of inelastic supply and demand means that small shifts in natural gas supply or demand, real or perceived, can and are likely to continue to cause relatively large fluctuations in the price of natural gas. The inelastic nature of natural gas means that supply is slow to respond to price changes in the marketplace. The immediate supply of natural gas primarily comprises gas coming from production that goes straight into the market and gas placed into storage during the warmer summer season for use during the winter heating season. On the production side, there is a significant delay from the time drilling begins to the time when newly produced gas enters the marketplace. Developing additional supplies from new wells and building the new infrastructure required to deliver the newly produced gas to market—such as gas processing plants and pipelines—can take considerable time. The amount of time required to get new gas to the market depends on several factors, including the location of the natural gas well. For example, natural gas industry sources told us that gas coming from new wells drilled in areas with established reserves that are not deep in the ground takes about 6 months to reach the market. However, it takes much longer for gas being extracted from very deep wells, from new fields, or from offshore wells to reach the marketplace. In addition, gas extracted from a new field often cannot reach the marketplace until a pipeline segment and/or gathering line is constructed, and this requires even more time. Thus, new gas production often cannot be brought into the marketplace quickly enough to meet increases in demand. In addition, the amount of natural gas available from storage to meet increasing demands is limited. According to industry officials, natural gas is generally purchased and injected into storage during the 7-month period from April through October. This gas is then withdrawn from storage for heating and other use during the winter heating season running from November through March. Once the injection season is over, the amount of gas in storage is typically set. Thus, when people in the gas industry become concerned that the available supply of gas will not be sufficient to last through the winter heating season, a significant price spike can occur, as it did in 1996 and again in 2000-2001, when the amounts of gas in storage were at low levels. Compounding the limited ability of production to respond quickly and the limited gas in storage is the lack of comprehensive and timely information on these market characteristics. This uncertainty can make it difficult for market participants to determine when shifts in supply are occurring, leading to increased and frequent speculation that may ultimately increase price volatility because of perceived shifts in supply. According to EIA, the agency’s monthly production data are subject to problems of accuracy and timeliness. First, the forms used to report production data vary from state to state and often do not include all information requested by EIA. Therefore, EIA must estimate marketed production from whatever data elements are submitted, information in state publications and web sites, the trade press, or prior year data. Also, EIA data is collected through an optional survey. If a state does not comply with information requests, the federal government has no authority to require it to provide information. In addition, monthly production data for a certain year are, for some states, available to EIA only in the late summer of the following year, leading to inherent delays in reporting. Late or incomplete reports from the states to EIA are common. Incorrect information concerning storage can also greatly affect the market. As discussed above, because timely production information is not available, storage data have become a widely used indicator to estimate the supply of natural gas. When this information is incorrect, it can increase volatility in the natural gas market. For example, when AGA reported on August 15, 2001, that injections for the week ended Friday, August 10 totaled a record low of 3 bcf, the September futures contract daily settlement price jumped by 12 percent from the previous day. Analysts had predicted that injections for that week would range from 45 to 70 bcf. Later, AGA discovered that it had received erroneous data from an entity included in its survey and issued a corrected gas storage report on August 22 showing that gas injection during the week ending August 10, 2001, was 50 bcf. As a result, the September futures contract price on August 22 decreased by more than 10 percent from the day before. On October 12, 2001, AGA announced that in 2002 it would stop providing weekly reports on the volume of natural gas in underground storage. AGA said that it was discontinuing its reporting of storage data primarily because the staff time required to conduct the gas storage survey drained staff resources that could be redirected to programs more beneficial to its members. Shortly after the AGA announcement, the Secretary of the Department of Energy announced that because of the importance of natural gas storage data in forecasting winter gas prices and demand, EIA would begin providing this data in a weekly report. The demand for natural gas is inelastic to varying degrees among major gas consuming sectors: residential, commercial, industrial, and electric generation. Demand from residential and commercial customers is perhaps the most inelastic because heat is generally a necessity, not a luxury. Those consumers that heat their homes and businesses with natural gas will require a certain level of heat even if gas prices are quite high. Furthermore, they cannot easily respond to high natural gas prices in the short run by switching to a more economic fuel source for heat. In addition, many of these customers do not know beforehand that they are paying higher gas prices because they are customarily billed later for gas they are currently using. Industrial natural gas demand is more elastic than demand from residential and commercial customers. For example, some industrial customers have the ability to switch from natural gas to other fuels when natural gas prices rise. However, many do not have this capability and others have limited fuel switching capability. As natural gas prices rise, some industrial customers may choose to reduce their operations and sell the gas they had under contract to the highest bidder. When natural gas prices rose significantly in 2000-2001, this option was more profitable for certain industrial users than if they had continued their operations using natural gas at higher-than-normal prices. Natural gas demand for electric generation may now be more elastic, but according to industry experts it is becoming more inelastic. Previously, many of these users had facilities that could use either natural gas or an alternate fuel, such as oil, depending on which energy source was less expensive. However, natural gas prices were low throughout the 1990s, so many electric generation facilities decided to use natural gas as their only source of energy, thus increasing their dependency on natural gas. The demand for natural gas in the electric generation sector is growing faster than in any other sector and if EIA’s projections for gas-fired electricity are realized, this sector will likely have a significant effect on future natural gas prices. EIA projects that the demand for natural gas in the electric generation sector will grow at an annual rate of 4.5 percent, and by 2020 the demand will have risen to 10.3 tcf of gas, accounting for 30 percent of the natural gas used annually in this country. In addition, industry analysts told us that because of the high demand for gas-fired electricity in some markets, some electric generating facilities are willing to pay premium prices for the natural gas needed to produce this electricity. As with gas supply data, some aspects of natural gas demand information are also limited, making it difficult for the market to see real changes in demand. The resulting increased speculation about perceived shifts in demand can also exacerbate price volatility. According to EIA, the growth and restructuring of the natural gas industry have made it more difficult to collect data concerning natural gas demand. For example, changes in certain regulatory requirements have led to the elimination of information that EIA needs to ensure the quality and completeness of its data. In addition, firms providing natural gas delivery do not always know the intended use for the gas they are delivering. For example, a gas supplier could deliver gas to a city building that contains both residential apartments and retail space. The supplier has no way to know what percentage of the gas delivered is used for what purpose and therefore cannot determine in what usage sector the gas should be reported. In the electric generation sector, the importance of nonutility generators, including independent power producers and cogenerators, is growing. In the past, EIA has included these entities in the statistics it develops for industrial or commercial users of natural gas sectors, thereby underreporting the amount of gas used to generate electricity. However, EIA is implementing a better approach to measure and report the amount of natural gas used for electric generation by nonutility generators. Also, EIA recently changed how it estimates and presents data on the fuels used to produce electricity. The purpose of this change is to improve data quality, ensure that data are reported consistently throughout EIA publications, and provide users with a better understanding of how fuels are consumed. Any market with inelastic supply and demand characteristics—as is the case in the natural gas market—is more susceptible to significant price fluctuations than a more elastic market: in an inelastic market, relatively small shifts in supply or demand can result in significant price changes. Natural gas supply is relatively fixed in the short term; it is limited to available storage and current production and cannot be quickly increased to meet increased demand. Thus, an increase in demand will result in a greater increase in price than if the supply were more elastic. Basically, in the perfectly inelastic supply market, more demand competes for the same level of supply, driving prices higher than they would go if supply were more readily available—more elastic. Figure 8 illustrates this example by comparing the smaller price increase in a market with elastic supply (panel A) with the larger price increase in a market with perfectly inelastic supply (panel B) when faced with the same increased level of demand. Figure 9 goes farther, illustrating this difference for a market with both inelastic supply and demand—as is the case with the natural gas market. Figure 9 compares the smaller price increase in a market with both elastic supply and demand (panel A) with the larger price increase in a market with inelastic supply and demand (panel B) when demand increases and supply decreases. On February 13, 2002, FERC commissioners directed staff to undertake a fact-finding investigation into whether any entity, including Enron Corporation, manipulated short-term prices in electric energy or natural gas markets in the West or otherwise exercised undue influence over wholesale electric prices in the West, for the period January 1, 2000, forward. On March 5, 2002, FERC staff issued an information request to companies that sold energy in the West during this period to report on their capacity and energy sales transactions. On May 6, 2002, counsel for Enron released several memos to FERC staff that indicated the company had actively worked at manipulating California’s wholesale electric power markets. On May 8, 2002, FERC issued an “Admit or Deny” order requiring other companies to either admit or deny they engaged in strategies that might have inflated market prices during California’s energy crisis of 2000- 2001. A May 22, 2002, FERC order further expanded the investigation by requesting that natural gas sellers in both the West and Texas provide information on “wash trading.” In an initial staff report issued August 13, 2002, FERC found indications that several companies, including Enron, may have manipulated spot prices upward for natural gas delivered to California during 2000-2001. FERC staff reported that during the months October 2000 to July 2001, the correlation of spot prices for natural gas at the California delivery points with prices at producing basins in the Southwest and the Rockies and Henry Hub was abnormally low. FERC staff found that published natural gas price data are susceptible to manipulation and cannot be independently validated. The staff report noted that the lack of formal verification opens the door for entities to deliberately misreport information in order to manipulate prices and/or volumes for both electricity and natural gas. The staff report concluded that in the absence of some form of double-checking, such misreporting is likely to be undetected in the reporting process and uncorrected when prices are published. FERC staff also found that Enron’s trading strategies, described in internal Enron memos, used false information in an attempt to manipulate prices. The FERC staff report stated that while the exact economic impact of Enron’s trading strategies remains difficult to determine, the Enron trading strategies have adversely affected the confidence of the markets (electric and natural gas) far beyond their dollar impact on spot prices. Based on the staff report, FERC ordered formal investigations into instances of possible misconduct by Avista Corporation and Avista Energy, Inc., El Paso Electric Company, and three Enron corporate affiliates—Enron Power Marketing, Inc., Enron Capital and Trade Resources Corporation, and Portland General Electric Corporation. In addition to the FERC investigation, on September 23, 2002, a FERC administrative law judge found that El Paso Natural Gas Company exercised market power during the 2000-2001 winter heating season by withholding substantial volumes of pipeline capacity to its California delivery points, thereby tightening natural gas supply to the state and increasing its price. The California Public Utilities Commission originally brought the case, filing a complaint with FERC in 2000. The judge recommended that FERC commissioners institute penalty procedures. The Commission will review the judge’s recommended decision. In addition to the FERC investigations, CFTC Chairman James E. Newsome confirmed during congressional testimony in March 2002 and again at a press conference in May 2002 that CFTC had began an investigation into various energy trading schemes, including possible wash trading, in gas and power futures markets. However, consistent with CFTC policy on ongoing investigations, CFTC could not tell us about the scope or reporting deadlines of its investigation. FERC, CFTC, and EIA play front-line roles in promoting a competitive natural gas marketplace by monitoring business activities and deterring anticompetitive actions that could undermine these markets, and obtaining information and analyzing trends in the industry that are used by decisionmakers in both industry and government. However, regulatory gaps and outdated data collection efforts have impeded effective federal oversight of the natural gas marketplace to ensure competition and limited its ability to provide market information. As we have recently reported, FERC has not adequately revised its regulatory and oversight approach to respond to the transition to competitive energy markets. As a result, it has been slow to react to charges of possible market manipulation and lacks assurances that wholesale natural gas and electricity prices are just and reasonable. We note, however, that FERC has recently take actions to correct this with the formation of the Office of Market Oversight and Investigation (OMOI). In addition, CTFC—the federal agency responsible for fostering competitive commodity futures markets—generally does not have regulatory authority over trading in the OTC derivatives markets. Finally, EIA recognizes that most elements of its natural gas data collection program were set in place more than 20 years ago, well before deregulation spawned a host of new entities and markets that influence natural gas prices. EIA recognizes that its ability to provide information that promotes understanding of the market price of natural gas has declined significantly and is currently reevaluating its data collection needs. Under federal law, FERC is responsible for regulating the terms, conditions, and rates for interstate transportation by natural gas pipelines and public utilities to ensure that wholesale prices for natural gas and electricity, sold and transported in interstate commerce, are “just and reasonable.” However, FERC jurisdiction over sales for resale is limited to domestic gas sold by pipelines, local distribution companies, and their affiliates. The Commission does not prescribe prices for these commodity sales. As energy markets deregulate, FERC has concluded that its approach to ensuring just and reasonable prices needs to change: from one of reviewing individual companies’ rate requests and supporting cost data to one of proactively monitoring energy markets to ensure that they are working well to produce competitive prices. However, we reported in June 2002 that FERC has not yet adequately revised its approach to regulating and overseeing the nation’s natural gas and electric power industries. The problems we identified include the following: FERC is using legal authorities to regulate competitive markets that were enacted when the energy industries were regulated monopolies. For instance, FERC generally does not have the authority to levy meaningful civil penalties. While this authority may not have been necessary when energy industries were regulated monopolies, it is important, in today’s market, if FERC is to deter anticompetitive behavior or violations of market rules by market participants. FERC’s oversight initiatives have been incomplete or ineffective. FERC initiatives to monitor competitive markets have served more to help educate FERC’s staff about the new markets than produce effective oversight. Additional market data available to staff have not been used to initiate an enforcement action or to confirm or refute a problem identified elsewhere in the agency. FERC’s organizational structure limits its ability to monitor competitive markets because it diffuses its market oversight function, making it more difficult to provide the communication, focus, and management attention needed to successfully implement a new regulatory and oversight approach. FERC must overcome significant human capital challenges, such as recruitment and retention of qualified staff. We concluded that absent an effective regulatory and oversight approach, FERC lacks assurance that today’s energy markets are producing interstate wholesale natural gas and electricity prices that are just and reasonable. FERC’s response to the natural gas price spikes during the winter of 2000-2001 highlighted the challenges it faces in providing market oversight. Because FERC did not have a system in place to monitor natural gas spot markets, it was slow in responding to charges of possible market manipulation. For example, the investigation into whether Enron Corporation or others manipulated short-term prices in electric energy or natural gas markets in the West for the period January 1, 2000, forward did not begin until February 2002, and remains incomplete almost 2 years after natural gas prices first spiked. According to FERC, this investigation should be completed by the first quarter of 2003. Further, this investigation was largely reactive to complaints and accusations of improper behavior by energy companies such as Enron, and relies heavily on requests for information from various energy companies. For example, the investigation had to rely on energy companies to report back to FERC, through information requests or “Admit or Deny” orders on whether they had engaged in any behavior that might have inflated market prices. Our previous report recommended that FERC take actions to ensure that it can effectively carry out its responsibilities for overseeing interstate wholesale natural gas and electricity markets, such as updating its strategic plan for overseeing energy markets and developing a training action plan for staff involved or potentially involved in carrying out FERC’s market oversight functions. We also suggested that the Congress might wish to convene public hearings to review FERC’s authorization legislation and determine, in consultation with FERC Commissioners, whether FERC’s authorities needed to be revised in the light of the changing energy markets. We also suggested that the Congress might want to consider providing FERC with the appropriate range of authorities to levy civil penalties against market participants that engage in anticompetitive behavior and violate market rules. FERC agreed with the conclusions of our report and noted that its internal restructuring to support its new market oversight role has not kept pace with the speed of energy industry restructuring. Specifically, FERC stated that it needs additional statutory authority—in particular, the ability to assess a meaningful range of penalties for violations of the law or FERC rules. To address organizational problems, FERC created a new Office of Market Oversight and Investigation whose purpose is to oversee and assess the fair and efficient operations of energy markets. OMOI reports directly to FERC’s Chairman and its responsibilities include understanding energy markets and risk management, measuring market performance, investigating compliance violations, and analyzing market data. According to FERC, a multidisciplinary team of 120 people will staff OMOI and 89 of them have been hired. In addition to the statutory and organizational problems that limit its oversight of energy markets, FERC is in the early stages of assessing what information it needs to have in order to monitor and regulate competitive markets for wholesale electricity, and to ensure that open access natural gas transportation and electric transmission services are provided fairly and efficiently, without the exploitation of market power. In September 2001, FERC formed a Comprehensive Information Assessment Team to survey its current data collections to ensure they meet FERC’s traditional and future information needs. The team’s goal is to assess and propose changes to FERC’s reporting requirements in order to improve FERC’s monitoring of competitive markets and performance of traditional regulatory duties. In addition to these problems, current FERC regulations governing the conduct of natural gas pipeline companies with affiliates are outdated. Because these regulations were set in place in 1988, significant changes have occurred in the natural gas marketplace, such as unbundling, capacity release, growth of e-commerce, and market growth and consolidation, that have expanded the number and types of pipeline affiliates. FERC’s current affiliate regulations do not address the potential exercise of market power through sharing information among pipeline companies and their affiliates because the regulations exclude nonmarketing affiliates, local distribution companies, and affiliated producers and gatherers. FERC issued a Notice of Proposed Rulemaking in September 2001, which puts forth new affiliate standards that would apply uniformly to natural gas pipeline companies by extending standards of conduct to relationships between the transmission providers, and all affiliates. CFTC’s regulatory oversight of natural gas derivatives varies among natural gas derivatives markets. CFTC was created in 1974 to oversee the nation’s commodity futures and options markets and has a twofold mission: to foster transparent, competitive, and financially sound markets, and to protect market users and the public from fraud, manipulation, and abusive practices in those markets. NYMEX—the largest exchange that trades natural gas derivatives—is a federally designated contract market that is fully regulated by CFTC. CFTC staff routinely monitored trading and price relationships in the NYMEX natural gas contracts and found no reason to take enforcement action during the 2000-2001 natural gas price spike. There are numerous off-exchange, or OTC, derivatives markets that trade substantial volumes of natural gas derivatives and that are generally not subject to CFTC regulations. CFTC is currently conducting an investigation into whether wash trading or other price-manipulative misconduct occurred in the OTC or spot markets during the price spike period. However, until CFTC’s investigation is complete, it is unknown, what role, if any, these markets may have played in the 2000-2001 natural gas price spike, or what, if any, enforcement or other actions may result. NYMEX reported that the average daily contract amount of its derivatives trades for all of 2001 was $13 billion. As a federally designated contract market, NYMEX must file all terms and conditions of traded contracts and contract changes with CFTC. CFTC reviews exchange rules to ensure that listed contracts are not readily susceptible to manipulation; oversees the registration of participants on the exchange; and requires daily reporting of key market and trader position information such as position size, trading volume, open interest, and prices. NYMEX participants are subject to CFTC’s antifraud and antimanipulation provisions, including prohibitions on wash trading. In addition, NYMEX is required to conduct market surveillance and enforce minimum financial requirements for its members. Also, because NYMEX acts as a clearinghouse, it protects all participants against counterparty credit risk, which is the risk of failure by a contract counterparty to settle the contract by paying funds as they become due as a result of the trade. For NYMEX natural gas contracts, CFTC market surveillance staff told us they found no market problems that required CFTC intervention during the winter of 2000-2001. Surveillance staff told us that because no unusual problems or excessive speculative positions were identified during this period using the customary daily surveillance tools and procedures, no special reports were prepared by CFTC pertaining to the price spike. Based on its monitoring, CFTC concluded that NYMEX natural gas contracts behaved normally during this period and that natural gas futures prices, though high, were driven by supply and demand. Because of the high prices and price volatility during this period, the natural gas futures market was discussed at 18 of the Commission’s weekly surveillance briefings in September 2000 through March 2001, which represented a high frequency for the commodity. Natural gas OTC markets are structured differently than NYMEX and generally are not subject to CFTC regulation. Natural gas OTC derivatives can be traded on multilateral basis (typically on an electronic trading facility in which multiple buyers and sellers participate) or on a bilateral, or principal-to-principal basis, which may also be through an electronic trading facility. Unlike exchange-traded derivatives, the maturity dates, quantities, and delivery points for the commodities underlying the derivatives offered in the OTC markets are negotiable among participants and are not subject to CFTC review and approval. The Commodity Futures Modernization Act (CFMA) of 2000 provided a series of exclusions and exemptions that removed these markets from most of CFTC’s regulatory authority. Therefore, these markets typically are not subject to daily monitoring by CFTC. However, CFTC can take action to address the use of OTC transactions in natural gas derivatives, other than swaps, to manipulate the underlying commodity and, depending on the parties to the transactions, the Commission can take action to prevent or address fraud. Also, CFTC has authority to investigate manipulation of commodity prices. Finally, participants in the OTC derivatives markets generally bear counterparty credit risk, but a clearinghouse function is legally permitted. For example, the Intercontinental Exchange, an OTC multilateral energy derivatives trading facility, has a clearing service. NYMEX also clears OTC energy derivatives. During the natural gas price spike of 2000-2001, CFTC, consistent with its lack of general regulatory authority, did not monitor or assess activity in the OTC markets. However, during congressional testimony in March 2002, CFTC Chairman Newsome confirmed that CFTC was among the federal agencies investigating Enron. Subsequently, in May 2002, responding to widely publicized concerns about wash trading in gas and power markets, Chairman Newsome stated that CFTC was investigating various energy trading schemes, including possible wash trading, in these markets. However, CFTC, consistent with agency policy, would not discuss the nature or extent of its ongoing investigations. As a result, the scope of its investigations and the authority upon which they are being undertaken is unknown. Further, it remains unclear what information CFTC may rely upon, conclusions it may draw, or enforcement or other actions it may take in relationship to the role the OTC markets may have played, if any, in the natural gas price spike of 2000-2001. However, in October 2002, the CFTC Chairman said that the agency’s investigations, in addition to leading to formal actions, might reveal facts that cause CFTC to revisit its rules or to suggest legislative changes. EIA—the federal agency responsible for analyzing energy price movements—reports that its ability to understand the market price of natural gas has declined significantly, largely because most elements of its data collection program for the industry were set in place before the industry’s restructuring. Most elements of EIA’s natural gas data collection program have been in place for more than 20 years, when pipelines and local distribution companies owned the natural gas in their custody and knew its purchase and sales price. In that environment, EIA designed its data collection program to survey a relatively small number of firms to obtain a complete picture of the industry. Today, pipeline and distribution companies do not know the prices of the gas they transport for others, and most industrial and commercial gas is priced in unreported private deals. In addition, entities that did not exist a decade ago—marketers, independent storage facilities, spot markets, and futures markets—are central to the operation of the industry. Because of these changes in the industry, the data collected under EIA’s outdated approach have come to describe only a portion of the industry. EIA has recognized that its collection of data on prices and volumes needs to be timelier because the natural gas market is no longer based solely on long-term contracts. With some exceptions, EIA’s current natural gas data collection program remains basically an annual effort to obtain comprehensive information on natural gas volumes and prices. Monthly data series are less complete and the largest monthly survey is a sample survey selected from respondents to the core annual survey. In response to the problems in data coverage and quality, EIA began a review in 1998, called the Next Generation Natural Gas Initiative, to assess the effect of industry restructuring and shifting customer needs on its future natural gas information program. This review includes efforts to identify data quality problems in EIA’s current price and volume series as well as requirements for new kinds of data. After a period of public comment in March of this year, EIA submitted a proposal to the Office of Management and Budget for its review that would update EIA’s natural gas data collection program package. EIA expects OMB to make final approval of changes to EIA’s information program in December 2002, so that the changes take effect in January 2003. In addition, EIA has recently began to provide more real time market information that traders and other gas industry analysts use as an indicator of both supply and demand. On May 9, 2002, EIA began releasing weekly estimates of natural gas in underground storage for the United States and three regions of the United States—a key predictor of future natural gas price movements. EIA began this weekly estimate because AGA discontinued its own estimate of natural gas in storage, with its final weekly report dated May 1, 2002. EIA has also undertaken efforts to better understand derivatives markets. In February 2002, the Secretary of Energy directed EIA to report on, among other things, how derivatives are being used and to discuss the impediments to the development of energy risk management tools. A draft EIA report, scheduled for release in December 2002, states that, when properly used, derivatives are generally beneficial in managing risk. EIA concluded that all available evidence indicates that the oil industry in particular, and the natural gas industry to a lesser extent, has successfully used derivatives to manage risk. However, EIA found that continuing problems with the reporting of natural gas price data and with pipeline transmission costs might be denying the benefits of derivatives to many potential users. Residential customers who rely on natural gas to heat their homes are especially vulnerable to price spikes because they may have limited ability to switch to alternate fuels for heating their homes or to obtain gas from sources other than the gas utility companies. Therefore, when the gas utilities pay higher wholesale prices for natural gas, residential customers usually see their heating costs increase as well. This is true because a majority of gas utility companies, under state or local regulatory oversight, pass their gas costs on to their customers. However, utility companies can use various techniques to protect or hedge against the risk of rising natural gas costs by locking in the prices they will pay for gas purchased for residential customers. Hedging does not, however, ensure that a utility company will pay the lowest possible price for future natural gas purchases: it simply provides stable gas prices and protection against price spikes such as the one that occurred in 2000-2001. Hedging may result in the utility company paying natural gas prices that are higher or lower than the prevailing market price. In the 5 years prior to the recent price spike, between 20 percent of the small and 45 percent of the large gas utility companies responding to our survey reported that they did not hedge any of their natural gas purchases. Further, industry data that we reviewed showed that prior to and during the winter of 2000-2001, many gas utility companies were relying more on shorter-term contracts and the more expensive spot market for the gas they were purchasing to satisfy customer needs throughout the winter heating season. As a result, a significant number of gas utilities likely had to pay higher prevailing market prices when they purchased the natural gas needed to satisfy their customers’ needs in 2000-2001, and these higher prices were likely passed on to their customers. This recent price spike increased the importance of price stability for those gas utilities that serve residential customers and the regulatory agencies that oversee this service. As a result of the 2000- 2001 price spike, gas utilities have increased their use of hedging when buying natural gas. Ninety percent of the utilities responding to our survey reported that after the price spike they made plans to hedge some portion of their gas supply for the winter of 2001-2002. Gas utilities can use several hedging techniques to stabilize their gas supply costs and thereby protect their customers against the unpredictable price behavior of natural gas. Hedging techniques include both physical and financial tools. Physical tools, which are widely used by gas utilities, include the following: Storage of gas for future use can provide a hedge against the effects of price volatility. According to industry officials, many gas utility companies have traditionally purchased a portion of their gas supply during the warmer summer months when prices are lower and stored the gas for use during the winter heating season when prices are typically higher. However, there are costs associated with storing natural gas and, because it is stored underground in geologic formations, such as salt caverns, and in depleted oil and gas wells located in 30 states, not all gas utility companies can take advantage of this tool. Fixed price contracts, or forward contracting arrangements, can also provide a hedge against price volatility. Under such an arrangement, a utility agrees to take delivery of a set amount of natural gas at a specified time, price, and location. However, the buyer must pay the contract price even if the market price at the time of purchase is lower. For those gas utility companies that cannot or do not want to rely on physical hedges, various derivatives can also provide protection against increasing gas prices. Derivatives are contracts whose value is linked to, or derived from, the price of the gas itself. There are costs associated with using all derivatives, but most of the state regulatory agencies we surveyed allow gas utilities to recover these costs through their gas rates. Derivatives include natural gas futures, options, and swaps. Futures contracts that are traded on regulated exchanges, such as NYMEX generally are standardized. A gas utility that purchases a futures contract or an options contract through NYMEX is protected against counterparty credit risk. Simply stated, the financial performance of both the buyer and the seller of futures and options are guaranteed by the exchange. A natural gas futures contract may be purchased to lock in a future price for up to 72 months in the future and natural gas options can be used to guarantee prices in increments of $0.05 per mmBtu for various time periods. For example, a purchaser of a futures contract traded on NYMEX makes a legal commitment to take delivery of 10,000 mmBtu of gas at the Henry Hub in Louisiana on a specified date in the future. However, hedgers who buy futures contracts usually do not take delivery of the gas. According to a NYMEX official, less than 1 percent of the gas futures contracts traded on the exchange result in physical delivery of the commodity. Instead, those holding futures typically sell the contracts through NYMEX before the contractual date of delivery at the going market price. Then, whatever profit or loss accrues from this transaction offsets the change in natural gas prices from the time they bought the contract to when they buy gas for delivery. For example, in March a gas utility company wishing to hedge against a possible future price increase buys a futures contract for gas to be delivered in January at $4.60. If the January cash price later increases to $5.15, the company can buy its gas on the spot market for $5.15 and sell the futures contract on NYMEX for $5.15 thereby accruing a gain of $.55 on the futures contract and a net gas cost of $4.60. If, however, the January cash price drops to $4.25, the company could buy its gas at this price, sell the futures contract at $4.25 and take a loss of $0.35. But, the company’s net gas cost would still be $4.60. Options, which can be bought for a premium on NYMEX or in the OTC markets, give a utility the right, but not the obligation, to buy or sell natural gas at a certain price at some time in the future. Some analysts believe that purchasing options is the best way for gas utility companies to hedge against possible price increases, because the utility holding an option is protected against possible increases in the price of gas, but at the same time has the ability to participate in any downward changes in price. Swaps generally provide more flexibility to users than do exchange-traded futures because their terms can often be individually negotiated, such as for different amounts of gas and for different delivery points. However, natural gas swaps are traditionally traded in the OTC markets, and these markets often do not provide the same level of protection against credit exposure as NYMEX. A gas utility company that follows a hedging strategy is not guaranteed that it will pay the lowest price for natural gas. In fact, minimizing price volatility through hedging and minimizing gas costs (beating the market) are two entirely different objectives. A hedging strategy for a gas purchaser aims at gaining more certainty with respect to future costs, or avoiding exposure to large price fluctuations in the future that could come from total reliance on spot market prices. This is a different strategy from one that tries to secure the lowest possible prices in the future. Neither strategy is costless, and parties that use them risk that their effective costs, after the fact, may be higher than those of alternative strategies. To show how a hedging strategy can result in prices that are lower or higher than spot market prices, we conducted an analysis based on a hypothetical utility and actual spot and futures gas prices. We constructed a hypothetical gas utility, GU-H, whose gas use patterns mirror, on a smaller scale, the pattern of residential gas consumption in the United States from 1990 through 2001. We modeled GU-H so that its gas requirements each month are equal to about 2.5 percent of residential gas consumption in the United States. This makes GU-H a fairly large gas utility. We assumed that GU-H follows a hedging strategy whereby it purchases NYMEX gas futures contracts for the months of November through March–the months for which it has the highest gas requirements during the year. We assumed GU-H purchases the same amount of NYMEX contracts for each month of the winter season every year, based on its estimate of “baseload” for that month. We assumed that its baseload estimate is equal to the lowest amount of gas used for that month from 1990 through 2001. For example, the lowest amount of gas GU-H used during the month of January was in 1992 at slightly under 20 bcf, so we assumed that GU-H hedges this amount for the month of January each year. We assumed GU-H effectively “locks-in” prices for the coming November through March by purchasing NYMEX gas futures contracts on the first trading day in April of each year. For example, on April 3, 2000, GU-H purchased NYMEX gas contracts for the months of November and December 2000 and January through March of 2001. We assumed a transactions cost for the NYMEX contracts based on conversations with NYMEX officials. This cost was added to the hedged cost of gas, but it is relatively small. We assumed that monthly amounts of natural gas used above the baseload amounts covered by the futures contracts were bought on the spot market at a price indexed to a monthly average spot price at the Henry Hub, effectively resulting in zero transmission costs, another simplifying assumption. Given the above, we compared the cost of GU-H’s gas purchases for the winter months of November through March with and without a hedging strategy. Without hedging, GU-H purchases all its gas requirements on the spot market at the monthly spot price. Table 1 summarizes the results of our analysis with respect to GU-H’s gas purchase costs from the 1990-1991 winter through the 2001-2002 winter. As the table shows, GU-H’s hedging strategy would have resulted in net savings over the spot market price in gas purchase costs for some winter seasons and losses for others. For the winter of 2000-2001, the savings would have been unusually large—over $275 million—because spot market prices turned out to be far higher than NYMEX futures prices. However, the very opposite would have been the case in the winter of 2001-2002, when GU-H’s losses would have been over $220 million. We also calculated the effective monthly prices for the winter months with and without hedging. Interestingly, over the 11-year period, the overall average price paid for gas under the two scenarios was virtually the same, at about $2.56 per mmBtu for the unhedged case and $2.57 per mmBtu for the hedged case. However, the level of volatility was greater for the unhedged case. According to one commonly used measure of deviation from averages (standard deviation), the hedged case resulted in considerably less exposure to price volatility than the unhedged case. A measure of dispersion from the average price was about $1.41 for the unhedged case and only about $0.97 for the hedged case. Figure 10 shows a comparison of hedged and unhedged gas prices for a hypothetical gas utility. Following the price spike in 2000-2001, many gas utilities took steps to protect themselves and their customers against a repeat of the soaring prices that marked that period. According to our survey, since the natural gas price spike in 2000-2001, many gas utilities have increased their focus on achieving stable prices for their customers. In fact, 87 percent of the small utilities and 74 percent of the large utilities responding to our survey reported this goal is very important or extremely important to them. Previously, only 72 percent of the small utilities and 48 percent of the large utilities thought that stable prices were very important or extremely important. In addition, the efforts of utilities to provide more stable prices for their customers have received more support from state regulatory agencies. For example, state regulatory officials from 29 of the 48 agencies that we spoke with told us that they consider it very important or extremely important for gas utility companies to work toward achieving stable prices for their residential customers. Before the gas price spike in 2000-2001, only 14 agencies surveyed had considered this goal to be very important or extremely important. Consistent with the increased importance of stable prices, many gas utilities increased the percentage of their gas supply that they hedged after the winter price spike of 2000-2001. During the 2000-2001 winter, 20 percent of the large utilities and 32 percent of the small utilities that responded to our survey did not hedge any of their winter gas supply for residential customers. As a result, these utilities had to pay the prevailing high spot market prices for gas, resulting in higher bills for their customers. In contrast, during the 2001-2002 winter, only 10 percent of these utilities did not hedge any of their winter gas supply for residential customers. About 63 percent of the large utilities and 81 percent of the small utilities that responded to our survey reported that they hedged at least one-half of their winter gas supply during 2001-2002. In comparison, during the previous year, about 44 percent of the large utilities and 56 percent of the small utilities hedged at least one-half of their gas supply. In addition, a recent survey of 52 companies completed by AGA found that a majority of them planned to increase their use of hedging techniques to protect at least part of their gas supply portfolios from future price spikes. According to an AGA official, the extreme price volatility experienced during the winter of 2000-2001 made it clear to many gas utilities that hedging a portion of their gas supply helped to shield their customers from dramatic increases in natural gas prices. As figure 11 shows, since 1995, the number of utilities that do not hedge any of their gas supply for residential customers has steadily decreased. Many gas utility companies continued to use fixed price contracting and storage as the primary tools for stabilizing their gas acquisition costs. However, some gas utilities also used derivatives, including futures, options, and swaps, as a way of stabilizing their gas costs. Table 2 shows that the gas utility companies that responded to our survey used physical hedging tools much more than derivatives, and large utilities reported much higher use of financial hedging techniques than small utilities. Overall, 57 percent of the large gas utility companies and 47 percent of the small gas utility companies responding to our survey reported that they had increased their use of one or more hedging techniques since the 2000- 2001 winter. Table 3 shows the specific changes in the use of different hedging techniques among the utility companies. More details on the gas utilities’ responses to our survey questions can be found in appendixes II and III. According to our survey of state regulatory agencies, most allow the gas utilities under their jurisdiction to use hedging techniques when they purchase gas for their residential customers. However, despite an increasing openness to the idea of hedging tools, these regulatory agencies favored the use of physical hedging tools over financial tools. Table 4 reflects the positions of state regulatory agencies on the use of hedging tools by the gas utilities they regulate. In general, state regulatory agencies that allow gas utilities to use hedging tools do not restrict the amount of gas purchased through use of these tools. In addition, a large percentage of the gas utilities responding to our survey reported that their regulatory agency allows them to recover all costs associated with hedging. And, while 90 percent of the utilities regulated by state agencies reported being subject to prudence audits of their gas-buying strategy, only 7 percent have had costs associated with gas purchases disallowed by an agency because of such an audit. More details concerning the state regulatory officials’ responses to our survey questions are shown in appendixes IV and V. Although the federal government is not a direct regulator of natural gas prices, it has an interest in promoting a competitive and informed natural gas marketplace that protects the public from unnecessary price volatility. The principal tools available to federal agencies to promote a competitive natural gas marketplace and protect the public from price volatility include monitoring for anticompetitive behavior; taking appropriate enforcement actions where necessary; and providing decision-makers in industry and government with sound, up to date, natural gas marketplace information, such as short-term price movements and long-term demand and supply trends. However, at this date, the federal government faces major challenges in meeting its role of ensuring that natural gas prices are determined by supply and demand factors in a competitive and informed marketplace. We had previously recommended that FERC take actions to update its strategic plan and to develop an action plan for overseeing energy markets, so that it could more effectively carry out its responsibilities for overseeing interstate wholesale natural gas and electricity markets. We continue to believe these steps are important and are encouraged that FERC is beginning actions to address this recommendation. FERC recognizes that it needs to improve its market oversight and is reviewing its statutory authority and market monitoring tools. In addition, we suggested and continue to believe that the Congress might wish to convene public hearings to review FERC’s authorizing legislation and determine, in consultation with FERC Commissioners, whether FERC’s authorities need to be revised in light of the changing energy markets. Of particular concern would be any changes needed to support FERC’s new Office of Market Oversight and Investigation. CFTC, consistent with its authority, did not monitor activity in the OTC markets during the winter of 2000-2001, but it is continuing its investigation into whether OTC energy derivatives markets were manipulated during this period. Findings from these investigations may lead to enforcement actions and may also highlight the need for changes in federal oversight. Finally, EIA has recognized the need to collect more accurate and timely data on the natural gas market and has begun taking steps to update its data collection program for natural gas. We support these efforts and believe it is important that the agency continue to refine its efforts to provide more timely natural gas market data and focus on implementing changes to its natural gas data collection program as soon as possible. We provided FERC, EIA, and CFTC with a draft of this report for review and comment. FERC generally agreed with our conclusions (see app. VI), and noted that it previously lacked an adequate regulatory and oversight approach to monitor a restructured natural gas industry. FERC stated that with the creation of its Office of Market Oversight and Investigation it has taken the steps needed to oversee and assess the fair and efficient operation of electric power and natural gas markets. In addition to its letter, FERC provided us with technical changes to our draft, which we incorporated into the final report as appropriate. EIA generally agreed with our conclusions (see app. VII), and noted that it recognized the need to collect more accurate and timely data on the natural gas market and has begun taking steps to update its data collection program for natural gas. In addition to its letter, EIA provided us with technical changes to our draft, which we incorporated into the final report as appropriate. CFTC did not provide us a formal letter, but met with us to provide us with technical changes, which we incorporated into the report as appropriate. It also generally agreed to our conclusions. Copies of this report will also be sent to the FERC Chairman, the CFTC Chairman, the DOE Secretary, and other interested parties. We will make copies available to others upon request. In addition, the report will be available at no charge at GAO’s Web site at http: www.gao.gov. Questions about this report should be directed to me at (202) 512-3841. Key contributors to this report are listed in appendix VIII. In our study of the natural gas market, we addressed (1) the factors that influence price volatility and, in particular, the high prices that occurred during the winter of 2000-2001; (2) the federal government’s role in ensuring that natural gas prices are determined in a competitive and informed marketplace; and (3) choices available to gas utility companies that want to mitigate the effects of future price spikes on their residential gas customers. To address these objectives, we reviewed pertinent documents and obtained information and views from a wide range of officials in both government and the private sector. Our review encompassed the entire natural gas market from the wellhead, where gas is produced and first valued, to the end-user. We obtained information and views from federal, state, and local agencies and from natural gas industry officials through a variety of means, including interviews and surveys. We interviewed analysts from the Department of Energy’s Energy Information Administration (EIA), the Federal Energy Regulatory Commission (FERC), the Commodity Futures Trading Commission (CFTC), the New York Mercantile Exchange (NYMEX), companies involved in over-the-counter gas markets, such as the Intercontinental Exchange, and state utility regulatory commissions, to obtain their views on the factors that influence natural gas prices. We also discussed natural gas prices with representatives from various industry organizations, including the American Gas Association (AGA), the American Public Gas Association (APGA), the National Association of Regulatory Utility Commissioners (NARUC), the National Association of State Utility Consumer Advocates, the Natural Gas Supply Association, the Independent Petroleum Association of America, and the Interstate Natural Gas Association of America. Finally, we spoke with various individuals who work in the natural gas industry, including experts working at production companies, gas marketing companies, and gas utilities. In addition to our interviews, we obtained and analyzed natural gas price data supplied by the EIA, Data Resources, Incorporated (DRI), and NYMEX. The EIA provided wholesale gas prices, city gate prices, and end- user prices by customer class and by state, while the DRI database provided prices for the Henry Hub spot market prices and NYMEX officials provided prices for NYMEX natural gas futures contracts. Our analyses focused on how gas prices have behaved since 1993, when natural gas wholesale prices became fully deregulated. We also collected and analyzed data on factors that influence natural gas supply and demand, such as production, storage, consumption, weather, and gas-fired electric generation, as well as data on natural gas derivatives trading. Because residential customers usually have limited ability to switch to alternate fuels and few choices concerning who will supply their natural gas, we concentrated on determining how high prices affected this group of end users and what gas utilities can do to protect them from future price spikes. We also reviewed laws and regulations pertaining to CFTC’s, EIA’s, and FERC’s responsibilities for monitoring and providing information about the natural gas market. In addition, we identified key changes in natural gas regulation and in the development of the natural gas market that changed how gas prices are established. We also examined pertinent CFTC, EIA, and FERC documents, including annual reports and filings, staff research papers, fact sheets, reports, and congressional testimonies. We surveyed a sample of both investor-owned and municipally-owned gas utility companies to determine how they acquire their natural gas and what actions they have taken or plan to take to mitigate the effects of future price spikes. We identified our sample primarily from the lists of member utilities belonging to the AGA and the APGA. The AGA generally represents larger, investor-owned gas utilities; whereas, the APGA generally represents smaller, municipal gas utility companies. Since some companies were members of both organizations, we adjusted our sample by removing duplicates from the APGA list. We also included in our survey four large gas utility companies, which were identified by AGA staff as major utilities that are not members of their organization. Thus, our overall population consisted of all gas utility companies in the United States that were members of either the AGA or APGA, plus four additional companies. We sent survey questionnaires to the 112 gas utilities on AGA’s membership list, plus the 4 large investor-owned utilities that are not members of the AGA. In addition, we selected 17 large municipal utilities from APGA’s members list of 923 utilities for inclusion in our survey. Each of these 17 companies reported that it serves more than 20,000 customers. Thus, the first group of gas utilities we surveyed, referred to as the AGA group, consisted of 133 companies that serve large customer bases and deliver a large majority of the total volume of natural gas sold in this country. According to AGA, their members plus four additional large companies account for more than 90 percent of the natural gas delivered by gas utilities annually in the United States. We then selected a statistical sample from the remaining 906 (923–17) municipally-owned gas utilities found on the APGA members list. Our sample consisted of 342 municipal utilities, which provided 95 percent confidence intervals of +5 percentage points. Thus, our second group of gas utilities, referred to as the APGA group, consisted of 342 municipal companies that tend to have smaller customer bases. Before mailing our survey questionnaire to the two groups, we pretested it at six utility companies across the country that serve a range of customers. During these visits, we administered the survey and asked the utility staff to fill out the survey as if they had received it in the mail. After completing the survey, we interviewed the respondents to ensure that (1) the questions were clear and unambiguous, (2) the terms we used were precise, (3) the questionnaire did not place an undue burden on the staff completing it, and (4) the questionnaire was independent and unbiased. We did not receive a high enough response rate to our survey of gas utility companies to allow us to generalize the results of our analysis to all gas utilities located in the United States. We did, however, receive responses from 90 or 68 percent of the 133 companies in the first group (AGA list) and 179 responses or 52 percent of the 342 companies in the second group (APGA list). Because we cannot generalize the results of our survey, we have reported the results from the two groups–large utilities (AGA) and small utilities (APGA)–separately. We also surveyed staff from the utility regulatory agencies of the 48 contiguous states and the District of Colombia. We did not include Alaska and Hawaii in our survey, as these states are unique in their use of natural gas because their geographic locations separate them from the rest of the country’s natural gas infrastructure. We pretested our questionnaire with the regulatory agencies in Maryland, New Mexico, and the District of Columbia and then completed a structured interview with staff from the 48 states and the District of Colombia. However, because the Nebraska Public Service Commission does not regulate gas utility companies (such regulation occurs at the local government level), we exempted this state from our analysis of regulatory agencies. To identify the most qualified person within the agencies to contact, we obtained a list from NARUC, whose members include the governmental agencies that are engaged in the regulation of utilities and carriers of telecommunications, energy, and water. In cases where NARUC was unable to provide a contact, we called the agency directly. We performed our review from June 2001 through September 2002 in accordance with generally accepted government auditing standards. However, we were unable to assess the accuracy of the natural gas prices and other information provided by the EIA or the DRI database, as no resources exist to verify this data. The tables in this appendix list results from our survey of 269 gas utilities that could not be displayed in the body of the survey. Table 5 identifies the percentage of the residential customers’ gas supply that gas utilities planned to hedge during the winters of 1995-1996 through 2001-2002. It is likely that fewer utilities answered for earlier years because some companies do not keep records for many years. Table 6 identifies the percentage of the residential customers’ gas supply that gas utilities actually hedged during the winters of 2000-2001 and 2001-2002. Table 7 identifies the volumes that gas utilities planned to purchase and actually purchased for residential customers in the winters of 1999-2000 through 2001-2002. These volumes cannot be directly compared in some cases because the number of respondents may differ. However, as shown in appendix II, differences between planned and actual gas purchases were in large part due to changes in weather. Finally, table 8 identifies how much of utilities’ gas supply came from storage on average over the last 5 years. This appendix provides selected results from our survey of regulatory agencies located in the 48 contiguous states and the District of Columbia. Table 9 shows what hedging tools the state and the District of Columbia regulatory agencies allow or do not allow gas utilities under their jurisdiction to use when purchasing natural gas for their residential customers. Table 10 shows the various approaches the regulatory agencies use in their oversight of gas utilities. In addition to those named above, James Cooksey, James Rose, Daren Sweeney, Timothy Minelli, Diane Berry, Philip Farah, Luann Moy, Mark Ramage, Barbara Timmerman, and Nancy Crothers made key contributions to this report. | During the winter of 2000-2001, the wholesale price of natural gas peaked at a level four times greater than its usual level. Responding to the congressional interest and concern caused by these high prices, GAO undertook a study to address the (1) factors that influence natural gas price volatility and the high prices of 2000-2001; (2) federal government's role in ensuring that natural gas prices are determined in a competitive, informed marketplace; and (3) choices available to gas utility companies that want to mitigate the effects of price spikes on their residential customers. GAO surveyed a nationwide sample of gas utilities and staff of state utility regulatory agencies. Price spikes occur periodically in natural gas markets because supplies cannot quickly adjust to demand changes. In 2000-2001 for example, natural gas supplies were constrained and demand skyrocketed, leading to the perfect environment for the price spike shown below. While market forces make natural gas prices susceptible to price volatility, investigations are underway to determine if natural gas prices were manipulated in the Western United States during the winter of 2000-2001. Federal agencies face major challenges in ensuring that natural gas prices are determined in a competitive and informed marketplace. The Federal Energy Regulatory Commission lacks an adequate regulatory and oversight approach and is reviewing its statutory authority and market monitoring tools. The Commodity Futures Trading Commission does not have regulatory authority for over-the-counter derivatives markets. It does have antimanipulation authority and is currently investigating what role, if any, these markets played in the natural gas price spike of 2000-2001. Finally, the Energy Information Administration has an outdated natural gas data collection program, but has made efforts to reassess its data needs to provide more useful information. Gas utility companies can protect their residential customers against price spikes such as the one that occurred in 2000-2001. For example, using various hedging techniques, utilities can lock in prices for future gas purchases. Continuing volatility in natural gas prices, especially the price spike of 2000-2001, has increased the importance of price stability for gas utility companies. Agencies that commented on this report generally agreed with its conclusions. |
The basic structure of the U.S. military retirement system was established in legislation over a period of years, ending in the late 1940s. The system provides benefits to nondisabled service members when they retire from active or reserve duty and service members who retire on disability. It also provides for optional survivor coverage. It is a noncontributory, defined benefit plan that allows retiring active duty service members with 20 or more years of service to receive an immediate lifetime annuity with cost-of-living adjustments, regardless of age. In 1980 and 1986, benefit formulas for new entrants were changed to reduce costs and, in 1986, provide incentives for longer careers, but the basic structure of the system was left intact. In recent years, U.S. armed forces have been affected by substantial changes, including the end of the Cold War, subsequent downsizing of U.S. forces, and significant technological advances and associated increases in skill requirements for military personnel. These changes, along with increasing federal budget pressures, have focused attention on whether the military retirement system is best designed to efficiently meet the needs of the Department of Defense (DOD) and service members. Currently, members are covered by three separate versions of the nondisability retirement system based on when they entered military service. Retired active duty personnel who entered the service before September 8, 1980 (known as pre-1980), receive a benefit equal to a percentage of their final basic pay, calculated by multiplying their years of service by 2.5 percent. The benefit is 50 percent of basic pay for 20 years of service and reaches a maximum of 75 percent of basic pay for 30 years of service. For members who entered military service on or after September 8, 1980, and before August 1, 1986 (known as 1980-86), the accrual percentage is the same, but an average of the highest 3 years of basic pay, rather than the final level of basic pay, is used in the calculation. For members who entered the service on or after August 1, 1986 (known as post-1986), the accrual percentage for benefits before age 62 is lower for members with less than 30 years of service. Retirement pay is 40 percent of the average of the highest 3 years of basic pay for 20 years of service, gradually increasing to 75 percent for 30 years of service. Benefits for this last group are not fully protected against inflation, whereas benefits for the first two groups are fully protected. Table 1.1 shows details of the benefits for the three military retirement systems. The DOD Authorization Act of 1984 established the Military Retirement Fund, which became effective on October 1, l984. With the establishment of the fund, the military retirement system went from pay-as-you-go accounting and budgeting to accrual-based accounting and budgeting. At that time, payments to individuals who had already retired began to show up in the federal budget as disbursements from the Military Retirement Fund and not as payments from DOD’s military budget. Under accrual-based accounting, the Secretary of Defense is required to allocate a percentage of annual military basic pay costs to the fund to meet future retirement obligations for current service members. This amount is paid from DOD’s military personnel account and is based on actuarial and economic assumptions. This payment is called the “normal cost” payment, or the retirement accrual charge. When the fund was established, the unfunded costs of retirement benefits already accrued became apparent. The initial unfunded liability as of September 30, 1984, was $528.7 billion ($751.8 billion in fiscal year 1995 dollars). The unfunded liability is being amortized over a period of 50 years with payments to be made to the Military Retirement Fund from the Treasury Department. Changes in the amount of the unfunded liability “owed” to the fund can occur due to changes in economic assumptions, changes in the benefit formula for retired pay, or differences between anticipated accounting gains or losses in the fund and actual experience. The value of the unfunded liability as of September 30, 1995, was $500.8 billion. In addition to normal cost payments from DOD’s military personnel account and unfunded liability amortization payments from the Treasury, the Military Retirement Fund receives income from interest earnings on investments in nonmarketable, special-issue Treasury securities. All three of these payments are intragovernmental transfers consisting of debits from one government account and credits to another. In addition to making payments to military retirees and their survivors, the fund purchases the special-issue Treasury securities, another intragovernmental transfer. The adoption of accrual-based accounting caused future retirement outlays to be recognized as a future liability and thus made the total cost of current personnel decisions evident. However, the military retirement system continues to be financed on a pay-as-you-go basis, as are the federal retirement systems for most civilian workers and Social Security, in that benefits paid each year are financed by federal revenues received that year. As requested, we reviewed selected aspects of the military retirement system. Specifically, we addressed (1) military retirement costs, (2) the role of military retirement in shaping and managing U.S. forces, and (3) proposed changes to modernize the system and contribute to more efficient force management. As part of our review, we hosted a roundtable discussion on June 12, 1996, at which several current and former DOD officials, as well as compensation experts, expressed their views on those aspects of the military retirement system included in our review. A summary of the discussion and a list of roundtable participants appear in appendix I. We focused our review on the nondisability active duty military retirement system. We identified and reviewed studies and data concerning the military retirement system and proposed changes. We interviewed military personnel, compensation, and force management officials from the Army, the Navy, and the Air Force. We also spoke with officials from the Office of the Secretary of Defense; Retired Officers Association; Retired Enlisted Association; Congressional Research Service; Congressional Budget Office; Office of Management and Budget; Office of Personnel Management; Brookings Institution; Employee Benefits Research Institute; Hay-Huggins Management Consultants; ICF Kaiser International, Inc.; KPMG Peat Marwick; and RAND. We reviewed historical data and the current projections of future retirement costs from the DOD Actuary. At our request, the Actuary also provided retirement cost estimates for selected proposals for change. We did not validate or verify the Actuary’s results, and the estimates only reflected retirement costs, not the total cost impacts to DOD. The four proposals we selected represent past proposals and suggestions from roundtable participants. Each proposal retains the basic feature of allowing retirement with an immediate annuity after 20 years. In addition, we collected and analyzed data on costs of civilian retirement systems and compared these costs with those of the military retirement system. We conducted our review from December 1995 to September 1996 in accordance with generally accepted government auditing standards. The cost of military retirement can be measured in a number of ways. For understanding military retirement cost as a portion of total federal government outlays and its impact on the current budget deficit, outlays to existing retirees are the appropriate measure. However, these outlays represent obligations already incurred. For evaluating military retirement as an aspect of current government and DOD policy, the accrual costs in DOD’s budget, which reflect future retirement outlays for individuals now serving in the military, are the relevant measure. In fiscal year 1996, the United States paid $29 billion to military retirees and their survivors. Figure 2.1 shows historical and projected federal government outlays for military retirement. The outlays are projected to increase to slightly more than $30 billion (in fiscal year 1995 dollars) by the year 2007, after which they will decline, in inflation-adjusted terms. Military retirement outlays have increased in constant dollars since 1960 due to the increase in the number of retirees, average retired pay, and survivor benefits. For example, from 1960 to 1995, the number of retirees grew sixfold—from 254,000 to 1,603,000—due primarily to the rise in the proportion of service members reaching retirement and somewhat to higher life expectancy. Over the same period, average annual inflation-adjusted pay per retiree rose by about 11 percent as military basic pay, on which retired pay is based, grew faster than inflation. Also, the percentage of retirees electing survivor benefits increased from 15 to 60, and the population of survivors receiving payments went from a few thousand in 1960 to 213,000 in 1995. Federal budget pressures have heightened interest in opportunities to reduce spending both in the near and long term. Efforts to reduce near-term spending have resulted in several initiatives to achieve savings through trimming payments to existing retirees. One initiative was a fiscal year 1996 budget resolution proposal to reduce outlays for those who entered the military before September 1980 by computing benefits on an average of the final year of basic pay instead of the final basic pay. (This initiative was removed from both the House and Senate versions of the reconciliation bill.) Other initiatives included a proposal to reduce inflation adjustments for all nondisabled retirees and a bipartisan plan to reduce inflation adjustments and the retired pay computation formula for retirees under age 50. Reactions to these initiatives demonstrated that proposals to change retirement benefits for service members already retired are likely to meet strong opposition. For example, in expressing DOD’s view of the fiscal year 1996 budget proposal, the Secretary of Defense said he would do everything he could to “. . . drive a stake through the heart of this idea.” One reason cited for the defense community’s opposition to this proposal is that retroactive changes constitute a breach of promise to service members, which could undermine DOD’s credibility. This position is consistent with the views of DOD officials and some analysts that changes to the military retirement system should apply only to new entrants so that the changes do not affect the terms under which a service member began his or her career. There is, however, tension regarding the disparity between benefits to current retirees and service members under the more generous systems, on one hand, and those members covered by a less generous system, on the other. Moreover, one of our roundtable participants observed that lifetime benefits to personnel currently retired will generally exceed expectations due to longer lifetimes. Participants also noted that all of society will have to make adjustments as the country’s budgetary strains continue to grow. Military retirement accrual cost for active duty personnel was an $11 billion DOD budget item in fiscal year 1996. DOD paid this amount into the Military Retirement Fund to reflect the future retirement obligations being generated by current personnel. Trends in DOD budget costs, called retirement accruals or normal costs, are shown as a percent of basic pay in figure 2.2. Normal cost payments, expressed in dollar amounts instead of as a percent of basic pay, show a similar pattern over the period. Military retirement normal cost percentages have declined sharply since the inception of accrual accounting in fiscal year 1985. This decline is due to more service members being under less generous retirement plans and changes made in actuarial assumptions to reflect experience. However, as shown in figure 2.3, military retirement normal costs remain a significant DOD budgetary item. They comprised nearly 16 percent of DOD’s $70.7 billion personnel costs in fiscal year 1995 and 4.3 percent of DOD’s fiscal year 1995 $257.8 billion budget. Analysts, including some of our roundtable participants, have advocated that the DOD Actuary be instructed to calculate separate normal cost percentages for each service and for officers and enlisted personnel to improve the use of the information for force management purposes. Although they are not reported separately, actual normal cost percentages are significantly different for each service and for officers and enlisted personnel. These differences exist because the services have varying percentages of personnel staying to retirement and a greater proportion of officers stay to retirement than enlisted personnel. The DOD Retirement Board of Actuaries is directed under law (10 U.S.C. 1465 and 1466) to calculate a single normal cost percentage for active duty service members,which is used in figuring retirement costs into each service’s personnel budget. Military retirement has historically been considered more generous and costly than most other retirement systems, including federal civilian retirement systems. However, comparisons are complicated by the need to consider total compensation packages and conditions and risks that are unique to military life. Even with the 1980s reductions, some observers question whether military retirement benefits have the right weight in overall military compensation. The Federal Employees Retirement System (FERS) covers most federal civilian employees who entered service after December 31, 1983. FERS is a three-part pension program that includes social security benefits, an additional defined benefit, and a tax-deferred savings plan with government matching of contributions. It differs significantly from the Civil Service Retirement System (CSRS), a stand-alone defined benefit system that covers most federal employees hired before 1984. Both the FERS and the CSRS systems have distinct provisions for law enforcement officers and firefighters (referred to in this report as protective service employees). Table 2.1 shows the normal cost percentage incurred by the government and the percentage contribution of the individual for the three military retirement systems in effect and for the different plans under FERS. The military retirement system strongly influences the broad shape of the force. The retirement system provides an increasing incentive for service members to stay in the military as they approach 20 years of service and encourages them to leave thereafter, helping DOD to retain midcareer personnel and yielding a relatively young force. However, the system can also impede effective force management. Because military personnel are not entitled to any retirement benefits unless they have served 20 years, the services have been reluctant to involuntarily separate personnel with less than 20 years of service beyond a certain point. Moreover, some analysts, including several roundtable participants, believe the military retirement system is an obstacle to achieving a force of the right size and composition because it provides the same strong career length incentive to all categories of personnel. These analysts maintain that 20 years may not be the optimal career length for all military personnel. The present practice of allowing normal nondisability retirement on an immediate annuity after 20 years of service evolved from a program designed to aid retention of naval enlisted members to a program covering all of the armed services. Officers and enlisted members of each service were brought under the 20-year retirement umbrella by separate pieces of legislation between 1915 and 1948. The legislative history of these actions shows that Congress established the 20-year retirement to encourage more enlisted personnel to remain in the service longer and eliminate older officers from the service to lessen promotion stagnation problems. The 5th Quadrennial Review of Military Compensation (QRMC) in 1984 specified the following military personnel management needs that the retirement system promotes: a young and vigorous force, with a continuing flow of officers and enlisted personnel through the system; military careers that are reasonably competitive with other alternatives; a mobilization base to be called up during a war or an emergency. This QRMC also identified several principles of military compensation with relevance for evaluating the retirement system, including economic and military efficiency, equity, flexibility, and integration with force management. The retirement system, as one aspect of military compensation and force management policy, influences the composition of the force primarily through its impact on a service member’s desire to continue military service. Other influences on retention include the general level of pay and allowances; up-or-out nature of the officer personnel management system;reenlistment policies; special and incentive pays; and satisfaction with conditions of military life, ranging from ship rotation policy to family housing. The military’s unusual personnel structure of a closed hierarchical system—with essentially no lateral entry at upper ranks—provides unique challenges. Because of the lack of lateral entry, shortfalls in numbers of midlength careerists cannot be easily rectified; thus, the compensation system needs to ensure a continual flow of personnel through the ranks. Each year the military recruits and trains many new entrants, most of whom will not make the military a career. The DOD Actuary reports that about 48 percent of new officers and 15 percent of new enlisted personnel attain 20 years of active duty service. Figure 3.1 illustrates average retention patterns across all the services for all personnel categories. The retirement system exerts an increasing “pull” effect on personnel as they approach the 20-year point but a substantial “push” effect thereafter. That is, retention rates for enlisted personnel have historically increased with each successive reenlistment. Similarly, after the initial term of obligated service, officer retention rates tend to increase with each year of service. The retention pull is generally believed to be strong by the 8th to 12th year of service. After 20 years of service, however, the retention rate drops significantly. For example, approximately 36 percent of personnel who attain 20 years of service retire within 1 year of reaching that threshold. In addition to its impact on overall retention, the retirement system likely affects force characteristics by providing a stronger incentive for some service members to stay than others. For example, because retirement pay is a form of compensation that is of greater value at the higher ranks, some analysts maintain that it particularly encourages the most able to stay in service because they view their promotion chances most favorably. The “lock-in” effect of the 20-year vested retirement system lessens the impact on retention rates that fluctuations in the private sector employment market would otherwise have. As personnel get closer to the 20-year point, it takes a greater private sector lure to offset the value of the military retirement benefits that would have to be foregone. For example, the percentage of personnel with 10 years of service who reach retirement eligibility has been about 70 percent for enlisted personnel and over 90 percent for officers. Thus, the retirement system has been valuable as a force stabilizer. Highly predictable retention rates beyond the 10th year of service make personnel planning and management considerably easier than if retention rates were influenced more by external labor market forces. Another way in which the retirement system fosters midlength careerist retention comes from the “push” effect after 20 years. The availability of an immediate annuity means that military personnel are effectively working for reduced compensation after 20 years of service, which prompts many personnel to retire at that point to begin a second career while they are still relatively young. The 20-year retirement option therefore enables more rapid promotion opportunities in the midcareer years, which prevents grade stagnation and increases the attractiveness of remaining in the military. Across DOD, the force has been growing more senior since the early 1970s.Some growth in seniority was to be expected after the change to an all-volunteer force because those who entered military service after that time did so by choice. Many defense analysts maintain, however, that the current grade structure and seniority has come about more by happenstance than design. According to our 1991 report, the structure came about as retention improved and the services allowed more personnel to reenlist than they needed to meet force profile goals. As RAND’s recent study noted, the services’ desired force structures reflect the actual retention patterns that emerge as a result of the current compensation system, particularly the retirement system; without the current retirement system, the desired force may differ significantly.Moreover, since the retirement system operates equally for all categories of personnel, it cannot be used to increase or decrease retention of personnel in particular occupations. A negative aspect of the military retirement system with respect to force management is that the lack of earlier vesting makes it difficult to separate some personnel. Because of the great financial loss to personnel nearing 20 years of service if they are separated earlier, the services have been reluctant to separate without any retirement benefits all but the worst performers after they have reached the midcareer point. This difficulty has consequences both for dealing with performance problems and adjusting force size or composition as requirements change. Two of our roundtable participants indicated that, even in the case of a serious breach of conduct, the decision to separate personnel not eligible for retirement is extremely difficult. They also said that many personnel with significant problems are kept until the 20-year point partly because of the implications of preretirement separation for their families. The recent drawdown required DOD to use a variety of tools, primarily temporary voluntary separation programs, to separate personnel with less than 20 years of service. To reduce the active duty force of 2,174,100 military personnel in 1987 to 1,485,500 in 1996, DOD employed voluntary separation tools, such as Voluntary Separation Incentives (VSI), Special Separation Benefits (SSB), and the Temporary Early Retirement Authority (TERA) to separate 148,700 personnel. All of these temporary programs are scheduled to expire in 1999. VSI and SSB are targeted programs for overstrength or oversubscribed fields, careers, and military occupational specialties. Individuals with 6 to 20 years of service are eligible for VSI and SSB. The TERA program allows voluntary retirement of members with 15 years of service in personnel categories subject to the discretion of the services. Some senior DOD officials indicated they would like to have these temporary authorities made permanent because they provide benefits for separating personnel and control over potential losses of critical personnel. Some officials indicated that they did not want TERA after the drawdown because they believed it would result in a constant stream of requests and undermine the concept of the 20-year commitment. The Selective Early Retirement Boards permit the services to exercise authority to select retirement-eligible officers to retire earlier than normal. This program was used to separate 10,420 officers from 1992 to 1995. Assessments of the value of the military retirement system in force management depend on the characteristics of the desired force. One key aspect of desired force characteristics is the optimal length of military careers. The military retirement system implicitly assumes that the optimal career length is the same for all military occupations and that career length should be relatively short due to the high physical demands of military duties. However, some analysts contend that, although some military occupations undoubtedly call for young and vigorous personnel because they entail physically demanding work under harsh conditions, many other occupations do not require exceptionally vigorous duties. Furthermore, in today’s more technologically and politically complex military environment, capabilities that peak later in life than physical capabilities, such as experience, knowledge, and judgment, may be more important in many military occupations than vigor. Therefore, the optimal career length is likely to vary by military occupation category, with some that are longer than 20 or 30 years (e.g., acquisition) and some that are shorter (e.g., infantry). One of the strongest arguments for longer careers for senior military leaders is the increased education and joint operational experience requirements of the modern career. One of our roundtable participants strongly advocated lengthening military careers for senior officers and shortening careers for other officers. Under such a proposal, each service would establish a general career length for officers that would be shorter than the current length, possibly ranging from about 12 years for the Army to about 17 years for the Navy. Beyond that point, only a small percentage of officers would be promoted to the next rank, and the career length expectation for those personnel could be greater than 35 years. Considerable uncertainty exists in the defense community about the size of the future force and its composition. The particular characteristics of the desired force need to be determined to design a retirement system that supports that force, according to several of the roundtable participants. In its 1993 Bottom-Up Review, DOD concluded that by fiscal year 1999 an active force of about 1.4 million personnel, down from about 2.2 million in 1987, would meet national security needs. Current personnel levels for all of the services are based on that assessment. However, future changes in personnel levels are possible. For example, DOD, in response to the 1997 DOD Authorization Act, is planning a review of defense strategy and force structure through 2005. Several recent studies have examined the mix of skills the future military will need. Joint Vision 2010, for example, prepared by the Chairman of the Joint Chiefs of Staff, describes a future force that relies on smaller, mobile units with more precise weapons and high-technology intelligence gathering, information warfare, and advance training simulators. Also, a recent Army Science Board report concluded that the Army’s development of technologically sophisticated officers was lagging behind its needs for the future. The types of management systems that will support the military’s personnel requirements in the post-Cold War environment have been the focus of (1) several studies being carried out by RAND for the Under Secretary of Defense for Personnel and Readiness and (2) the 8th QRMC. RAND’s study of alternative career management systems for officers examined several alternative officer career flows and their potential for meeting DOD’s objectives. The study generally concluded that the benefits of uniformity need to be balanced by a capacity for flexibility in the management of officer careers. The types of officers the services need may be increasingly varied. One example of a proposal the study described is an officer management system that would substantially increase the number of officers forced to leave at the 5- and 10-year service points but would encourage longer careers for those who remained. A preliminary conclusion of the 8th QRMC review of the principles of military management and compensation is that uniformity of human resource management systems among all DOD organizations is not desirable because the various DOD communities have different strategies and therefore should also have their own human resource management systems. Many changes to the military retirement system have been previously suggested and analyzed, including several proposed at the roundtable discussion we hosted. Some of these changes would modify or add to the current system, whereas others would completely replace the current defined benefit system. A common feature of suggestions for modifying the current system, which was generally supported by our roundtable participants, is earlier vesting. Analysis suggests that some types of earlier vesting could be offered with little or no increase to DOD’s retirement costs, although the ultimate cost impacts to DOD depend on retention and force composition effects. Some analysts, including several roundtable participants, have called for more far-reaching structural changes to the retirement system, possibly with other changes in compensation and personnel policy, to accommodate different career lengths for different personnel. These changes could increase effectiveness or reduce costs through yielding a force of a different composition and size than today’s force. Several features of any retirement system that could be considered for change include the following: the specific type of system—defined benefit, defined contribution, or both; the benefit accrual formula; the formula for inflation adjustments; the amount employees can contribute, the level (if any) of matching contributions, and investment options for a defined contribution system; the point at which benefits are paid; and the amount of time until employees are vested in benefits. One or more of these features can be modified to adjust the current system or create a complete alternative. The features to be changed, of course, depend on the objectives to be fulfilled. For example, the 1980 and 1986 changes to the military retirement system were designed primarily to reduce the system’s cost and thus affected the benefit accrual formula, calculation base, and adjustments for inflation. The 1986 changes had the additional objective of increasing the incentives to continue in service for 30 years. Neither legislative change affected the system’s other features, such as the time benefits are paid, the amount of time until service members are vested, or the nature of the system as a defined benefit system exclusively. Recent suggestions for changing the military retirement system, including those put forth during our roundtable discussion, have generally focused on improving force management and making the system more attractive or fairer to service members. Analysis of these changes focuses on two types of management impacts. The first is the potential for DOD to reduce cost or enhance effectiveness by increasing its ability to manage a given force through separating poor performers and adjusting force size or composition as needs change. The second concerns whether DOD could design policies and incentives, including those for retirement, that better yield the force needed, including one with career types and lengths that differ across military occupations. Most roundtable participants believed that the 1980 and 1986 reforms made reducing retirement accrual costs a less compelling motivation than it had been, although several stated that pressures on the defense budget would cause continued examination of all personnel costs. Most of our roundtable participants supported changing the military retirement system to provide some benefits to personnel who serve less than 20 years. A common feature of several proposals is that members would be vested earlier in a portion of their retirement benefits so that the sharp rise in the value of military retirement benefits at 20 years of service would be somewhat leveled. One proposal for vesting benefits earlier was adding a deferred annuity for those retiring with less than 20 years of service. This change would reduce costs by deferring receipt of the benefit until, for example, age 62 and maintain most of the current incentive for personnel to remain for 20 years. Several roundtable participants proposed adding a tax-deferred savings plan, similar to the 401(K) plans commonly available to workers in the private sector, to the current defined benefit system. This change could also include some government matching of service member contributions. Although a tax-deferred savings plan without government matching might not be considered to constitute earlier vesting, it does provide a way for personnel to acquire some additional long-term savings. Some participants noted that this option could offset the limited opportunity service members have to build equity in a home, although others commented that most enlisted personnel would have little extra income for a tax-deferred savings plan. The DOD Actuary, at our request, estimated the impact on retirement accrual costs as measured by the normal cost percentage of several options, all of which retain the basic feature of allowing retirement with an immediate annuity after 20 years. The options selected for analysis reflect previous proposals and suggestions from roundtable participants. The options, which are fully detailed in appendix II, are adding a deferred annuity (or equivalent lump-sum separation payment) to the current system for service members separating with between 10 and 20 years of service, either not adjusted for inflation (option 1A) or adjusted for inflation (option 1B); adding a tax-deferred savings feature, with no government matching, to the current system (option 2); adding a tax-deferred savings feature, with government matching, to the current system (option 3); and vesting members at 10 years of service in a retirement annuity that is based on years of service and gradually shifts from being deferred to being received as an immediate annuity with 20 years of service (option 4). The Actuary’s estimates of the impact of options 1, 2, and 3 on DOD’s budgetary cost for military retirement are shown in table 4.1. These estimates assume the modifications do not change retention patterns and do not reflect any potential changes in other DOD costs. Adding a deferred annuity (options 1A and 1B) for those who separate early increases retirement accrual costs by less than 1 percent of basic pay. Cost increases are small because relatively few service members separate between 10 and 20 years of service and the value of the benefit for an individual service member is low. Adding a tax-deferred savings feature (option 2) to the current retirement system does not increase DOD’s retirement accrual costs if there is no government matching of contributions. Option 3 increases accrual costs because of the government’s matching contributions to the tax-deferred savings plan. The Actuary also calculated that, for DOD to match service members’ contributions under option 3 without an increase in the normal cost percentage, the value of the defined benefit portion of the plan would need to be reduced by about 11 percent. Service members’ contributions to a tax-deferred savings account that do not increase DOD’s retirement accrual costs would, however, have a near-term cost to the government in terms of a reduction in tax revenues. However, contributing members will eventually owe taxes on their contributions and earnings. These deferred taxes offset much of the near-term cost to the government. Our analysis suggests that DOD could offer some earlier vesting of a portion of retirement benefits without significantly raising retirement costs. However, the previous options are unlikely to substantially increase force management flexibility. Figure 4.1 illustrates the pattern of the value of future retirement benefits, under the post-1986 system and options 1 and 3, for an officer leaving the military after different years of service. The present value of option 3 as illustrated reflects the government’s matching contributions to a tax-deferred savings plan and not the service member’s contributions or tax benefits. Since option 2 has no additional government contribution, it is not illustrated. These modifications to the post-1986 system do not substantially alter the sharp increase in the value of retirement benefits at 20 years of service, although members who serve less than 20 years can receive some retirement (or tax-deferred savings) benefits under the options. Some analysts have thus questioned the desirability of earlier vesting options such as options 1A and 1B because they involve some additional cost to DOD and may not significantly increase DOD’s management flexibility. Other analysts, including some roundtable participants, have maintained that limited earlier vesting options are in fact desirable because they offer some benefit to members separating with less than 20 years at very low cost. The DOD Actuary estimated cost impacts of an additional earlier vesting option that, unlike options 1 through 3, would lessen the sharp increase in the value of benefits at 20 years of service and thus decrease the difficulties associated with separations for individuals with less than 20 years of service. Figure 4.2 illustrates the impact of this modification on the present value of retirement benefits at different years of service compared with the post-1986 system. Instituting the change as specified in option 4 would increase retirement accrual costs from 28 to approximately 29.9 percent if retention behavior were unchanged, according to the DOD Actuary’s analysis. The increased cost represents payment of partial retirement benefits to some personnel who are presently leaving before 20 years of service without benefits. However, because the incentive for service members to stay to 20 years is substantially reduced under this option, it is unlikely that current retention patterns would continue. Thus, we asked the DOD Actuary to estimate retirement accrual costs with changes in retention patterns. The Actuary found that a 25-percent reduction in the probability that a service member would stay 20 years (with increased exits spread evenly between 10 and 20 years of service) would reduce the normal cost percentage to 24.7 percent and a 10-percent reduction would reduce normal cost to 26.7 percent. This estimated decline in normal costs under graduated vesting results from the lower value of retirement benefits received by those service members who would normally be expected to stay in service at least 20 years but are assumed to leave with between 10 and 20 years of service. Thus, our analysis shows that the reduced value of retirement benefits to service members who leave earlier because of graduated vesting more than offsets the increase in benefits paid to service members who would normally have left with between 10 and 20 years of service under the post-1986 system. Our analysis of a graduated vesting option illustrates that the impact on retirement costs largely depends on the impact on retention patterns. Since retention patterns affect force seniority, significant changes in retention patterns would result in a more junior force. There could also be changes in personnel quality or work effort, according to some analysts. If DOD wanted to maintain a certain level of seniority or personnel quality with a substantially smoother vesting pattern of retirement benefits, changes in other aspects of compensation or personnel policy might be required, and these changes would have their own cost implications. Pay raises or other incentives could, for example, offset to some extent reductions in retirement costs. Even if a more junior force were desired, some adjustments in pay or incentives might be required to retain certain individuals. Some analysts have called for major structural changes to the military retirement system, possibly along with other changes in compensation and personnel policy, in part to better accommodate different career lengths for different categories of personnel. Such changes include placing military personnel under a system similar to FERS and having retirement systems that vary, for example, by service, officer and enlisted status, or occupation and optimal career length. One suggestion offered at the roundtable was to maintain the current system for occupations requiring youth and vigor, except for a modification to provide earlier vesting of benefits, and place other military personnel under a system similar to FERS. Among the roundtable participants who advocated major retirement system changes, two views prevailed. One view was that designing the right retirement system required determining the kind of force DOD was trying to build toward. The other view was that such foresight was unlikely and that a retirement system was needed that could accommodate changes in circumstances and needs. Predicting the cost and other impacts of more substantial changes to the military retirement system is difficult. The DOD Actuary did not estimate the cost of any military retirement alternatives that completely eliminated the payment of an immediate annuity after 20 years of service because of the complexities of predicting the behavioral impacts of such a substantial change. One concern voiced by several of the roundtable participants was that even the most sophisticated analysis may be a poor predictor of the effects of such changes. These complexities are illustrated in recent analyses of alternatives to the current military retirement system. The RAND Corporation designed a computer simulation model of retention behavior with data on Army personnel to predict the impacts of substantial retirement system changes. In addition to modeling retention effects, RAND also predicted impacts on how hard individuals work and the likelihood that the most capable personnel would stay and seek advancement. RAND used this computer simulation model in its 1994 evaluation of a military retirement system with the following features: (1) service members with at least 10 years of service would be vested in a deferred annuity based on years of service and high three basic pay that would be available at age 60 and (2) members separating after 10 years of service could receive a separation payment based on years of service and final basic pay. Also, under this system the services could vary eligibility for the separation payments to control career lengths in different skills. RAND found that maintaining a force of the current size and quality under that system would require an active duty pay raise and overall compensation costs, including retirement, would be higher by about $800 million per year compared with the post-1986 system. Placing military personnel under a retirement system similar to FERS could save DOD $2.4 billion per year and maintain a given size and quality force, according to a 1996 RAND study that used a similar modeling approach. If improved efficiencies allowed some reduction in force size for a given level of effectiveness, savings could be greater. The system RAND analyzed includes a defined benefit plan, a defined contribution plan, and social security benefits. The defined benefit annuity formula and the provisions for government matching of TSP contributions would be the same as that for FERS general employees. Because retirement benefits would be considerably less generous than under the current system for those who separate with 20 or more years of service, the RAND analysis provided for an active duty pay raise that was sharply skewed toward the upper grades. The system also included separation payments. The increase in basic pay costs and the costs of separation payments were more than offset by retirement cost savings, according to the study. Modifications to the military retirement system could make the system more attractive to many service members and increase management efficiencies at little additional cost to DOD. Certain changes, such as offering some type of retirement benefit to members serving less than 20 years, may be worth careful analysis for implementation in the short term. Evaluation of the costs and benefits of more substantial restructuring of the military retirement system must be done in the context of overall force needs. As U.S. forces adapt to new challenges and budgetary pressures continue to require increased efficiencies in all federal spending, the role of the military retirement system as one tool in managing and shaping the force is likely to come under increased scrutiny. Although retirement budgetary costs have declined, the rigidities of the system may be inconsistent with fostering the most effective force possible. As DOD evaluates the size and type of military it wants to build, the retirement system is an important personnel policy to be considered. DOD provided written comments on a draft of this report, which appear in appendix III. DOD stated that it did not object to the overall thrust of the report but did, however, express concern that the report’s discussion of potential changes to the retirement system could be taken to suggest a consensus on specific shortcomings of the system. DOD emphasized the overall effectiveness of the retirement system in providing the military with needed personnel and stated that the impact of 1980 and 1986 changes to the system should be fully assessed before further changes are made. DOD also believes that any changes eventually made to the retirement system must apply only to new entrants to avoid breaking faith with service members. In addition, DOD believes that an immediate annuity for members completing at least 20 years of active military service is an essential feature of the system that must be maintained. DOD identified several issues it believes merit great weight in considering whether and how the military retirement system should be changed. These issues included DOD’s beliefs that (1) the current system has been effective in retaining experienced personnel while simultaneously avoiding stagnation among senior personnel; (2) the existing retirement system, augmented by temporary authorities established for the ongoing force drawdown, has provided adequate flexibility in managing force levels; (3) the 1986 changes to the retirement system increase the incentive for service beyond 20 years; (4) changes to the retirement system, such as those discussed in our report, could result in increased cost of other programs; and (5) changes in the retirement system are not needed to allow DOD to adequately vary career lengths according to specialty, given other available compensation and management tools. We agree that these are important factors and perspectives in evaluating the military retirement system and possible changes and believe they are appropriately discussed in the report. DOD also expressed concern about the report’s discussion of proposals to (1) gradually vest service members in retirement benefits and (2) place military personnel under a retirement system similar to FERS. We presented those options to include the full range of views and suggestions reflected in our roundtable discussion. We also pointed out that substantial changes to the retirement system would involve significant uncertainties and require thorough evaluation. | Pursuant to a congressional request, GAO reviewed selected aspects of the military retirement system, focusing on: (1) military retirement costs; (2) the role of military retirement in shaping and managing U.S. forces; and (3) proposed changes to modernize the system and contribute to more efficient force management. GAO found that: (1) payments from the military retirement fund to military retirees and their survivors totaled $29 billion in fiscal year (FY) 1996; (2) these payments have been rising over several decades as both the number of military retirees and the average payment to individual retirees have increased and are expected to peak at slightly more than $30 billion (in FY 1995 dollars) in 2007; (3) since FY 1985, the accrual accounting concept has been used to reflect the cost of future retirement payments for current service members in the Department of Defense's (DOD) military personnel budget; (4) these annual DOD budgetary costs have declined for several reasons, including lower benefits for new entrants, changes in economic and actuarial assumptions to reflect experience, and recent decreases in force size; (5) the military retirement system strongly influences the broad shape of the force, since it provides an increasing incentive for service members to stay in the military as they approach 20 years of service and encourages them to leave thereafter, helping DOD to retain midcareer personnel and yielding a relatively young force; (6) however, the system can also impede effective force management because military personnel are not entitled to any retirement benefits unless they have served 20 years, and the services have been reluctant to involuntarily separate personnel with less than 20 years of service beyond a certain point due to the financial consequences for service members and the impact on morale; (7) some analysts, including several of GAO's roundtable participants, believe the military retirement system is an obstacle to achieving the right force size and composition because the system provides the same career length incentive for all categories of personnel; (8) proposals to change the military retirement system are intended to improve efficiency and flexibility in force management, increase fairness or attractiveness to service members, and reduce costs; (9) earlier vesting of at least a portion of military retirement benefits is a common feature of proposed changes; (10) cost estimates done by the DOD Actuary, at GAO's request, suggest that some type of earlier vesting could be offered with little or no increase to DOD's retirement costs; (11) the total impact on DOD's budget of the proposed changes depends on their effect on retention and force composition; (12) some analysts have called for more fundamental changes to the retirement system, possibly with other changes in compensation and personnel policy, to accommodate different career lengths for different personnel; and (13) these changes could increase effectiveness or reduce costs by yielding a force of a different composition and size than today's force. |
Formal phased retirement is an employer-based program in which older workers can reduce their working hours in order to transition into retirement. Phased retirement may include partial drawdown of defined contribution or defined benefit pension benefits and a knowledge-transfer component. Depending on the employer, the program may include health coverage for participants. In contrast to formal programs, informal phased retirement arrangements are not part of a formal program but are alternate methods to ease into retirement with the same employer, such as an ad hoc agreement or retirement followed by a term as a contractor. Employer goals for formal phased retirement programs vary, but may include knowledge retention, skills transfer, workforce planning, and retirement planning. Employers can use phased retirement as a human resource tool not only to retain workers with essential skills or knowledge, but also to provide an incentive for other workers to retire. Additionally, workers may find phased retirement to be a positive way to ease into retirement. Income in retirement can come from multiple sources, including but not limited to: (1) Social Security, (2) payments from defined benefit (DB) plans, and (3) retirement savings, such as savings in an individual retirement account (IRA) or a defined contribution (DC) plan, such as a 401(k). Social Security: Social Security retirement benefits partially replace earnings lost due to retirement and provide a base of income upon which to build. The initial monthly benefit amount depends on the worker’s earnings history and the age at which he or she chooses to begin receiving benefits, as well as other factors. Social Security pays unreduced benefits at the full retirement age, which has gradually increased from 65 (for 1937 and earlier birth cohorts) to 67 (for 1960 and later birth cohorts). Workers can elect to receive retirement benefits as early as age 62, but the benefit amount is reduced compared to benefits at full retirement age. Workers who retire after their full retirement age receive a benefit increase for each month they delay claiming retirement benefits, up to age 70. A worker may also choose to work and receive Social Security benefits. However, depending on his or her earnings, those benefits may be reduced until full retirement age, although any earnings in and after the month a worker reaches full retirement age will not reduce retirement benefits. Additionally, for workers who have income above a certain threshold, their Social Security benefits may be taxed. Social Security faces significant financial challenges, as we have previously reported. According to the 2016 report from the Social Security Board of Trustees, the Old-Age and Survivors Insurance trust fund (from which Social Security retirement and survivors’ benefits are paid) is projected to be able to pay full benefits until 2035. The report warns that unless action is taken to avert depletion of the trust fund, continuing revenue is projected to be sufficient to cover about 75 percent of scheduled benefits at that time. This projection raises the possibility of changes to Social Security benefits, taxation, or both before 2035. Defined Benefit Plans: DB plans offer pension benefits in the form of an annuity that provides a periodic payment for life, typically on a monthly basis, and may offer a lump-sum distribution option. They are employment-based and offer benefits determined by a formula that includes factors specified by the plan, such as salary and years of service. Specifics on how the calculation takes those factors into account can affect the final benefit amount. For example, this amount may be determined by the average of the worker’s last 5 years of wages, or the average of the worker’s highest 5 years of wages. Workers may be able to receive in-service distributions from their DB plan (i.e., draw a pension benefit while they are still working), generally no earlier than age 62. Over the past several decades, private sector employers have shifted from providing a large share of retirement benefits through DB plans to relying much more heavily on DC plans, according to Department of Labor data. In 1975, there were about 103,346 DB plans and 207,748 DC plans. By 2014, the number of DB plans had shrunk by more than half (to 44,869) while the number of DC plans had more than tripled (to 640,334). Retirement Savings: Two primary types of retirement savings vehicles are IRAs and employer-sponsored DC plans (such as 401(k) and 403(b) plans). For both DC plans and IRAs, benefits accrue in the form of account balances, which grow from contributions made by workers (and sometimes by their employers) and investment returns. DC plans and IRAs often place the primary responsibility on individuals to participate in, contribute to, and manage their accounts throughout their working careers and to manage their savings throughout retirement. Workers and employers who contribute to retirement savings accounts generally receive favorable federal tax treatment, such as tax deductions or exclusions for contributions and tax-deferred or tax-free returns on investment. A worker may start to withdraw, without a penalty, from these types of retirement savings vehicles as early as age 59 ½, if the DC plan or IRA allows it. In prior work, we analyzed data from the 2013 Survey of Consumer Finances and found that about half of households age 55 and older had no retirement savings, such as in a 401(k) or an IRA. Moreover, we also found that many older households without retirement savings had few other resources, such as a DB plan or nonretirement savings, to draw on in retirement. Social Security remains the largest component of household income in retirement, making up an average of 52 percent of household income for those ages 65 and older. The Internal Revenue Service (IRS) within the Department of the Treasury (Treasury), the Department of Labor (DOL), and the Equal Employment Opportunity Commission (EEOC), as part of their work, have the primary responsibility for administering the laws and regulations that affect employment programs for older workers such as phased retirement. The Employee Retirement Income Security Act of 1974 (ERISA) is the primary federal law governing the sponsoring of pension plans in the private sector. Under ERISA, both IRS and DOL have important authorities and responsibilities. IRS: IRS determines whether private sector pension plans qualify for preferential tax treatment under the Internal Revenue Code. In determining the qualification of a plan, IRS enforces Internal Revenue Code nondiscrimination requirements, which prohibit a qualified pension plan from discriminating in favor of highly compensated employees (in comparison to lower paid, rank and file employees). These nondiscrimination requirements would apply to qualified plans, including those maintained by employers that offer phased retirement. Specifically, qualified plans must show that they do not discriminate in two ways: 1) by demonstrating they do not favor highly compensated employees in terms of plan coverage, and 2) they are not providing disproportionate contributions or benefits to those highly compensated employees. DOL: Under ERISA, DOL is responsible for protecting the interests of plan participants. DOL’s Employee Benefits Security Administration takes primary responsibility for enforcing ERISA reporting and disclosure requirements, such as informing participants and sponsors of their rights and obligations under the plan. The Employee Benefits Security Administration also enforces ERISA’s fiduciary requirements, i.e., the standards of conduct for those who exercise discretionary authority or manage a plan or have authority to dispose of its assets. Under ERISA, the ERISA Advisory Council was established to advise the Secretary of Labor with respect to carrying out his/her duties under the act. The Council established a Working Group on Phased Retirement to, among other things, examine issues facing employers who wish to create phased retirement programs and the various legal and regulatory obstacles to implementing phased retirement. EEOC: As part of its responsibility, the EEOC enforces the Age Discrimination in Employment Act of 1967 (ADEA) and Titles I and V of the Americans with Disabilities Act of 1990 (ADA). The ADEA provides protection for workers ages 40 and older from employment discrimination because of age. The ADEA applies to all the terms, conditions, or privileges of employment, including hiring, firing, promotion, lay-off, compensation, benefits, job assignments, and training. The ADA provides, among other things, for protections from employment discrimination due to disability and reasonable accommodation for qualified workers. While not all researchers agree, it has been suggested by some that as the population ages and the number of baby boomers leaving the labor force increases, there could be a loss of economic productivity. This potentially has important implications for future economic growth. In a 2016 study, researchers found that a 10 percent increase in the percentage of the population age 60 and older decreases the growth rate of gross domestic product (GDP) per capita by 5.5 percent. According to this study, two-thirds of the reduction is due to slower growth in the labor productivity of workers across the age distribution, while one-third arises from slower labor force growth. The researchers say their results imply that annual GDP growth will slow by 1.2 percentage points this decade. The availability of phased retirement, by extending labor force participation, has the potential to provide options that would be beneficial both to the older workers and the overall economy. In 2005, GAO reported that labor force participation rates of older workers were projected to rise between 2005 and 2015 and this has indeed been the case. This increase in labor force participation among older workers occurred at the same time that the workforce participation of the U.S. population overall declined by approximately 3 percentage points (see fig. 1). The Bureau of Labor Statistics (BLS) and GAO reports anticipated this trend among older workers prior to the recession of 2007-2009, and the negative effect of the recession on the income security of older workers may have added an incentive for older workers to keep working. Increases in labor force participation by women ages 55 to 64 and by women and men age 65 and older were the primary contributors to the overall increased labor force participation among older workers. Men ages 55 to 64 kept their labor force participation relatively stable from 2005 to 2016. BLS reports that it expects the labor force participation of those age 65 and older will continue to increase and that older workers will constitute a larger part of the workforce overall by 2024 as the population in general ages. However, BLS expects the overall labor force participation rate for those 55 and older to decline as the baby boom generation moves from pre-65 to the over 65 category. According to the BLS report, this is primarily because the baby boomers make up a disproportionately large share of the labor force and as they move into age groups with lower participation rates, this will lower the average labor force participation both overall and for the 55 and older population. Overall, in 2016, about 40 percent of all individuals age 55 and over participated in the labor force, and unemployment was lower than for the population as a whole (monthly unemployment ranged from 3.3-3.9 percent for older workers in 2016, as compared to 4.7-5.0 percent for all ages). According to GAO analysis of CPS data, most workers age 55 and over work full-time. Analysis of CPS data suggests that older workers are more concentrated in white-collar and service occupations. According to three of 16 experts we interviewed, white-collar workers are likely to work longer, partly because their jobs tend to be less physically demanding than blue-collar jobs. Table 1 provides a summary of the percentage of older workers by occupational sector. In 2014, most older workers ages 61 to 66 worked full time, though many reported that they could reduce their work hours. We analyzed Health and Retirement Study (HRS) data from 2004-2014, focusing on a group of people who were born from 1948 to 1953. In 2004, when this cohort, known as the Early Baby Boomers, was 51 to 56 years old, an estimated 29 percent responded affirmatively when sked whether they could reduce their hours. Ten years later, when this group was 61 to 66 years old, of those Early Boomers still working, an estimated 35 percent said they could reduce their hours (see fig. 2). Between 24 and 29 percent of Early Baby Boomers plan to gradually transition to retirement by reducing their hours, which is more than the percentage who plan to stop working altogether (see fig. 3). Similarly, GAO reported in 2015 that about 26 percent of workers ages 55-64 planned to work part time, while 18 percent planned to stop working altogether. For most years we analyzed, between 16 and 18 percent of the cohort approaching retirement said they would be interested in reducing their hours even if their pay was also reduced proportionally. This percentage increased to 22 percent in 2014 as the cohort aged (see fig. 4). In all years within this time period, more women than men in this age cohort expressed willingness to accept lower pay for reduced work hours. However, over the period we analyzed, data indicate that fewer Early Baby Boomers actually retired gradually than said they would be interested in reducing their hours. Based on our analysis of HRS, in 2014, as the Early Baby Boomer cohort approached retirement, the number of individuals who were partially retired was about 11 percent. This number was lower in 2004—at about three percent—when the cohort was younger. The percentage who were classified as partly retired in 2014 is generally lower than the percentage which indicated some ability, plan, or interest in reducing hours as they approach retirement (see fig. 5). Other studies analyzing HRS data had findings similar to ours, namely that relatively few workers gradually retire from their career jobs, and that more of those workers who gradually retire have higher-paying jobs than workers who do not gradually retire. Specifically, four studies we reviewed also used HRS to examine the percentage of older workers who gradually retire. The most recent of these studies estimated that only 11 percent of men and 6 percent of women in the Early Baby Boomer cohort gradually retired from their full-time career jobs. It also found that those workers are more likely to have higher-paying jobs. For example, among the Early Baby Boomer cohort, an estimated 7 percent of men who earned up to $50 per hour gradually retired, compared to 19 percent of men who earned over $50 per hour. (For a discussion of what retirement is, see sidebar.) While there may be unobserved barriers to a gradual reduction in hours, there are concrete financial reasons why more workers may plan to retire gradually than actually do. First, gradually retiring may have consequences for employer-provided health and pension benefits and no measures to address them. Our analysis of HRS data indicates that among workers ages 61 to 66 in 2014 who said they could reduce their work hours, about 33 percent said their health insurance benefits would be reduced or eliminated and 23 percent said their eligibility for pension benefits would be affected. Another factor that may affect individuals’ ability to gradually retire is Americans’ low savings leading into retirement and a desire to maximize earnings prior to retiring fully. As we reported in 2015, most households approaching retirement have low savings. Further, many workers retire sooner than they thought they would and therefore may not be able to carry out their plan to reduce work hours leading into retirement. Specifically, despite increases in older workers’ overall labor force participation, HRS respondents retired, on average, sooner than they expected. In the HRS cohort approaching retirement between 2004 and 2014, the average difference between planned retirement year and actual retirement year was about 6 years. Nearly 70 percent of respondents who had a plan for when to retire ended up retiring prior to their planned retirement year. About 17 percent of respondents retired later than expected. Depending on the year, up to one-half of cohort members retiring from 2004 to 2014 said they felt forced to retire; the percentage was higher for those who retired in their 50s than in their 60s. That said, as the cohort aged, more respondents said they wanted to retire when they did than said they felt forced to retire. In our prior work we reported that individuals approaching retirement tend to overestimate their ability to keep working past retirement age and often have to retire for reasons they did not anticipate, such as health problems, changes at their work place, or caregiving responsibilities. While no nationally representative data on the prevalence of phased retirement exist, one large study we reviewed and experts we interviewed indicated that formal phased retirement programs are relatively uncommon. The largest study we reviewed, a 2016 Society for Human Resource Management (SHRM) survey, found that an estimated 5 percent of all employers in SHRM’s large membership base offer a formal phased retirement program. Moreover, experts we spoke with confirmed that formal phased retirement programs are not common. Of the 16 experts we interviewed, 14 said that such programs were either not common or were rare. The other two studies providing information on the prevalence of phased retirement programs we reviewed also found that such programs were not widely adopted by employers, though the studies did not specify whether the programs were formal and looked only at employers with a certain number of workers. Further, the findings from these two studies likely overstate the prevalence of phased retirement among employers overall because while a substantial proportion of U.S. firms have a small number of workers, such small firms were underrepresented in these studies. Formal vs. Informal Phased Retirement In this report we discuss both formal phased retirement programs and informal phased retirement arrangements, similar concepts that both involve easing into retirement while remaining with the same employer. For purposes of this report, formal phased retirement is an employer-based program in which older workers can reduce their working hours in order to transition into retirement. While studies we reviewed all used variations on this definition, they all included programs that employers offered to workers prior to full retirement. For example, a 2016 Society for Human Resource Management study most closely described formal phased retirement as we use the term, defining it as a formal reduction in schedule and/or responsibilities prior to full retirement. A study by the Transamerica Center for Retirement Studies the same year described phased retirement as a work-related program to help workers age 50 and older transition into retirement by reducing hours and shifting from full time to part time, and an earlier MetLife study described such programs as part-time work programs to help employees ease into retirement. In comparison, informal phased retirement arrangements are situations in which a worker remains with the same employer but eases into retirement through an informal channel rather than a program. For example, some workers nearing retirement may be allowed to have part-time status though there is no formal policy (sometimes referred to as an ad hoc arrangement). Alternately, an employee may retire and then be rehired by the same employer (known as retire/rehire). Informal phased retirement arrangements are generally more common than formal phased retirement programs, according to the two studies we reviewed that examined this topic and 10 of the 16 experts we interviewed. (See sidebar for more information about formal and informal phased retirement.) According to SHRM’s 2016 study, 11 percent of employers in their membership base reported that they offered informal phased retirement in 2016, which is about twice as many as reported they offered formal phased retirement. Another study found that a majority of employers with 20 or more workers could “work something out” vis-a-vis phased retirement, although only one-third of these had a formal written policy. There is little indication that the prevalence of phased retirement has changed much in recent years, according to the three studies we reviewed on this topic. The SHRM study examined formal phased retirement programs specifically, reporting that their prevalence has remained relatively low among its members over the last decade. These programs may be unlikely to increase, as SHRM reports less than one percent of their members plan to begin offering such a program in the next year. Two different studies examined a combination of formal and informal phased retirement and found the prevalence unchanged in recent years. One study looked at the time period between 2008 and 2014 and found no statistically significant difference over time in the percentage of employers with 50 or more workers offering phased retirement. One small study that included large domestic and international employers found the proportion of employers offering phased retirement relatively unchanged from 2010 to 2015. More large employers offer phased retirement than small employers, according to the three studies we reviewed that examined the number of workers at employers offering phased retirement. The SHRM survey found that its members with 2,500 to 9,999 workers are significantly more likely to offer formal phased retirement programs than those with fewer than 500 workers (an estimated 16 percent, compared to 5 percent for employers with 100 to 499 workers and 4 percent for employers with 1 to 99 workers). Another study reported that a slightly larger percentage of employers with 500 or more workers offer phased retirement programs than employers with 10 to 99 workers (30 percent compared to 25 percent), though the difference was not statistically significant. One further study found that phased retirement occurred more at employers with 500 or more workers than at those with less than 500 workers (77 percent compared to 39 percent). Employers in certain industries are more likely to offer phased retirement, particularly those in industries with technical and professional workforces. Consulting, education, and high-tech were among the industries most likely to offer phased retirement, according to the three studies we reviewed that included information on formal and informal phased retirement by industry. According to SHRM’s survey of its members, industries most likely to offer formal phased retirement include education, government, utilities, consulting, and high-tech (see table 2). For example, 12 percent of SHRM members in the education industry offer formal phased retirement, and among the subgroup of higher education members, 23 percent offer it. Industries least likely to offer formal phased retirement include real estate/rental leasing and retail/wholesale trade. The other two studies examining data on prevalence examined both formal and informal phased retirement and found patterns similar to the SHRM study. One older study of employers with more than 20 workers found that establishments in the service sector, especially those in health, education, and social services, are more likely to permit formal and informal phased retirement. In contrast with the SHRM survey, this study found that public administration and transportation/communications/utilities industries were less likely to permit formal and informal phased retirement. Lastly, one study based on a small survey of large domestic and international employers found that consulting, professional, scientific, and technical services organizations were most likely to offer formal and informal phased retirement (41 percent) while manufacturing employers were least likely to offer it (24 percent). (See sidebar for information on phased retirement in the federal government.) Employers with professional and technical workforces may have more of a reason to retain older workers via phased retirement precisely because their workers tend to be highly skilled. Nine of the 16 experts we interviewed explained that industries with skilled workers or with labor shortages have motivation to offer formal phased retirement programs in part because their workers are hard to replace. For example, one expert we interviewed described a company with manufacturing staff who were highly skilled in engineering or the complex manufacturing process. The company saw a need to offer phased retirement to retain these staff, who would be hard to replace. Certain employers may also choose to offer phased retirement to their most skilled or higher ranking employees rather than to others. For example, one study found that among large employers offering phased retirement, a smaller percentage offered phased retirement to hourly workers than offered it to executives and salaried workers. Another article we reviewed described how technological advances have increased the demand for skilled labor and that phased retirement may be better to manage skilled workers, managers and professionals than clerical and blue-collar workers. Some of the industries most likely to offer phased retirement already have part-time opportunities for workers, which may have to do with how their work is structured and the common practices in those industries. For example, according to 2016 CPS data, an estimated 26 percent of workers in education and health services work less than 35 hours per week, compared to 11 percent in manufacturing. The nature of the job likely also plays a role, as it may be logistically easier for a professor, for example, to teach fewer courses than for an assembly-line worker to reduce the hours on her shift. For instance, two of the publications we reviewed explained that some employers feel phased retirement may not be a good “fit” with their job structure. As one expert told us, some industries have embraced flexible work arrangements while others have not. Establishments more open to part-time work or flexible hours also tended to be more open to phased retirement, according to the two studies we reviewed that examined employer characteristics. One of these studies also found that establishments that permitted informal or formal phased retirement tended to have policies that were supportive of part-time work, such as health insurance and paid vacations for part-time workers. There are other reasons that employers may not be interested in phased retirement or retaining older workers, according to four of 11 publications we reviewed that described potential obstacles to phased retirement. For example, two articles cited bias or beliefs among some employers that older workers are less productive or less valued than younger workers. One of these and another article described how health care costs can be expensive for older workers. One additional study reported that the obstacle most commonly cited by large employers who do not offer phased retirement is that there is no expressed interest from employees. This may be especially true in workplaces with few older workers. Employers face potential challenges in complying with various laws and regulations when designing a phased retirement program, according to experts and employers we interviewed and the publications we reviewed. Of large employers, 71 percent agreed that “regulatory complexities and ambiguities involving federal tax and age discrimination laws impact their organization’s ability to offer a phased retirement program,” according to a small MetLife study of employers with 1,000 or more workers. One of the experts we interviewed described a general sense of fear or uncertainty among employers about laws and regulations and their possible application to phased retirement arrangements. Based on employer and expert interviews and publications we reviewed, some employers report facing challenges with Internal Revenue Code (IRC) nondiscrimination provisions, employment-related discrimination laws, the defined benefit pension formula, health care coverage, and in-service distributions from pension and savings plans. IRC nondiscrimination provisions: According to experts, publications, and employers, IRC provisions regarding discrimination can be a challenge when designing phased retirement programs. These provisions generally prohibit a qualified plan from discriminating in favor of highly compensated employees. Failure to comply may result in loss to the employer of the tax benefits of providing an ERISA qualified plan. In addition, workers in a plan that is no longer qualified may lose tax benefits and certain protections. Over the past several decades, private sector employers have shifted from providing a large share of retirement benefits through DB plans to relying much more heavily on DC plans. The nondiscrimination rules apply to both DB and DC plans. The MetLife survey found that an estimated 51 percent of large employers agreed that “the retirement plan nondiscrimination rules can be an obstacle to an effective phased retirement program for their organization.” Of the 11 publications we reviewed, five reported the nondiscrimination provisions in general were a challenge, as did seven of the 16 experts we interviewed. However, of the eight employers we spoke with that had DC plans and phased retirement programs, none identified the nondiscrimination rules as a challenge to setting up a phased retirement program in the context of their DC plan. In contrast, one employer we interviewed had seriously considered a phased retirement program but ultimately did not implement one in part because the employer believed it could fail the nondiscrimination testing. It believed the IRS regulations limited its ability to provide the phased retirement program it wanted. The employer explained their view that if they offered phased retirement and gave partial service credits to phasing workers who were participating in the DB plan, and the credits were included in the nondiscrimination testing, it could fail the test due in part to their older workforce’s longer service and therefore higher salaries. According to eight of the 16 experts we interviewed, some employers, such as those providing specialized services, would prefer to choose only those workers with specific, difficult to replace skills for phased retirement, and often it is those workers who are highly paid. This potential challenge was also noted by four of the 11 publications we reviewed. For example, one of the experts said in his view if an employer wanted to incentivize phased retirement by offering additional 401(k) matching contributions, it would be discriminatory if it were offered only to highly compensated employees—potentially those with the specific skills the employer wanted to retain. Specifically, the IRC nondiscrimination rules require that the group of employees who are eligible for phased retirement not be constituted in a way that favors highly compensated employees. This determination is made by comparing the extent to which highly compensated employees are eligible for phased retirement with the extent that other employees are eligible and takes into account the business reason for the selection of the eligible group. One expert observed that if a company does not have a business need to make all workers eligible for phased retirement, it must have a business need for selecting specific types of workers. He added that companies struggle to decide and define who should be eligible for pension and other benefits such as phased retirement. Employment-related discrimination laws: According to experts and employers we interviewed, designing phased retirement programs for older workers also potentially brings employers face-to-face with age- and disability-related legal challenges. Of the 16 experts we interviewed, 10 noted as a challenge the potential of a phased retirement program violating ADEA and/or ADA protections against employment-related age or disability discrimination. The ADEA was also discussed in three of the 11 publications we reviewed. One article explained that deciding to offer phased retirement only to employees who have essential skills could expose the employer to ADEA claims, especially if the program denied enrollment to relatively old employees. Another expert pointed out that it could be considered discriminatory if it targeted the phased retirement program only to workers who were younger than age 62. Two employers commented that it is easier to allow an ad hoc agreement for a worker who wants to work fewer hours or to become a contractor than it is to have a formal phased retirement program. According to four of the employers we spoke with and six of the publications we reviewed, the potential legal uncertainties and challenges that surround both nondiscrimination provisions and employment-related discrimination laws may discourage employers from establishing formal phased retirement programs, even though they and their employees may benefit from such programs. One expert we interviewed told us that phased retirement is a grey area under the age discrimination laws. Another told us there is a high level of concern about creating discriminatory phased retirement programs. Calculation of defined benefit pensions: The benefit formula of some DB plans can be a potential challenge to designing a phased retirement program, according to seven of the 11 publications we reviewed. According to those publications, depending on how the formula is designed, it could have a negative effect on working longer and be a disincentive for workers to participate in their employer’s program. For example, if the benefit formula calculation takes into account the last 5 consecutive years of wages, and the worker participates in a phased retirement program that entails fewer work hours and lower wages, it could have a permanent effect on the worker’s DB pension amount. Seven out of 16 experts noted the potential challenge of determining how the benefit for a DB plan is calculated. For example, one expert said a major concern was that participating in phased retirement could reduce a worker’s lifetime DB pension benefit if the benefit is based on the last 3 or 5 years of service. Another told us that if the employer made changes in the DB plan to accommodate the phased retirement participants, the employer would have to be very careful to do this in a nondiscriminatory way. Of the nine employers we interviewed, two had DB plans. One of the two commented that when they designed their phased retirement program, the DB plan was the most difficult piece to figure out. Health care coverage: The provision of health benefits to participants in a phased retirement program can be a challenge, according to two of the 11 publications we reviewed. Employers may choose to offer group health coverage to their workers who work less than full time. These employers have to decide whether phasing workers will be covered. For active workers over age 65, Medicare is generally the secondary payer. If an employer provides health coverage to phasing workers, both older and younger than age 65, the employer may have increased health care costs. According to two articles we reviewed, some employers may see this increased cost as a disincentive to implementing a phased retirement program. These articles noted the potential cost of providing health insurance for phasing workers. However, health care coverage was provided for both full-time and phasing workers by all eight of the employers we interviewed who offered phased retirement. One pointed out that their health insurance subsidy is a major benefit to employees, and as a component of the phased retirement program, shows that the company respects and values its workers. Three of the eight employers required that the phasing worker complete a designated number of work hours per week or pay period to qualify for these health benefits. One of the three had two levels of coverage differentiated by age, hours worked, and tenure requirements. In-service distributions: According to nine of the 16 experts we interviewed and three of the 11 publications we reviewed, workers may be unable to afford living on the reduced wage of phased retirement, which may make the programs unattractive to such workers. To afford living on the reduced wage of phased retirement, workers may need to withdraw income from their retirement savings accounts or start receiving DB benefits. However, in-service withdrawals are subject to age requirements, and not all plans allow in-service withdrawals. DB plans generally provide in-service distributions only to workers age 62 and older. One article pointed out that DC plan participants generally may not receive, without penalty, distributions from a DC plan until they reach age 59 and ½. The article noted that because few workers can afford to partially retire unless they receive retirement benefits, these provisions effectively rule out phased retirement before age 59 ½ for DC plan participants and age 62 for DB plan participants. Two of the experts we interviewed said that age 62 was too old to make a difference in early retirement decisions. One added this can be an issue in certain industries where workers may want to retire before age 62. This can be challenging for employers who may want to provide phased retirement to workers in their 50’s. One article noted that employers with DB plans may want to offer phased retirement to their younger workers, preferably when they are eligible for early retirement under the plan provisions. One expert said that phased retirement could be very helpful for workers in physically demanding jobs, such as the service industry or building trades, that tend to wear out workers’ bodies by their 50s. According to our interviews with experts and employers, operational challenges with phased retirement programs fall into two general categories: 1) on-going compliance activities with IRC nondiscrimination provisions and employment-related discrimination laws; and 2) administrative issues including the needs and concerns of managers. IRC nondiscrimination provisions and employment-related discrimination laws: According to five of the 11 publications we reviewed and seven of the 16 experts we interviewed, compliance with the nondiscrimination provisions can be an ongoing challenge. Depending on a retirement plan’s eligibility criteria under a phased retirement program, there may be complaints of employee discrimination. For example, one employer we interviewed said they did not advertise their program partly because it is not offered in every business unit. Both an expert and an employer told us that the paperwork required to stay in compliance with the nondiscrimination provisions can be burdensome and is easy to get wrong. According to two of nine employers and 10 of 16 experts we interviewed, ongoing activities related to compliance with ADEA- and ADA-related discrimination laws can also be a continuous challenge. Administrative and manager concerns: Seven of the nine employers we interviewed told us that phased retirement programs present administrative challenges. Six of them told us their managers were concerned that they have to get the same amount of work completed with fewer work hours from phased retirement participants. Administering the payroll was also cited as an ongoing challenge by another employer, who told us it can be difficult to track these workers’ time and to account for merit increases and bonuses. Another employer said it is a challenge both to arrange workers’ schedules and make sure clients’ needs are met. One employer said it takes managers extra time to help with knowledge transfer and adjustments due to changes in workers’ schedules. Two employers told us their managers also were concerned about the phased retirement program in the context of their organization’s financial and personnel rules and processes because, ultimately, the program could result in reduced budgets for the individual work units. One employer explained that managers have to do their planning and budgeting as if the phased retirement participants were working full time. Another employer described a similar budget/staffing situation. This employer told us that each division is funded by head count (number of staff), so if the division has a phased retirement participant, the manager will not necessarily have the budget to hire a full time replacement because the head count remains the same. In light of these cited challenges, employers we spoke with who had implemented phased retirement programs told us they were able to address various design and operational challenges using different approaches. IRC nondiscrimination provisions and employment-related discrimination law approaches: Of the nine employers we interviewed, five reported that they overcame potential IRC nondiscrimination challenges applicable to their retirement plans by allowing all of their workers who met basic age and years of service requirements to participate in the phased retirement program. For example, one employer opened phased retirement to all U.S. employees age 60 and older with 5 years of service at the company. Another opened the program to all workers age 55 and older with 10 years tenure and at least “achieved expectations” on their performance evaluations. Three employers had no eligibility requirements at all. One employer commented that their program’s open eligibility was in line with the inclusive culture of the company. The three employers with specialized or highly skilled workers said they overcame the challenge by making their phased retirement program available to those workers they identified as meeting a “business need.” For example, one employer told us that eligibility for their phased retirement program was up to management and management’s perception of the business need to retain staff, and the ability to fill the phasing worker’s position on a part-time basis. They said that some positions require full-time staff, for example, customer service positions. Another employer said they require the worker to submit an enrollment form with the manager’s signature both at initial application and every year of program participation thereafter. According to this employer, this procedure ensures there is a business need for the worker to participate in the program. To allay employment-related discrimination concerns, employers reported using different approaches. One employer told us managers have very strict guidelines about what can and cannot be said in a discussion about phased retirement. Specifically, a manager cannot offer advice or ask leading or specific questions about age or retirement. Another employer, who does not advertise their program, told us they wait for the “windows” when workers bring it up or at performance reviews to discuss the program. Similarly, another employer said that when an employee tells human resources they are interested in retirement, human resources asks if phased retirement is an option. One of the employers, who does not have a written policy on phased retirement, told us the individual worker and the company representative work together on phased retirement to “make it work.” How One Employer Met the Challenge of Defined Benefit Plan Accruals One employer we spoke with told us it calculates the benefit amount for its defined benefit (DB) plan using a consecutive 5-year average of wages. Because workers in its phased retirement program only work four days per week and receive 80 percent of their full-time pay, they would risk getting less than the targeted replacement level of full-time income if the reduced pay level were used in their DB benefit calculations. To meet the challenge of lower DB pension accruals during the phased retirement period, the employer told us they pay workers in the program a full-time salary and allow them to purchase one day of vacation per week for 20 percent of their salary. Thus, phasing workers effectively receive 80 percent of their full-time salary for working four days per week, and a full-time equivalent salary is used for purposes of the DB pension calculation. Defined benefit plan approaches: One employer we spoke with said they overcame the challenge of DB benefit formulas by making changes to the calculation for phased retirement participants. Specifically, the employer said they changed the way that benefits are accrued so there is only a slight difference from the benefits a worker would have received if they continued to work full-time (see sidebar). Another employer reported avoiding any challenges to DB plans because the company had frozen its DB plan prior to introducing phased retirement. Current trends show a significant shift away from DB plans and toward DC plans, so there may be less of a need in the future for approaches to overcome DB plan challenges regarding phased retirement. Administrative and manager concern approaches: Employers we interviewed said they overcame the challenges of managers’ concerns about working with a phased retirement program in ways that worked for each individual organization. The human resources department at one employer responded to the managers who objected to the phased retirement program by promoting the program’s benefits. That employer said, for example, that managers would be reminded that having an experienced part-time person was better than having no one, which could be the case if the phased retiree had stopped working altogether. Additionally, managers were reminded that a part-time experienced worker could help train a new person for the job. Employers also reported making various program adjustments to help with managers’ concerns. According to one employer, work needed to be completed even if some workers reduced their hours, so they set up a “flex team.” This group of workers is available to fill in as needed throughout the company, and managers can tap it to fill shifts of phased retirement participants. Another approach taken by one employer we interviewed is that when a request for phased retirement is made, they look at the current staff roster to see if there is a part-time worker who might want to work more hours or go full time to fill the gap left by the phased retiree. They noted that because of the nature of their work, they can set up different combinations of hours and shifts. Employers we interviewed identified four primary, employer-focused benefits of phased retirement: 1) the retention of knowledgeable, highly skilled workers; 2) the transfer of knowledge to younger workers; 3) the ability to transition older workers into retirement; and 4) the opportunity for workforce planning. Worker retention: Seven of the nine employers we interviewed suggested that allowing knowledgeable, experienced workers to phase into retirement often means they will stay longer with their employer. One employer said they are very satisfied with the phased retirement program because it helps retain highly educated, specialized workers. Another commented that their workforce is very valuable and if these employees were not participating in phased retirement they would be retired. Knowledge transfer: Seven of the nine employers we interviewed said that maintaining the company knowledge base is critical to employers. One small employer told us their main challenge is the aging of the workforce and succession. We were told by another employer that it is expected a phasing worker will train and mentor his or her replacement, thus maintaining the company knowledge base. Yet another employer said that knowledge transfer is a large component of the phased retirement program and it is expected that workers create a transfer plan. Transition to retirement: Six of the nine employers we interviewed said providing a gradual pathway to retirement allows both employer and worker to adjust. The culture of the company, one employer said, facilitates the phased retirement program. Another employer noted that phased retirement eases the transition for workers afraid of losing their sense of professional belonging as they transition out of paid work. In this same vein, an employer said that their program provides an attractive off ramp, and added that it is a way to reward a worker for their years of service. Another commented that phased retirement is a positive way for those at or near retirement age to transition softly into retirement—they are participating, but at a reduced pace. Two companies conducted surveys of phased retirement program participants and found that these workers appreciated the ability to transition into retirement. Workforce planning: Five of the nine employers we interviewed said knowing when workers will retire allows employers to plan for the future. Providing a phased retirement program, one employer told us, makes them aware of workers’ retirement plans and thus able to plan for future workforce needs. Another employer said that a major goal is to help the company with workforce planning by encouraging workers to let the company know about their retirement plans and to help transfer their knowledge before they retire. We provided a draft of the report to the Departments of Labor and the Treasury, the Equal Employment Opportunity Commission, the Internal Revenue Service, the Office of Personnel Management, and the Social Security Administration. The Departments of Labor and the Treasury, the Equal Employment Opportunity Commission, the Internal Revenue Service, and the Office of Personnel Management provided technical comments, which we incorporated as appropriate. The Department of the Treasury and the Internal Revenue Service reviewed this report solely for technical accuracy. They noted that in conducting this review they made no determination on whether the current phased retirement programs described in this report (including in Appendix II) satisfy the requirements of the Internal Revenue Code. The Social Security Administration did not have 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 to the appropriate congressional committees, the Secretary of Labor, the Secretary of the Treasury, the Acting Chair of the Equal Employment Opportunity Commission, the Commissioner of the Internal Revenue Service, the Acting Director of the Office of Personnel Management, the Acting Commissioner of Social Security, and other interested parties. This report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report examines (1) the recent trends in the labor force participation of older workers, (2) the extent to which employers have adopted phased retirement programs and what type of employers offer them, and (3) what challenges and benefits, if any, exist to the design and operation of phased retirement programs. To describe the recent trends in labor force participation of older workers, we analyzed nationally representative data from the Current Population Survey (CPS) and the Health and Retirement Study (HRS), two datasets with information about the labor force participation of older workers. We analyzed data from the 2005-2016 CPS Annual Social and Economic (ASEC) Supplement, which included the most recent available data. For example, we used CPS ASEC to estimate the labor force participation of older men and women of different age groups, as well as the occupational sector in which older workers work. CPS is sponsored jointly by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics. ASEC is an annual supplement to the CPS that includes information about family characteristics, household composition, education attainment, previous year’s income, work experiences, and other things. It is representative of the U.S. noninstitutionalized population living in households. We chose CPS because it is the primary source of labor force statistics for the population of the United States, and because it has a large sample size (about 94,000 households in 2016). Approximately 185,000 total individuals comprised the sample in 2016. Moreover, it included questions relevant to our purposes, such as age, labor force participation, and occupation. We also analyzed data from the 2004-2014 HRS for the Early Baby Boomer Cohort (born 1948-1953), which included the most recent available data. For example, we used HRS to estimate the percentage of older workers that can reduce their work hours, that plan to reduce their work hours as they transition to retirement, that would like to reduce hours even if their pay is also reduced, and the percentage that are partly retired. We also used HRS to analyze other information for this cohort, such as the percentage that said their pension or health benefits would be affected by reducing their hours and the percentage that retired sooner than expected. The University of Michigan’s HRS is a longitudinal panel study that surveys a representative sample of approximately 20,000 Americans over the age of 50 every 2 years, with new cohorts being added to the sample every 6 years. We chose HRS because of its large sample size, focus on older Americans, and because it included questions relevant to our purposes. For example, it asks about workers’ plans for retirement and work patterns. Moreover, the longitudinal panel structure allowed us to examine changes over time, such as an individual’s plans at one period compared to the outcomes in another period. We examined the reliability of the CPS and HRS by reviewing documentation and conducting selected data checks. For example, we reviewed codebooks, technical documentation, and information about survey weights for each dataset. We also conducted electronic testing to check for missing data or errors. We found the data we used to be sufficiently reliable for our purposes. Nonetheless, as with all survey data, estimates from the CPS and HRS are subject to some sampling error since the samples are one of a large number of random samples that might have been drawn. Since each possible sample could have provided different estimates, we express our confidence in the precision of the sample results as 95 percent confidence intervals. These intervals would contain the actual population values for 95 percent of the samples that could have been drawn. In this report, we report percentage or other numerical estimates along with their 95 percent confidence intervals. Unless otherwise noted, all percentage estimates based on the CPS have 95 percent confidence intervals that are within about +/- 2 percentage points or less, and all percentage estimates based on the HRS have 95 percent confidence intervals that are within +/- 3 percentage points. The survey literature refers to both the CPS and HRS samples as complex designs, a loosely-used term meant to denote the fact that the sample incorporates special design features such as stratification, clustering and differential selection probabilities (i.e., weighting) that analysts must consider in computing sampling errors for sample estimates of descriptive statistics and model parameters. For CPS, we used weights provided by the U.S. Census Bureau. For HRS, we adapted the Balanced Repeated Replication (BRR) method to develop and use weights specific to the Early Baby Boomer cohort. The BRR method is applicable to stratified sample designs with two half-sample units (i.e., primary sampling units) selected from each stratum. When full balancing of the half-sample assignments is employed, BRR is the most computationally efficient of the replicated variance estimation techniques. To inform all sections of this report, we reviewed relevant federal laws and regulations and conducted a literature review regarding the prevalence of phased retirement programs in the United States. The literature review included scholarly journals, conference and working papers, and trade news published between 2006 and 2016. The trade news helped us also identify industry surveys and reports. We excluded publications limited to a particular industry, those not based on a reputable data source, and those whose authors are affiliated with a partisan organization. From this search, we identified 20 publications (11 quantitative studies for which we reviewed the methodology and 9 qualitative articles that we used to describe the perspectives or observations of the experts who authored them). All 11 studies described the prevalence of phased retirement (4 described percentage of workers who gradually retire, and 7 described the percentage and/or type of employers who offer phased retirement). Eleven of the publications (2 quantitative and all 9 qualitative) described challenges to phased retirement. While we concluded that each of the publications we included was appropriate for our purposes, they did have some limitations. For example, the quantitative studies were based on surveys that had various sample sizes, populations, and were from various years. Moreover, none was nationally representative of all employers and there were varying definitions of phased retirement, though each quantitative study described phased retirement with the same employer. For our purposes, we distinguished the studies that described formal phased retirement (an employer-based program in which workers reduce their working hours in order to transition into retirement) from those that described informal phased retirement (such as an ad hoc agreement or situation in which a worker retires and is rehired on a part-time basis, such as a contractor). Nonetheless, these publications provide valuable information on the prevalence of phased retirement and the challenges to such programs. To understand the prevalence of phased retirement programs and any issues designing and operating these programs, we spoke with agency officials, including officials from the Department of Labor. For example, we discussed the ERISA Advisory Council reports with officials from the Department of Labor’s Employee Benefits Security Administration, the Department of the Treasury, and the Internal Revenue Service. We also interviewed 16 experts on the topic of phased retirement. We identified these experts through our review of relevant literature and through expert referral. The experts represent a variety of fields, such as consulting, industry groups, interest groups, and academics, and we evaluated these experts’ independence, for example, by confirming they had no known source of bias and were not affiliated with a partisan organization. Lastly, we conducted semi-structured interviews with 9 employers that offer or considered offering phased retirement programs (see appendix II for more information). Six employers had formal phased retirement programs, and 3 did not. Of the 3 without formal phased retirement programs, 2 had phased retirement programs that were not written down or formalized but that otherwise met our definition of a phased retirement program, and 1 employer considered but did not implement phased retirement. We identified these employers using publicly available websites, relevant literature, and expert recommendations. We also considered proximity to other employers and GAO offices. While the information from these interviews is not generalizable, it provided rich examples and perspectives on the issues related to phased retirement. We selected these 9 employers to represent a variety of employer types by location, size, industry, and retirement plan. We spoke with 4 employers in the Midwest, 4 employers in the West, and 1 employer in the South. We spoke with 2 employers with fewer than 200 employees, 2 with 200 up to 2,500 employees, and 5 with over 2,500 employees. We spoke with employers in various industries, including consulting, higher education, finance, and health care. Five employers had only a defined contribution plan, 3 had both a defined contribution and defined benefit plan, and one had a deferred compensation plan. Formal phased retirement is an employer-based program in which older workers can reduce their working hours in order to transition into retirement. We conducted semi-structured interviews with 9 employers that offered or considered offering phased retirement programs. Six employers had formal phased retirement programs, and three did not. Of the 3 without formal phased retirement programs, 2 had phased retirement programs that were not written down or formalized but that otherwise met our definition of a phased retirement program, and 1 had considered but did not implement a phased retirement program. We identified these employers using publicly available websites, relevant literature, and expert recommendations. The employers represent a variety of employer types by location, size, industry, and retirement plan. Below are profiles of the 8 employers with whom we conducted interviews who offered formal or informal phased retirement. The following information reflects how each employer generally responded to the questions we asked during the semi-structured interviews. We did not independently verify the information each employer provided to us about their phased retirement program. Features of phased retirement: Basics: In this formal phased retirement program, workers work 80 percent time and receive 80 percent of pay and 80 percent of their bonus money, but the defined benefit (DB) pension formula is based on full salary for up to five years because workers appear full time on paper. Cited benefits/advantages: Retention of workers and development of future leaders and the ability of the employer to do workforce planning. The employer has conducted surveys of workers and managers, and feedback about the phased retirement program is very positive. Eligible workers: All employees in the United States who are at least age 55 with 10 or more years of service, who have achieved or exceeded performance expectations, and who have permission from management are eligible. Hours reduction allowed: 20 percent Length of phased retirement: Workers can stay in the program for any length of time as long as they are meeting program standards and have their manager’s approval. Knowledge transfer: Phasing workers agree to spend time transferring knowledge, skills, and expertise. For each year the worker participates, he or she creates a proposal that includes a knowledge transfer plan with recommendations on how it will ensure business continuity. Effect on health care benefits: Participation in phased retirement does not affect the cost of health insurance for the worker or employer. Effect on pension benefits: DB plan: For phased retirement participants, DB benefits are based on the worker’s full-time salary and reduced bonus. This mitigates the effect of reduced pay on the worker’s benefit. However, if the worker participates in the program for more than five years, the pension will be affected. DC plan: The defined contribution (DC) plan contribution is based on a worker’s full-time salary and reduced bonus. Features of phased retirement: Basics: In this formal phased retirement program, workers and managers develop a structured plan to transfer knowledge and transition to retirement within two years. Cited benefits/advantages: The primary benefit is knowledge and skills retention. Additionally, it helps the company with workforce planning by encouraging workers to inform the company about their retirement plans and to help transfer their knowledge before they retire. The employer has conducted surveys of workers and managers, and feedback about the phased retirement program is very positive. Eligible workers: All workers who have reached age 60 and who have been at the company for five or more years and who have permission from their managers and human resources, are eligible. Hours reduction allowed: Participants must work at least 50 percent and no more than 80 percent. A participant may submit a request to work less than 50 percent, though they lose eligibility for health care benefits. Length of phased retirement: Phasing can last from six months up to two years. Knowledge transfer: Knowledge transfer is a large component of the program. The employer provides many tools and guidelines, and it is expected that phasing workers create a transfer plan. Effect on health care benefits: The employer provides a subsidy so that the health insurance rates for phased retirement participants are the same as if they were working full time. Effect on pension benefits: There is no DB plan. The DC plan contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. Other: To deal with the challenge of completing work with phasing workers working only part time, the company has a group of workers who fill in as needed throughout the company. Members can be called on to fill in for phasing workers. Features of phased retirement: Basics: In this formal phased retirement program, workers in units that have implemented the program may participate. Cited benefits/advantages: The benefits are primarily worker retention and knowledge transfer, training, and mentoring of staff that remain. Eligible workers: Eligibility is up to management and management’s perception of the business need to retain staff, and of the ability to fill a position with a part-time worker. It can begin at any age. Some work units have implemented the program, while others have not. Hours reduction allowed: Participants typically work 60 percent of full time. Length of phased retirement: (no response) Knowledge transfer: There is an expectation that participants will mentor or train staff, but there is no formal knowledge transfer program. Effect on health care benefits: If the worker is more than 60 percent time, the employer provides a subsidy so that the health insurance rates for phased retirement participants are the same as if they were working full time. However, employer-provided health benefits end at age 65—the age at which workers become eligible for Medicare. Effect on pension benefits: There is no DB plan. The employer provides a dollar-to-dollar match for the DC plan. Since it is not based on a proportion of the worker’s salary, the match remains unchanged regardless of participation in phased retirement. Features of phased retirement: Basics: In this formal phased retirement program, workers are allowed flexibility within the program’s basic rules. Workers can retire fully at any point during phased retirement. Cited benefits/advantages: Phased retirement helps avoid a retirement “cliff.” Instead, it is a ramp from 100 percent time to 0 percent time. Additionally, phased retirement allows the employer to hire new workers at a lower cost. Eligible workers: Must be at least age 55 and an eligible worker for at least seven years. Hours reduction allowed: The phasing worker and his or her supervisor negotiate the workload. Length of phased retirement: Phasing may last one to five years. Knowledge transfer: Knowledge transfer and mentoring is done on a case-by-case basis. Effect on health care benefits: The employer provides a subsidy so that the health insurance rates for phased retirement participants are the same as if they were working full time. Effect on pension benefits: There is no DB plan. The DC plan contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. Features of phased retirement: Basics: In this formal phased retirement program, a workers’ unit must determine that participation can be accommodated given staffing levels in that unit. Cited benefits/advantages: Phased retirement helps the employer retain specialized or knowledgeable workers and uses these workers to bridge the gap between experienced and inexperienced workers. It also helps with workforce planning. Eligible workers: All who meet basic requirements of at least age 55, worked at least 10 years with the employer, have worked a certain number of hours in one of the three prior calendar years and per pay period are eligible to apply. Each request is approved or rejected on a case-by-case basis. The supervisor and a human resources representative discuss the request with the employee. A primary consideration is whether phased retirement for this worker can be accommodated given staffing levels in the worker’s unit. Hours reduction allowed: While there is no requirement, the average phased retirement participant works 24 hours a week. Length of phased retirement: There is no restriction on the length of phasing. Knowledge transfer: Phasing workers may be tapped to pass on knowledge both formally and informally to younger workers. Effect on health care benefits: Participants who have worked 10 years with the employer pay health insurance costs at the part- time worker rate. For those who have worked 20 years, the employer provides a subsidy so that the health insurance rates for phased retirement participants are the same as if they were working full time. Effect on pension benefits: There is no DB plan. For the DC plan, the contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. Features of phased retirement: Basics: In this formal phased retirement program, workers must transition into full retirement within three years. Cited benefits/advantages: This program provides participants the ability to adjust to full retirement by reducing their workloads gradually, while they are still contributing to their units. Eligible workers: Certain full-time workers who are at least age 57 and have completed at least 10 years of service are eligible. Hours reduction allowed: Participants may work 75 percent or 50 percent time. Length of phased retirement: Phased retirement can last no longer than three years. Knowledge transfer: There is no knowledge transfer requirement. Effect on health care benefits: Participation in phased retirement does not affect the cost of health insurance for the worker or employer. Effect on pension benefits: Eligible workers have a choice between coverage by a DB plan or a DC plan. DB plan: Phased retirement affects the final years’ contributions to the DB plan because workers have a lower salary while participating in phased retirement. However, this does not necessarily have an effect on the amount of the DB pension benefit at full retirement because the current calculation is based on the worker’s highest years of earnings, not the most recent. DC plan: For the DC plan, the contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. Features of phased retirement: Basics: This phased retirement program is not formalized but otherwise meets our definition of a phased retirement program. While there is no formal structure, the program can be set up in a number of ways. A worker can switch out of duties that are on his or her career track, to less stressful duties, or less complex duties; or a worker could phase to part-time at their regular duties. Cited benefits/advantages: The organization is able to retain people who do highly specialized work. It helps with the transition as a worker near retirement works with his or her replacement. Eligible workers: All workers are eligible and phased retirement can begin at any age. Hours reduction allowed: There is no requirement. Length of phased retirement: There is no limit to how long a worker can phase. Knowledge transfer: There is no official policy but the program helps with the transition from one worker to the next as the phasing retiree works with his or her replacement. Effect on health care benefits: If a phasing retiree works at least 25 hours per week, it does not affect the cost of health insurance for the worker or employer. Effect on pension benefits: There is no DB plan. The DC plan contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. Features of phased retirement: Basics: This phased retirement program is not formalized but otherwise meets our definition of a phased retirement program. In consultation with management, workers may develop a plan to reduce their hours prior to full retirement and train their replacement. Cited benefits/advantages: The ability to offer phased retirement helps the company attract and retain its highly skilled workforce. Eligible workers: It is available to all employees. Employees can begin phasing at any age. Hours reduction allowed: While there is no requirement, the most common reduction in hours is to 50 to 60 percent time. Length of phased retirement: While there is no requirement, workers generally phase for one to two years. Knowledge transfer: It is expected that an employee will train and mentor his or her replacement. Effect on health care benefits: If the employee works 20 or more hours per week, the employer provides a subsidy so that the health insurance rates for phased retirement participants are the same as if they were working full time. Effect on pension benefits: There is no DB plan and no DC plan. The employer funds a deferred compensation plan, and the contribution formula does not change with phased retirement, but the amount of pay upon which the contribution is based changes in proportion to the worker’s reduced salary. In addition to the contact named above, Michael Collins (Assistant Director), Laura Hoffrey (Analyst-in-Charge), Laurel Beedon, Samuel Kelly-Quattrocchi, and Jessica Rider made key contributions to this report. Also contributing to this report were Carol Bray, Lawrance Evans Jr., Sarah Gilliland, Robert Goldenkoff, Kirsten Lauber, Sheila McCoy, Erin McLaughlin, Mimi Nguyen, Jessica Orr, Dae Park, Rhiannon Patterson, Oliver Richard, Matthew Saradjian, Joseph Silvestri, Adam Wendel, and Daphne Williams. 401(k) Plans: Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings. GAO-17-69. Washington, D.C.: October 21, 2016. Social Security’s Future: Answers to Key Questions. GAO-16-75SP. Washington, D.C.: October 2015. Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10, 2015. 401(k) Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants. GAO-15-578. Washington, D.C.: August 25, 2015. Retirement Security: Most Households Approaching Retirement Have Low Savings. GAO-15-419. Washington, D.C.: May 12, 2015. Retirement Security: Women Still Face Challenges. GAO-12-699. Washington, D.C.: July 19, 2012. Unemployed Older Workers: Many Experience Challenges Regaining Employment and Face Reduced Retirement Security. GAO-12-445. Washington, D.C.: April 25, 2012. Income Security: Older Adults and the 2007-2009 Recession. GAO-12-76. Washington, D.C.: October 17, 2011. Highlights of a GAO Forum: Engaging and Retaining Older Workers. GAO-07-438SP. Washington, D.C.: February 2007. Retirement Decisions: Federal Policies Offer Mixed Signals about When to Retire. GAO-07-753. Washington, DC: July 11, 2007. Older Workers: Labor Can Help Employers and Employees Plan Better for the Future. GAO-06-80. Washington, D.C.: December 5, 2005. Older Workers: Demographic Trends Pose Challenges for Employers and Workers. GAO-02-85. Washington, D.C.: November 16, 2001. | As the large baby boomer generation retires, the workforce will lose much of their knowledge and experience. Encouraging phased retirement, in which older workers reduce their work hours with their current employer to transition into retirement, has been cited by retirement experts as one way to mitigate this loss. GAO was asked to review the work patterns of older Americans and phased retirement programs. In this report, GAO examines (1) recent trends in the labor force participation of older workers, (2) the extent to which employers have adopted phased retirement programs and what type of employers offer them, and (3) what challenges and benefits, if any, exist in designing and operating phased retirement programs. GAO analyzed data from two nationally representative surveys, the Health and Retirement Study (2004-2014) and the Current Population Survey (2005-2016); reviewed relevant federal laws and regulations; conducted a literature review; and interviewed 16 experts on retirement and 9 employers who offer or considered offering phased retirement programs. While phased retirement programs exist in both the private sector and government, this report focuses on private sector programs. Participation of older workers in the labor market has increased in the last decade, according to GAO analysis. Further, most individuals ages 61 to 66 who were still working maintained a full-time work schedule. However, although about a quarter of workers in this age group had planned to reduce hours as they transitioned to retirement, fewer than 15 percent subsequently reported being partly retired or gradually retiring from their career jobs. While no nationally representative data on the prevalence of phased retirement exist, GAO's review of studies and interviews with retirement experts indicate that formal phased retirement programs are relatively uncommon. Of those that are offered, they are more common among employers with larger or technical and professional workforces, such as education, consulting, and high-tech, according to studies GAO reviewed (see table). Nine of 16 experts GAO interviewed explained that industries with skilled workers or with labor shortages are motivated to offer phased retirement because their workers are hard to replace. Formal phased retirement programs present design and operational challenges for employers, including compliance with provisions and laws related to discrimination, according to publications GAO reviewed and experts and employers GAO interviewed. For example, in one study GAO reviewed, 71 percent of large employers agreed that regulatory complexities and ambiguities involving federal tax and age discrimination laws impact their ability to offer phased retirement programs. Experts and employers said programs that target highly skilled workers, who are often highly paid, could violate rules that allow for favorable tax treatment that generally prohibit qualified pension plans from favoring highly compensated employees. Despite these challenges, most employers GAO interviewed who reported having phased retirement programs found them beneficial. For example, eight of the nine employers GAO interviewed said they were able to address various design and operational challenges and cited program benefits related to worker retention, knowledge transfer, transition into retirement, and workforce planning. GAO is not making recommendations in this report. |
JWST is envisioned to be a large deployable, infrared-optimized space telescope and the scientific successor to the aging Hubble Space Telescope. JWST is being designed for a 5-year mission to find the first stars and trace the evolution of galaxies from their beginning to their current formation, and is intended to operate in an orbit approximately 1.5 million kilometers—or 1 million miles—from the Earth. With a 6.5-meter primary mirror, JWST is expected to operate at about 100 times the sensitivity of the Hubble Space Telescope. JWST’s science instruments are to observe very faint infrared sources and as such are required to operate at extremely cold temperatures. To help keep these instruments cold, a multi-layered tennis-court-sized sunshield is being developed to protect the mirrors and instruments from the sun’s heat. The sunshield and primary mirror are designed to fold and stow for launch and fit within the launch vehicle. When complete, the observatory segment of JWST is to include several elements (Optical Telescope Element (OTE), Integrated Science Instrument Module (ISIM), and spacecraft) and major subsystems (sunshield and cryocooler). The JWST project is divided into three major segments: the observatory segment, the ground segment, and the launch segment. The hardware configuration created when the Optical Telescope Element and the Integrated Science Instrument Module are integrated, referred to as OTIS, is not considered an element by NASA, but we categorize it as such for ease of discussion. Additionally, JWST is dependent on software to deploy and control various components of the telescope as well as collect and transmit data back to Earth. The elements, major subsystems, and software are being developed through a mixture of NASA, contractor, and international partner efforts. See figure 1 below for an interactive graphic that depicts the elements and major subsystems of JWST. For more information on JWST’s organizational structure, see appendix III. Given JWST’s complexity, integration and test activities are comprised of five separate periods—two of which have already started—over the course of almost 7 years to build the observatory. During the test periods, the project works to mitigate risks to an acceptable level prior to launch. According to project officials, while some risks may be eliminated entirely through various mitigation strategies, others will be accepted as residual risks that remain upon launch. See figure 2 below for the overall planned integration and test flow for JWST that includes the remaining schedule reserve—or extra time built into the schedule to address any issues found. For the majority of the work remaining, the JWST project will rely on three contractors: Northrop Grumman, Harris (formerly Exelis), and the Space Telescope Science Institute (STScI). Northrop Grumman plays the largest role, developing the sunshield, the OTE, the spacecraft, and a cooling subsystem for the Mid-Infrared Instrument (MIRI). Northrop Grumman performs most of this work under a prime contract with NASA, but its work on the MIRI cooler is performed under a separate subcontract with the Jet Propulsion Laboratory (JPL). Harris is manufacturing the test equipment, equipping the test chamber, and assisting in the testing of the optics of JWST. Finally, STScI will collect and evaluate research proposals from the scientific community and will receive and store the scientific data collected, both of which are services that they currently provide for the Hubble Space Telescope. Additionally, STScI is responsible for developing the ground system that manages and controls the telescope’s observations on behalf of NASA. The MIRI instrument, one of the four instruments within ISIM, requires a dedicated, interdependent two-stage cooler subsystem designed to cool the infrared light detector to about 6.7 Kelvin (K), just above absolute zero. This cooler is referred to as a cryocooler and works by moving helium gas through about 10 meters (approximately 33 feet) of refrigerant lines located on the sun-facing surface of the JWST observatory to the colder, shaded side where the ISIM is located. According to NASA officials, a cryocooler of this configuration has never been developed or flown in space before. See figure 3 below for an illustration of the MIRI cryocooler on JWST and the varying temperatures needed in different areas of the telescope. Complex development efforts like JWST face myriad risks and unforeseen technical challenges which oftentimes can become apparent during integration and testing. To accommodate these risks and unknowns, projects reserve extra time in their schedules—which is referred to as schedule reserve—and extra money in their budgets— which is referred to as cost reserve. Schedule reserve is allocated to specific activities, elements, and major subsystems in the event there are delays or to address unforeseen risks. Each JWST element and major subsystem has been allocated schedule reserve. When an element or major subsystem exhausts schedule reserve, it may begin to affect schedule reserve on other elements or major subsystems whose progress is dependent on prior work being finished for its activities to proceed. The element or major subsystem with the least amount of schedule reserve determines the critical path for the project. Any delay to an activity that is on the critical path will reduce schedule reserve for the whole project, and could ultimately impact the overall project schedule. Cost reserves are additional funds within the project manager’s budget that can be used to address unanticipated issues for any element or major subsystem and are used to mitigate issues during the development of a project. For example, cost reserves can be used to buy additional materials to replace a component or, if a project needs to preserve schedule reserve, reserves can be used to accelerate work by adding shifts to expedite manufacturing and save time. NASA’s Goddard Space Flight Center (Goddard)—the NASA center with responsibility for managing JWST—has issued procedural requirements that establish the levels of both cost and schedule reserves that projects must hold at project confirmation. After this point, a specified amount of schedule reserve continues to be required throughout the remainder of development. In addition to cost reserves held by the project manager, management reserves are funds held by the contractors that allow them to address cost increases throughout development. We have found that management reserves should contain 10 percent or more on the cost to complete a project and are used to address different issues. JWST has experienced significant increases to project costs and schedule delays. Prior to being approved for development, cost estimates of the project ranged from $1 billion to $3.5 billion with expected launch dates ranging from 2007 to 2011. Before 2011, early technical and management challenges, contractor performance issues, low level cost reserves, and poorly phased funding levels caused JWST to delay work after confirmation, which contributed to significant cost and schedule overruns, including launch delays. The Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies requested from NASA an independent review of JWST in June 2010. In response, NASA commissioned the Independent Comprehensive Review Panel, which issued its report in October 2010, and concluded that JWST was executing well from a technical standpoint, but that the baseline funding did not reflect the most probable cost with adequate reserves in each year of project execution, resulting in an unexecutable project. Following this review, the JWST program underwent a replan in September 2011, and Congress in November 2011 placed an $8 billion cap on the formulation and development costs for the project. On the basis of the replan, NASA rebaselined JWST with a life-cycle cost estimate of $8.835 billion that included additional money for operations and a planned launch in October 2018. The revised life-cycle cost estimate included a total of 13 months of funded schedule reserve. In the President’s fiscal year 2013 budget request, NASA reported a 66 percent joint cost and schedule confidence level—lower than the 70 percent level noted in NASA procedural requirements—for these cost and schedule baselines. A joint cost and schedule confidence level is the process NASA uses to assign a percentage to the probable success of meeting cost and schedule estimates and is part of the project’s estimating process. In December 2014, we found that the project was progressing within the 2011 replan for both cost and schedule. We reported on technical challenges with JWST elements and major subsystems that had consumed a portion of the cost and schedule reserves. We also found that the cryocooler remained an ongoing challenge and continued to use a disproportionate amount of cost reserves. Finally, we found that NASA had not conducted a cost risk analysis since the 2011 replan. A cost risk analysis determines the reliability of a program’s cost estimate by determining a program’s cost drivers and the risk of cost overruns through an analysis that links historical schedule information along with technical issues and uncertainties in schedule and cost. Since new risks had emerged, we recommended that NASA follow best practices when it updated the 2011 analysis for the Northrop Grumman contract and ensure the analysis is updated as significant risks emerge in the future. NASA partially concurred with our recommendation and stated that the JWST program and project use a range of tools to assess all major contractors’ performance and that the project initiated a cost risk analysis of Northrop Grumman’s contract incorporating best practices and would update it when required by NASA policy. The status of NASA’s analysis and our evaluation of it are discussed later in the report. The JWST project is currently on schedule with 8.75 months of schedule reserve remaining. However, all of JWST’s elements and major subsystems are within weeks of moving onto the project’s critical path, potentially reducing schedule reserve further. This is a tenuous position for the project given that it must complete five integration and test periods, three of which have not yet started. Testing can uncover problems that can be difficult or time-consuming to resolve, thereby adding schedule risk to the project and the unusual complexity of JWST further heightens these risks. To achieve mission success, the project will have to address over 100 technical risks and ensure that the project’s potential areas for mission failure are fully tested and understood before project launch in October 2018. Overall project schedule reserve, currently at 8.75 months, remains above Goddard requirements and the project’s plan—which was set above the Goddard standard at the replan in 2011 and included more reserve than required. However, as shown in figure 4 below, the use of schedule reserve on any element or major subsystem—two of which have entered integration and testing phases—may reduce the overall project schedule reserve. While some use of schedule reserve is expected, the proximity of each element and major subsystem schedule to the critical path means that the project must prioritize the mitigations when problems occur. Overall, the project has used more than 30 percent of its schedule reserve established at the time of the replan in 2011 to address technical challenges. Our prior work has shown that it is in integration and testing where problems are most likely to be found and as a result, schedules tend to slip. As we found in 2012, the project has a set amount of time allocated to the final three integration and test efforts over the next 3 years, with between 2 and 4 months for each. This time could easily be used if a significant problem occurred. For example, the OTIS integration and test period—the first major integration involving OTE and ISIM—planned to start in 2016 currently has 3 months of schedule reserve allocated at the end of testing. The final event in the OTIS integration and test effort is a cryovacuum test that takes approximately 3 months to complete. If an issue occurred that required stopping and repeating the cryovacuum test, this reserve could easily be exhausted. Additionally, as the project moves further into integration and testing, events become more serial so flexibility will be diminished. Issues uncovered in integration and testing also tend to be more expensive to mitigate, due to increased schedule pressure. To prevent the use of additional schedule reserve, the project and its contractor for OTIS testing are taking proactive steps to reduce risk before testing needs to commence by ensuring the availability and readiness of test equipment and the cryogenic chamber to be used to test the optics of JWST. For example, the project’s contractor that is to test the optics has conducted two of three optical ground support equipment tests on a replica of the OTE with 2 of 18 primary mirror segments installed. According to the project, the first test met its intended objectives and provided valuable insight into the performance of the ground support equipment and preparation of the cryogenic chamber. The second test was completed in October 2015, and project officials are currently analyzing the results. The third test is to build upon these findings to provide further confidence for the eventual OTIS testing. Additionally, the contractor performed several risk mitigation activities, including additional testing of the large cryogenic chamber that will be used for OTIS testing, which revealed several issues, including a leak in the cryogenic chamber that would have had major impacts if not discovered and repaired before OTIS testing began. The project has used schedule reserve in 2015 to address various technical problems that have arisen. More specifically, the project experienced several problems with ISIM and OTE, elements in the two of five integration and test phases that have begun. For example, the ISIM heat straps—flexible straps that are to conduct energy and heat away from the instruments—did not perform as expected in testing. An investigation revealed design issues with the parts as delivered from the supplier. As a result, the heat straps were redesigned and reinstalled, which required the use of schedule reserve. Additionally, as a result of these and other issues, the beginning of the third cryovacuum test was delayed by 3 months. ISIM currently holds 1.75 months in schedule reserve—down from 4.5 months as we found last year—from its overall schedule reserve of 8.75 months to address any issues that may arise during the third cryovacuum test and before OTIS testing begins. Additionally, the OTE element used about 2 months of schedule reserve this past year due to workmanship issues related to the 76 cryogenic harnesses that connect to JWST’s mirrors. According to program and contractor officials, the majority of these harnesses were damaged due to use of inappropriate tooling by the supplier. The damage was not discovered until some of the harnesses were installed on the OTE. The harnesses were removed for inspection with most requiring repairs or replacement. According to contractor officials, initially, the harnesses would have been installed at Northrop Grumman’s facility in Redondo Beach, California, but due to the workmanship issues, and in an effort to preserve as much schedule as possible, all but two of the harnesses are being installed at Goddard after the OTE was transferred there to begin the integration of the mirrors with the backplane. Various spacecraft challenges during the past year have used about 3 months of schedule reserve. For example, Northrop Grumman planned for certain integration activities to be conducted concurrently. However, according to project officials, due to safety and access to the spacecraft bus, the work had to be completed sequentially instead which took longer than expected. Additionally, a propellant tank required redesign and rework to meet its requirements. Spacecraft bus structure integration has been completed and the bus assembly recently completed various fit checks and acoustics and dynamics testing in preparation for the spacecraft integration and testing phase to begin in 2016. Schedule reserve for the sunshield was reduced to 9.25 months—two weeks from the critical path—due to various manufacturing challenges, and additional reserves will likely be needed in the near future. For example, an anomaly with the membrane retention devices—which need to operate correctly to ensure that the sunshield can unfold properly— during qualification testing required a redesign of the parts. According to contractor officials, when the devices were released, the contact between the metal surfaces moving adjacent to one another resulted in a small amount of debris being generated. Project officials expressed concern that the debris posed a risk of damaging other parts of the telescope. A new design has since been tested and proven to no longer pose the same risk. Additionally, coordinating the testing of the five individual layers of the sunshield created some delays. The five layers of the sunshield are currently in various stages of assembly, with two layers having been delivered to Northrop Grumman from the supplier in April 2015 and November 2015, respectively. In addition, in October 2015, the project reported that a piece of flight hardware for the sunshield’s mid boom assembly was irreparably damaged during vacuum sealing in preparation for shipping. The effect of the accident on the schedule has not yet been determined as project and prime contractor officials are currently determining the path forward. The cryocooler continued to experience technical challenges in 2015 that used schedule reserve and delayed its delivery. Although it has now been delivered—approximately 18 months later than planned—the cryocooler remains a schedule risk as it begins testing. Northrop Grumman delivered the compressor assembly—the third and final cryocooler component to be delivered after the cold head assembly and electronics assembly—to JPL in July 2015. Over the last several years, the project has accommodated a series of cryocooler schedule slips by reordering and compressing JPL’s test schedule and resequencing the spacecraft bus integration schedule. For example, several tests that were initially planned to be conducted on flight hardware will now be conducted on the spare hardware later into JWST’s integration and testing phase and closer to launch. Additionally, in May 2015, the project used 3 weeks of reserve and removed 3 weeks of lower priority and redundant items from the planned 40 weeks of acceptance and end-to-end testing. The project took these actions to accommodate a further delay in the delivery of the compressor assembly. According to contractor officials, the delay was primarily caused by the contractor not scheduling enough time to complete the bake out—a process whereby moisture is removed by heating the compressor and pumping helium through it. Table 1 below shows the tests removed from the acceptance and end-to-end testing. According to JPL officials, the thermal tests removed were from those that would have tested the cryocooler compressor assembly with the electronics assembly. A program official stated that the risk of eliminating these tests has been reduced now that the compressor and electronics assembly have been tested together for the first time. NASA and JPL assessed the removal of the electromagnetic interference and electromagnetic compatibility testing as low risk, and a program official stated that additional parallel activities and testing of the spare electronics to further mitigate the risk have been added. However, various integration and test experts we spoke with noted that eliminating testing is a sign that the project may be taking on additional risk because discovery of issues may be pushed to higher levels of testing or to later in the testing phase, where problems are more costly and time consuming to address. To accommodate any delays to testing or problems that may be found, JPL currently maintains 12 weeks of reserve for acceptance and end-to- end testing of the cryocooler. According to JPL officials, a key driver in deciding to eliminate testing instead of using additional schedule reserve was to retain as much as possible in the event that a test has to be stopped and restarted—which would require approximately 5 weeks—in addition to the time it takes to mitigate a problem. At the completion of the acceptance and end-to-end testing programs, the cryocooler is needed for spacecraft integration and testing—when the spacecraft and sunshield are integrated—no later than August 2, 2016. Spacecraft integration and test is followed by the final observatory level integration and test— completing the telescope—which is expected to begin in September 2017. The cryocooler’s testing flow and schedule reserve leading to its integration with the spacecraft is depicted in figure 5 below. Because the development and delivery of the cryocooler by Northrop Grumman took significantly longer than expected and to maintain the 12 weeks of reserve, JPL must complete acceptance and end-to-end testing in a more schedule-compressed environment. However, challenges have persisted in bringing the cryocooler flight model to testing and completing development of the spare model which could be needed if the flight model is not available in time to be integrated into the observatory for launch. For example, despite having an extra 18 months to prepare for the cryocooler testing due to the delay in the delivery of the compressor assembly, the project noted concerns with JPL’s readiness to accept the flight hardware. Specifically, a procedure error led to an interruption of the ongoing testing of the electronics assembly and fit checks of the flight cooler tower assembly and flight refrigerant line deployable assembly were delayed because the procedures were late in being completed. JWST is one of the most technologically complex projects NASA has undertaken. The project incorporates nine critical technologies— technologies that are required for the project to successfully meet requirements—whereas we found the average technology development project at NASA incorporates an average of 2.3 critical technologies. JWST also incorporates 15 pre-existing technologies that are being leveraged from previous development efforts. Future testing on JWST has to reduce a significant amount of risk before the October 2018 launch. The project identifies and maintains a list of risks—currently with 102 items—that need to be tested and mitigated to an acceptable level in the next 3 years. According to the project, approximately 25 of these risks are not likely to be closed until the conclusion of the observatory integration and test phase—just prior to project launch. This is the point where the project has determined that no further mitigations are feasible and that these risks have been tested per a plan to reduce the risk, when possible, to an acceptable level. In some cases, it may take years to resolve a particular risk. For example, the project continues to track a risk related to the release mechanisms that hold the spacecraft and the OTE together for launch. Once in space, they are to activate and release to allow the OTE to separate from the spacecraft. If the mechanisms do not operate correctly, mission failure will occur. This risk was identified in January 2014 at the spacecraft critical design review. During testing, these devices were causing excessive shock when performing their releasing function. After redesign, the project is continuing to work on resolving the underlying problem and qualifying the new design. Additionally, while testing the redesigned mechanism, a new concern arose that it could release early which would cause mission failure. According to a program official, the redesigned mechanism is not needed for spacecraft integration and test until summer of 2016 and therefore these issues do not pose a significant schedule concern at this time. As integration and testing moves forward, the project will need to be able to resolve problems in a timely manner to stay on schedule. A backlog of unresolved problems and risks may indicate there may not be enough schedule left before launch to complete all necessary work. The project keeps track of these problems via problem reports and problem failure reports. Thus, ensuring that problem reports and problem failure reports are resolved in a timely manner is key to successfully launching the project on time. Project officials reported that they do not track problem report and problem failure report closure rates over time; instead, they monitor the reports to ensure that they are closed before subsequent test events and receive monthly briefings from the contractors on the status of their progress. According to project officials responsible for the ISIM and OTIS development and testing, while there are numerous problem reports open at any given time, they are comfortable with the number of open reports at this stage of the project. Northrop Grumman officials reported that development of the OTE, sunshield, and spacecraft are on track with respect to problem and failure reports, which they refer to as nonconformance reports. Additionally, experts we spoke with told us that addressing requests for action (RFAs) from project reviews is important because RFAs are written to identify potential risks to the project. Since the spacecraft critical design review in January 2014, the project has closed 14 RFAs from that review while one related to the release mechanism noted above remains open. The project tracks and reports open RFAs to senior management at NASA, and we will continue to examine the open RFA and additional RFAs that result from future reviews to monitor their timely closure. The extent of JWST’s deployments—which are necessary because JWST must be stowed for launch to fit in the launch vehicle—means the telescope could fail to operate as planned in an extensive number of ways. According to project officials, there are over 100 different ways that a failure could occur, referred to as single point failure modes, across hundreds of individual items in the observatory. Each of these could result in a loss of minimum mission objectives, and thus needs to be fully tested and understood. Nearly half of the single point failure modes involve the deployment of the sunshield. The approval of single point failures requires written justification from the project including sound engineering judgement, supporting risk analysis, and implementation of measures to mitigate the risk to acceptable levels. The project’s mission systems engineers have developed justifications and mitigation strategies for its single point failures, and project officials expect these to be summarized and submitted to the agency prior to launch. According to project officials, this approach is consistent with other high-priority NASA missions, which require the most stringent design and development approach that NASA takes to ensure the highest level of reliability and longevity on orbit. The JWST project continued to meet its cost commitments throughout fiscal year 2015 despite cryocooler delays that used a disproportionate amount of cost reserves. However, the project required larger than planned workforce levels to complete new and existing work, which poses a cost threat in future years if levels do not decrease. To help manage the project and account for new risks since the 2011 replan, JWST project officials conducted a cost risk analysis of the Northrop Grumman contract. We found that while the cost risk analysis substantially met best practices, these officials do not plan to periodically update it. Instead, the project is using risk-adjusted analyses to update and inform its cost position. However, we found that this method is a simplified version of a cost-risk analysis that does not contain the same rigor or allow the project to prioritize risks. Furthermore, we found anomalies in the contractor- provided data rendering the results of the analyses unreliable. Finally, we also found the project lacks an independent surveillance mechanism for the data to ensure anomalies are corrected by the contractor before being incorporated into larger analyses. As a result, the project is relying partially on unreliable information to inform its cost and schedule decision-making. Project officials managed JWST within its allocated budget for the fourth consecutive year since the 2011 replan. Additionally, the project’s fiscal year 2016 budget request to Congress is consistent with its cost commitment. According to preliminary estimates, at the end of fiscal year 2015, the project spent $68 million dollars more than planned at the beginning of the fiscal year, carrying over less money into fiscal year 2016 than originally planned. As in past years, the project used a portion of its cost reserves to address technical challenges that included funding activities to address significant delays with the cryocooler. The project also used program-level cost reserves to pay for new work that included conducting additional thermal verification tests and risk reduction activities, such as an analysis to better understand how JWST will likely interact with its launch vehicle—the Ariane 5. The cryocooler used a significant share of the project’s fiscal year 2015 cost reserves—more than 50 percent—to fund the workforce for this effort and address technical issues. This is the fourth year in a row that the cryocooler used a substantive portion of the project’s cost reserves to further fund the subcontractor’s schedule delays in delivering its components. The project estimates that the overall cryocooler development cost will be nearly 250 percent higher than baselined at the 2011 replan. The Northrop Grumman cryocooler team forecasts that a larger workforce is needed until at least February 2016 when the spare compressor assembly is currently scheduled to be delivered. JPL will maintain the majority of its workforce through the conclusion of spare cryocooler testing. After testing concludes, its workforce is projected to decrease by about 50 percent. Project cost reserves will likely continue to be needed to fund cryocooler development and testing costs until fiscal year 2017 when JPL testing of the spare compressor assembly is scheduled to conclude. While the project remains on cost, contractor work is costing more to complete because a larger workforce than planned was needed for components beyond the cryocooler, including Northrop Grumman for the sunshield, spacecraft, and OTE, and Harris for OTIS testing and preparation. This need derives from work taking longer than planned to complete and additional work requested by NASA. For example, Northrop Grumman’s workforce projections for fiscal year 2015 predicted a peak in the workforce in November 2014. However, the actual workforce peaked in February 2015 and continued to remain above the projected peak until August 2015. While workforce numbers have declined somewhat since February, these increases largely remained in place through the end of the fiscal year. In its role as prime contractor, Northrop Grumman’s workforce stayed within its budget in fiscal year 2015. From January through July of 2015, its workforce was exactly at its funding threshold in order to conduct new work and address technical issues for its body of work. In addition, larger workforces contributed to additional contractor cost for two other development efforts—OTIS testing and the cryocooler—requiring the use of additional project cost reserves. Looking forward, the primary threat to JWST meeting its long-term cost commitment is the prime contractor, which must continue to control its costs and decrease its workforce. For the past 20 months, Northrop Grumman’s actual workforce exceeded its projections. Figure 6 below illustrates the difference between the workforce levels that Northrop Grumman projected at the beginning of fiscal years 2014 and 2015 and its actual workforce levels for those periods. Based on its projections at the beginning of the fiscal year, Northrop Grumman exceeded its total fiscal year 2014 workforce monthly projections by about 12 percent, and exceeded its projections for fiscal year 2015 by about 20 percent. On average, in fiscal year 2015, Northrop Grumman was 121 FTEs above its projections each month, and at the end of fiscal year 2015, it exceeded its monthly projection for September 2015 by 235 FTEs. While actuals have remained above projections since the workforce levels peaked in February 2015, Northrop Grumman currently projects that its workforce will decline throughout fiscal year 2016, with the exception of August 2016, when additional work is projected to be needed for integration and testing, among other areas. However, this was the projection for both fiscal years 2014 and 2015 and has yet to happen. For example, while Northrop Grumman expected to be ramping down by the end of fiscal year 2014, its projections at the start of fiscal year 2015 were approximately 55 percent higher than where workforce levels were projected for the end of fiscal year 2014. The primary drivers that have increased the cost and size of the workforce under the prime contract have been the development of the sunshield and spacecraft and additional work NASA has requested. Over 60 percent of the cost increases are attributed to addressing technical concerns such as sunshield alignment and verification work, mechanical design integration, and spacecraft mass reduction. Northrop Grumman has covered additional costs pertaining to technical issues through its management reserves, and has not needed project cost reserves in fiscal years 2014 and 2015. The remaining cost increases are attributable to new contract scope which has been funded by the JWST program. Some of this new scope included additional spacecraft simulators, as well as new thermal risk reduction testing to verify the final design changes made to the core of the telescope–the region between all the observatory elements. Approximately 15 percent of work remains on Northrop Grumman’s contract and its management reserves exceed the recommended minimum amount that should be held at the contractor level—10 percent or more of the cost of work remaining on the project. Significant decreases in the workforce are planned to occur in fiscal year 2017 when final hardware delivery to observatory integration and test is scheduled to take place. To incentivize the contractor to lower its workforce, project officials evaluate workforce management as part of NASA’s appraisal of Northrop Grumman’s performance in its award fee determinations. The project also communicates frequently with the contractor including phone calls, face to face meetings twice a month, and quarterly in-person management meetings to discuss workforce planning, among other subjects. The project has communicated the need to reduce the workforce size, but since Northrop Grumman has operated within its budget in fiscal years 2014 and 2015, the award fee it has received has not been reduced as a result of workforce size issues. The subcontractor for OTIS testing, Harris, needed additional funding to cover cost overruns and additional work. Project cost reserves were utilized to pay for this work to maintain schedule through a contract change in January 2015. Over 55 percent of the increase was made to address cost overruns that resulted from increasing workforce levels to maintain schedule. The rest of the contract increase covered new scope. As a result, Harris is anticipating more work than originally planned for fiscal years 2016 and 2017. Despite the contract increases, Harris’s management reserves are 2.5 percent as of August 2015—significantly below the 10 percent cost of work remaining that is considered to be healthy. With over 25 percent of work remaining on its contract, this low level of reserves means that any additional overruns will likely need to be covered by project-held reserves. We found that NASA’s 2014 cost risk analysis on Northrop Grumman’s remaining work substantially met best practices. In December 2014, we recommended that project officials update the 2011 JWST cost risk analysis utilizing best practices, and to update it periodically as significant risks emerge. NASA partially concurred with our recommendation stating that the program and project use a range of tools to assess the performance of the project and conducted a one-time update to the cost risk analysis in 2014. We found that NASA’s updated cost risk analysis substantially met best practices. For example, it incorporated subject matter expert input to model cost and schedule uncertainties from the prime contractor’s threats and opportunities list—both of which are components of the best practice of modeling a probability distribution for each cost element’s uncertainty based on data availability, reliability and variability. See appendix I for a list of best practices that we used to evaluate cost risk and uncertainty. In addition, NASA included correlation between elements to account for different cost elements being affected by the same external factors—another best practice. However, the cost risk analysis also had some weaknesses as a result of not fully following best practices. For the first best practice noted above on modeling probability distribution, NASA relied on the contractor’s risk data without conducting corroborating interviews with contractor personnel to obtain insight into threats and opportunities not listed in contractor data. For the same best practice, the detailed schedule that reflected all of the work that needed to be done by Northrop Grumman that was used for the cost risk analysis had some activity sequencing logic issues. For example, we found instances where activities listed were not sequentially linked to one another. As a result, this called into question the calculation of the critical path during simulations as well as the ability of the schedule to dynamically respond to changes, which it must do thousands of times during the risk simulations. Moreover, the JWST project does not plan to periodically update its cost risk analysis even as additional risks have emerged. JWST officials stated that the cost risk analysis was a time intensive process to complete and that the program and project use various tools consistent with best practices to assess all major contractors’ performance. Nonetheless, best practices call for conducting periodic updates to a cost risk analysis as a project progresses even if it is not experiencing problems. Updating the cost risk analysis is also part of the best practice of implementing a risk management plan with the contractor which calls for identifying and analyzing risk, planning for risk mitigation, and continually tracking risks. An accurate cost risk analysis is particularly vital to JWST because about 70 percent of the project cost reserves have been used to address concerns that were not anticipated as threats by the project’s budget system. Failure to update the cost risk analysis as we recommended in 2014 limits stakeholder confidence that the cost risk analysis prepared in 2014 accurately reflects the project’s current financial status. Given this uncertainty, it is important for the project to have reliable information for the risks that are known to inform decision making. One of the tools that the project has started to use in place of updating the cost risk analysis is a monthly risk-adjusted analysis to provide insight into potential future cost growth. The monthly risk-adjusted analyses are based on contractor EVM data that incorporate known threats to provide an estimate at completion (EAC) that is updated monthly by NASA for each contractor. The results of these analyses may then be compared to the contractors’ estimates and project cost reserves to provide insight into the project’s ability to cover future increases. Monthly risk-adjusted analyses demonstrate a commitment by NASA to manage and project future costs. However, we found that the risk-adjusted analyses do not serve as an adequate substitute for an updated cost risk analysis because they are a simplified version of a cost risk analysis that does not allow the project to prioritize risks or assign confidence levels to meet key milestones in the schedule consistent with best practices for cost risk analyses. Additionally, based on our analysis of contractor EVM data over 17 months, we found that some of the data used to conduct the analyses were unreliable. First, we found that both Northrop Grumman and Harris were reporting optimistic EACs at the time of our analysis that did not align with their historical EVM performance and fell outside the low end of our independent EAC range. Second, we found various anomalies in contractor EVM data for both the Northrop Grumman and Harris work that they had not identified throughout the 17-month period we examined. The anomalies included unexplained entries for negative values of work performed (meaning that work was unaccomplished or taken away rather than accomplished during the reporting period), work tasks performed but not scheduled, or actual costs incurred with no work performed. For Northrop Grumman, many were relatively small in value ranging from a few thousand to tens of thousands of dollars. These anomalies are problematic because they distort the EVM data, which affect the projection of realistic EACs. We found that these anomalies occurred consistently within the data over a 17-month period, which brings into question the reliability of the risk-adjusted EAC analysis built upon this information. NASA did not provide explanations into the anomalies for either contractor. While the contractors were able to provide explanations for the anomalies upon request, their explanations or corrections were not always documented within EVM records. Some of the reasons the contractors cited that were not in the EVM records included tasks completed later than planned, schedule recovered on behind schedule tasks, and replanning of customer-driven tasks. Finally, like the cost-risk analysis in 2014, the risk-adjusted EAC analysis does not include interviews with contractor officials to gain insight into risks which may not be present in the contractors’ threats and opportunities list. Without updating the cost risk analysis, reconciling and documenting data anomalies, and utilizing reliable data for the risk-adjusted EAC, the JWST project does not have a reliable method to assess its cost reserve status going forward. This means that some of the cost information the project officials use to inform their decision making may indicate they are in good shape when the reality might be otherwise, and as result, project management may not have a solid basis for decision making. In discussions with the contractors, we found that the project also lacks an independent surveillance mechanism, such as the Defense Contract Management Agency, to monitor contractors’ EVM data—provided to the project each month from two of the contractors. Surveillance entails reviewing a contractor’s EVM system with the purpose of focusing on how well a contractor is using its EVM system to manage cost, schedule, and technical performance. However, the lack of surveillance and the data anomalies in EVM data are problems we previously identified across NASA’s portfolio of major spaceflight projects. We found in November 2012 that 4 of NASA’s 10 major spaceflight projects we reviewed had established formal independent surveillance reviews. For the 6 projects that did not have formal independent surveillance in place, we found that each provided evidence that they instituted monthly EVM data reviews, which according to project officials, helped them to continually monitor cost and schedule performance. However, we found that the rigor of both the formal and informal surveillance reviews was questionable given the numerous EVM data anomalies we found in the monthly EVM data. As a result, we recommended that NASA improve the reliability of project EVM data by requiring projects to implement a formal surveillance program that ensured anomalies in contractor-delivered and in-house monthly earned value management reports were identified and explained, and report periodically to the center and mission directorate’s leadership on relevant trends in the number of unexplained anomalies. Citing resource constraints, NASA partially concurred with the recommendation and commented that it did not plan to implement a formal surveillance program, but agreed that the reliability and utility of the EVM data needed to be improved and noted several steps it planned to take to do so. We continue to believe that implementing this recommendation would be beneficial and prevent anomalies in EVM data from occurring that we have identified on the JWST project. Implementing surveillance of EVM contractor data is a best practice listed in the NASA Earned Value Management Implementation Handbook and GAO’s Cost Estimating and Assessment Guide. With adequate surveillance in place, the anomalies we found in the EVM data could have been identified earlier and corrective action could have been directed to the contractors to explain the anomalies in the data. Without implementing proper surveillance, the project may be utilizing unreliable EVM data in its analyses to inform its cost and schedule decision making. NASA has taken steps to provide independent oversight of the JWST project. Independent oversight of the JWST project has played and will likely continue to play an important role leading up to JWST’s launch in October 2018. Before the 2011 replan, two groups examined JWST to address underlying concerns with schedule and cost and made recommendations that NASA implemented. On an ongoing basis until launch, the Standing Review Board and the Independent Verification & Validation (IV&V) facility are to continue to oversee progress on hardware and software development, identify concerns, and assist the project to identify solutions to reduce risk and improve JWST’s likelihood of success. Various groups internal and external to NASA have conducted reviews, provided insights, and identified schedule efficiencies to inform and enhance the project’s approach to managing the development of JWST. Prior to the 2011 replan and because of concerns raised at the JWST mission critical design review held in the spring of 2010, the Test Assessment Team was formed to address those concerns. Convened by the Astrophysics division of the NASA Science Mission Directorate, the team included nine members and three NASA consultants with considerable experience in systems engineering, instrument development, system verification, modeling and testing, and other areas focused on reviewing plans for the ISIM and OTIS cryogenic testing. The team was primarily tasked to determine whether (1) the test plans in place at that time were sufficient to test the relevant observatory functions, (2) the key optical and thermal objectives were clearly identified, (3) the test plans themselves were properly scoped and prioritized, (4) any duplicative or unnecessary tests existed in the plans, and (5) the plans were overly ambitious or optimistic regarding hardware performance and analysis capabilities. Their insights and recommendations have helped to decrease programmatic cost and future growth as well as to find schedule efficiencies. For example, they recommended OTIS testing duration be reduced from 167 to 90 days while still verifying critical functions of the telescope. Also prior to the 2011 replan, the Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies asked that NASA set up a panel to review the JWST project because of concerns about cost growth and schedule delays. In response, NASA convened the Independent Comprehensive Review Panel to provide an independent, integrated perspective and response with the goal of providing recommendations that would lead to a successful launch while minimizing cost. At the conclusion of its work in October 2010, the panel made 22 recommendations to NASA to increase oversight, improve communications, and assist with risk management and mitigation, among other recommendations. NASA implemented all of these recommendations. Both of these reports have informed our ongoing reviews of the JWST project as we have incorporated many of the concerns on cost estimates and cost reserves into our methodology and reporting on the health and status of JWST as it moves forward. Another aspect of independent oversight that is a key element of NASA’s strategic framework for managing space flight projects are Standing Review Boards which consist of technical experts who do not actively work on a specific project or program. The mission of the boards is to provide NASA senior management with objective information to ensure there is appropriate program and project management oversight to increase the likelihood of mission success. The boards help to determine the adequacy of programs’ (1) management approach, (2) technical approach, (3) integrated cost and schedule estimates and funding strategy, and (4) risk management, among others. NASA’s Independent Program Assessment Office and various NASA centers organize these boards and coordinate their involvement at different reviews. The boards are involved at various agency-level reviews with some members participating in lower-level reviews at NASA’s different centers, in monthly reviews held by the projects and program, or in special reviews on a specific topic or set of issues. Standing Review Boards may also make non-binding recommendations after life-cycle reviews, but do not have programmatic or technical authority over the programs or projects. The Standing Review Board Handbook describes three types of boards that may be formed to provide independent oversight of programs or projects. See table 2 below for the three types of Standing Review Boards. NASA’s Standing Review Board Handbook states that a civil servant consensus with no expert support is the preferred structure within NASA because experience demonstrates that a consensus board leads to a more meaningful discussion of the review findings and recommendations, especially where dissenting opinions are discussed. A non-consensus mixed board provides only the perspective of the chairman. In 2015, 1 of 33 active Standing Review Boards was a civil service consensus board with no expert support, 15 were civil service consensus with consultant support, and 17 were non-consensus mixed boards. Although NASA guidance prefers civil servant consensus boards, NASA officials told us that they have found it challenging to staff boards exclusively with civil servants for a number of reasons including availability of staff, finding a person with the appropriate skill set, and independence reasons, among others. JWST has had a number of changes occur on the boards overseeing the project for different reasons. JWST has had a Standing Review Board since 2006 when a special review was conducted. During that review and from 2008 to 2014, the board was a non-consensus board led by an outside expert chosen by NASA senior officials. The experts were civil servants as well as non-civil-servant experts. In May 2014, the chairman retired, a new chair was appointed the same year, and NASA senior officials changed the board to a consensus board with consultants. Independent Program Assessment Office officials told us that board types can change for numerous reasons, including when a project or program enters a different phase of development that may require different technical skills or if all of the convening authorities request it. As a result of the retirement of the chairman, most of the 2008-2014 Standing Review Board members who were not civil servants but who had overseen JWST for more than 6 years were replaced and 2 civil servants were carried over to the new board. Consultant support was added for schedule analysis and in one technical area to support launch vehicle integration because NASA has never launched a mission on an Ariane 5 rocket as it plans to do for JWST. Before retiring in 2015, the previous Standing Review Board chairman expressed the importance of having representation from JPL as a member of the board to provide experience working on unmanned spacecraft projects—but a JPL member could not be added since JPL employees are not civil servants and can only be consultants to the board. With the appointment of a new chairman in October 2015, there have been additional membership changes to the board including the addition of a JPL consultant. NASA’s IV&V facility—which independently examines software development—reviews mission critical software for most NASA programs and projects to achieve the highest levels of safety and cost-effectiveness by ensuring that developed software will perform as required. Experts at the facility work to uncover high-risk errors early in the development life cycle of software for many NASA programs and projects. IV&V is a process whereby organizations can reduce the risks inherent in system development and acquisition efforts by having a knowledgeable party who is independent of the developer to determine whether the system or product meets the users’ needs and fulfills its intended purpose. IV&V applies software engineering best practices to risk elements on safety critical and mission-critical software throughout the development life cycle. We have found IV&V to be a leading practice for federal agencies in managing their complex, large-scale, or high-risk acquisition of programs. Software development is a challenge we have found on many different acquisitions—some space-related—in government programs that has led to schedule delays and cost growth. Examples include the F-35 Joint Strike Fighter, the Aegis Modernized Weapon System, NASA’s Stratospheric Observatory for Infrared Astronomy, and Geostationary Weather Satellite development, among others. The goal of IV&V is to examine the three following questions regarding software: Will the system do what it is supposed to do? Will the system not do what it is not supposed to do? Will the system perform as expected under adverse conditions? IV&V is required to examine software on all projects with a life cycle cost over $1 billion, other projects over $250 million with a higher risk classification, or those specifically selected by the NASA Chief, Safety and Mission Assurance. Once selected, a portfolio-based risk assessment is developed to identify top-level mission capabilities and a risk based assessment process identifies the most important system capabilities and the software components that play the most important role in the mission. IV&V officials noted that due to limited resources, they examine mission and safety critical software and they do not have the funding to examine all programs or projects across NASA’s portfolio. Generally, IV&V officials stated that they believe JWST’s software development is going well, but the testing that lies ahead—when the different components are integrated—will be a challenge. For example, IV&V officials noted that JWST’s software build is the largest they have reviewed for a science mission, but not the largest they have reviewed across NASA as some Human Exploration Operations are larger. They said that most of JWST’s software required to position and deploy the telescope will be examined by IV&V. However, they noted that JWST’s integration is more challenging, primarily due to the number of software developers involved. While most science programs or projects have two to four software developers, JWST has eight. JWST’s software development has been examined by IV&V since fiscal year 2004 and, according to officials, will likely continue to be examined until after launch when operations begin. IV&V officials said they do not examine the software for the launch vehicle. While IV&V’s function requires independence from programs and projects, there have been recent changes in funding that have reduced its financial independence to some extent. Organizationally, the IV&V Facility remains independent by reporting to the Office of the Director of Goddard and the Office of Safety and Mission Assurance at NASA Headquarters— not to the programs or projects it examines. However, financially, starting in 2015, an IV&V financial management official said that 75 percent of the IV&V’s funding came from NASA Headquarters via the Agency Management Operations fund and the remaining 25 percent was divided amongst the various mission directorates. This changed from the past 10 years, when 100 percent of the IV&V Facility’s budget came from the Agency Management Operations to ensure the independence of the IV&V office. We have previously found that financial independence requires that the funding for IV&V be controlled by an organization separate from the development organization. This ensures that the effort will not be curtailed by having its funding diverted to other program needs, and that financial pressures cannot be used to influence the effort. As a user of IV&V’s expertise, JWST, via the use of program cost reserves, contributed a small portion of funding to the software IV&V facility to help fund their budget in fiscal year 2015. While this financial situation was new in fiscal year 2015, we will continue to monitor how NASA deals with funding the IV&V facility in the future to protect its independence. The JWST project has made progress building, integrating, and testing significant portions of JWST in the past year within the commitments made at the time of the 2011 replan for both schedule and cost. With the third major integration and test period starting in 2016, resolving technical challenges in a timely manner, and ensuring the OTIS test goes smoothly are key to continued progress within the project’s schedule commitment. Additionally, reducing the size of Northrop Grumman’s workforce and controlling costs within the fiscal year 2016 budget will be key metrics to monitor to demonstrate the project can meet requirements within its cost commitment. In the past, the project has benefited from independent expertise, information, and recommendations to improve the management of the project. Moving forward, the project may benefit from having more reliable data provided from its contractors to ensure that its EACs, which take into account risks and threats, are better able to inform its cost status. While the contractors were able to explain the anomalies, most had not been previously identified or documented. NASA used the data for its analyses, which subsequently raised questions about the reliability of those analyses. Making management decisions using unreliable data can result in bad decision making and can misinform the project on its long-term financial position which may have significant consequences if not corrected. We recommended in our December 2014 report that NASA conduct a cost risk analysis and follow best practices, which include updating it as risks change during the life of the program. Because the project is not going to conduct another cost risk analysis, putting independent surveillance in place to improve the accuracy of its risk- adjusted analysis—despite its weaknesses relative to the information a cost risk analysis provides—will provide better information to inform its decision making. In November 2012, we recommended that NASA improve the reliability of project EVM data by requiring its major spaceflight projects to implement a formal surveillance program that ensured anomalies in contractor-delivered data and in-house monthly EVM reports were identified and explained. NASA partially concurred with this recommendation but has not taken steps to require surveillance on projects like JWST. However, we continue to believe that improving the surveillance on projects will help reduce data anomalies from occurring like the ones we identified on JWST, resulting in better information and analyses to inform project decision making. To resolve contractor data reliability issues and ensure that the project obtains reliable data to inform its analyses and overall cost position, we recommend that the NASA Administrator direct JWST project officials to require the contractors to identify, explain, and document all anomalies in contractor-delivered monthly earned value management reports. We provided a draft of this report to NASA for comment. In written comments, NASA agreed with our recommendation. These comments are reprinted in appendix IV. NASA also provided technical comments, which have been addressed in the report, as appropriate. We are sending copies of the report to NASA’s Administrator and interested congressional committees. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 or chaplainc@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. Our objectives were to assess (1) the extent to which technical challenges have impacted the James Webb Space Telescope (JWST) project’s ability to meet its schedule commitments, (2) the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, and (3) the extent to which independent oversight provides insight about project risks to management. To assess the extent to which technical challenges have impacted the JWST project’s ability to meet its schedule commitments, we reviewed project and contractor schedule documentation, and held interviews with program, project, and contractor officials on the progress made and challenges faced building the different components of the telescope. We examined and analyzed monthly JWST project status reports to management to monitor schedule reserve levels and usage and potential risks and technical challenges that may impact the project’s schedule, and to gain insights on the project’s progress since our last report in December 2014. Further, we attended flight program reviews at the National Aeronautics and Space Administration (NASA) headquarters on a quarterly basis where the current status of the program was briefed to NASA headquarters officials outside of the project. We examined selected individual risks for elements and major subsystems from monthly risk registers prepared by the project to understand the likelihood of occurrence and impacts to the schedule based on steps the project is taking to mitigate the risks. We examined previous and current test schedules and plans to understand the sequence, what risks will be mitigated, which risks will continue, and any reductions to planned testing. Furthermore, we interviewed experts within and outside of NASA to identify criteria, best practices, and metrics that may be used to assess the project’s progress in reducing risk or provide insight into the health of the project. Finally, we interviewed project officials at Goddard, contractor officials from the Harris Corporation, the Jet Propulsion Laboratory, the Space Telescope Science Institute, and different divisions of Northrop Grumman Aerospace Systems concerning technological challenges that have had an impact on schedule, and the project’s and contractor’s plans to address these challenges. To assess the current cost status of the JWST project and the primary challenges that may influence the project’s ability to meet its future cost commitments, we reviewed and analyzed program, project, contractor, and subcontractor data and documentation and held interviews with officials from these organizations. We reviewed JWST project status reports on cost issues to determine the risks that could impact cost. We analyzed contractor and subcontractor’s workforce plans against workforce actuals to determine whether contractors’ are meeting their workforce plans. We monitored and analyzed the status of program, and project cost reserves in current and future fiscal years to determine the project’s financial posture. We evaluated the cost risk analysis conducted by NASA of the remaining Northrop Grumman work to determine the extent to which all applicable best practices from GAO’s Cost Estimating and Assessment Guide were used to build the analysis. Those best practices included the following: A probability distribution modeled each cost element’s uncertainty based on data availability, reliability, and variability. The correlation between cost elements was accounted for to capture risk. A Monte Carlo simulation model was used to develop a distribution of total possible costs and an S curve showing alternative cost estimate probabilities. The probability associated with the point estimate was identified. Contingency reserves were recommended for achieving the desired confidence level. The risk-adjusted cost estimate was allocated, phased, and converted to then year dollars for budgeting, and high-risk elements were identified to mitigate risks. A risk management plan was implemented jointly with the contractor to identify and analyze risk, plan for risk mitigation, and continually track risks. We examined and analyzed earned value management (EVM) data from two of the project’s contractors to identify trends in performance, whether tasks were completed as planned, and likely estimates at completion. We also conducted analysis to ensure the reliability of the data over a 17- month period. In addition, we examined and analyzed risk-adjusted analyses from NASA to determine what information they provide to the project, the risks incorporated, their reliability, and how the project is utilizing this information. We also discussed our assessment of the project’s data and analysis with program and project officials to obtain their input. To assess the extent to which independent oversight provides insight about project risks to management, we reviewed documentation and data from NASA relevant groups, the program, the project, and the Standing Review Board and held interviews with experts as well as officials from independent oversight entities. We analyzed NASA policy and guidance documents to understand the elements for setting up and managing a Standing Review Board. We also reviewed the Test Assessment Team and Independent Comprehensive Review Panel team reports to determine how independent oversight has provided insight to JWST in the past. We interviewed officials at NASA’s Independent Program Assessment Office, as well as past and current Standing Review Board members, to understand how Standing Review Boards are created, members are selected, and how structural and personnel changes are made over the life of NASA programs and projects, including JWST. We also interviewed and reviewed documentation and analysis provided by NASA’s Independent Verification and Validation group working on JWST’s software development to determine the extent to which this group is providing oversight of JWST software development, to determine the health of software development on JWST, and determine what kinds of problems remain. We did not independently review JWST’s software development. Our work was performed primarily at NASA headquarters in Washington, D.C.; Goddard Space Flight Center in Greenbelt, Maryland; the Independent Verification and Validation facility in Fairmont, West Virginia; and by video teleconference with officials from the Independent Program Assessment Office at Langley Research Center, Hampton, Virginia. We also visited the Jet Propulsion Laboratory in Pasadena, California; Northrop Grumman Aerospace Systems in Redondo Beach, California; and the Space Telescope Science Institute in Baltimore, Maryland. We conducted this performance audit from February 2015 to December 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 III: Organizational Chart for the James Webb Space Telescope (JWST) Program The Jet Propulsion Laboratory is the contractor for the development of the cryocooler, but has subcontracted most of the work to a different division of Northrop Grumman than the one that is responsible for OTE, spacecraft, and sunshield development. Cristina Chaplain, (202) 512-4841 or chaplainc@gao.gov. In addition to the contact named above, Shelby S. Oakley, Acting Director; Arthur Gallegos, Assistant Director; Jay Tallon; Assistant Director; Karen Richey, Assistant Director; Jason Lee, Assistant Director; Brian Bothwell; Patrick Breiding; Aaron Gluck; Laura Greifner; Michael Kaeser; Katherine Lenane; Silvia Porres; Carrie Rogers; Sylvia Schatz; and Ozzy Trevino made key contributions to this report. | JWST is one of NASA's most complex and expensive projects, at an anticipated cost of $8.8 billion. With significant integration and testing scheduled in the 3 remaining years until the planned launch date, the JWST project will need to continue to address many challenges and identify problems, many likely to be revealed during its rigorous testing to come. The continued success of JWST hinges on NASA's ability to anticipate, identify, and respond to these challenges in a timely and cost-effective manner to meet its commitments. Conference Report 112-284 included a provision for GAO to assess the project annually and report on its progress. This is the fourth such report. This report assesses (1) the extent to which JWST is meeting its schedule commitments and (2) the current cost status of the project, among other issues. To conduct this work, GAO reviewed monthly JWST reports, reviewed relevant policies, conducted independent analysis of NASA and contractor data, and interviewed NASA and contractor officials. The National Aeronautics and Space Administration's (NASA) James Webb Space Telescope (JWST) project is meeting its schedule commitments, but it will soon face some of its most challenging integration and testing. JWST currently has almost 9 months of schedule reserve—down more than 2 months since GAO's last report in December 2014—but still above its schedule plan and the Goddard Space Flight Center requirement. However, as GAO also found in December 2014, all JWST elements and major subsystems continue to remain within weeks of becoming the critical path—the schedule with the least amount of schedule reserve—for the overall project. Given their proximity to the critical path, the use of additional reserve on any element or major subsystem may reduce the overall project schedule reserve. Before the planned launch in October 2018, the project must complete five major integration and test events, three of which have not yet begun. Integration and testing is when problems are often identified and schedules tend to slip. At the same time, the project must also address over 100 technical risks and ensure that potential areas for mission failure are fully tested and understood. JWST continues to meet its cost commitments, but unreliable contractor performance data may pose a risk to project management. To help manage the project and account for new risks, project officials conducted a cost risk analysis of the prime contract. A cost risk analysis uses information about cost drivers, technical issues, and schedule to determine the reliability of a program's cost estimates. GAO found that while NASA's cost risk analysis substantially met best practices for cost estimating, officials do not plan to periodically update it. Instead, the project is using a risk-adjusted analysis to update and inform its cost position, but this analysis is a simplified version of a cost risk analysis—and not a replacement—and is based on contractor-provided performance data that contains anomalies that render the data unreliable. Further, the project does not have an independent surveillance mechanism, such as the Defense Contract Management Agency, to help ensure data anomalies are corrected by the contractor before being incorporated into larger cost analyses, as GAO recommended in 2012. As a result, the project is relying partially on unreliable information to inform its decision making and overall cost status. GAO recommends that the JWST project require contractors to identify, explain, and document anomalies in contractor-delivered monthly earned value management reports. GAO continues to believe that its 2012 recommendation to implement formal surveillance to help improve the reliability of contractor-provided data has merit and should be implemented. NASA concurred with the recommendation made in this report. |
DOD defines “UAS” as systems whose components include the necessary equipment, networks, and personnel to control unmanned aircraft—that is, aircraft that do not carry human operators and are capable of flight under remote control or autonomous programming. The components of a UAS include an unmanned aircraft ground control station from which a UAS pilot flies an aircraft, a communications terminal that receives signals from the aircraft and relays these signals to the ground control station, sensors installed on the aircraft that collect data and images that are then sent to the ground control station, and weapons that are attached to some unmanned aircraft. DOD classifies its UAS into five groups on the basis of their weight and capabilities, including airspeed and operating altitude. For example, group one UAS weigh fewer than 20 pounds, whereas group five UAS weigh more than 1,320 pounds. The Air Force UAS pilots fly three types of UAS in groups four and five5: the MQ-1 Predator, the MQ-9 Reaper, and the larger RQ-4 Global Hawk. The Army UAS pilots fly two types of UAS in groups three and four: the RQ-7B Shadow and the MQ-1C Gray Eagle. Servicemembers in the Air Force and the Army who operate the larger and more capable UAS in group three or above are either manned- aircraft pilots or pilots specializing in flying UAS. In contrast, personnel who operate the less capable UAS that are classified in groups one and two generally operate UAS as an additional duty. The Air Force and the Army use different strategies to assign personnel to this position. The Air Force assigns four different types of officers to this position: (1) temporarily re-assigned manned-aircraft pilots, (2) manned-aircraft pilots and other Air Force aviation officers who have converted to this career field permanently, (3) graduates of manned-aircraft pilot training on their first assignment, and (4) pilots who specialize in flying UAS with limited manned-aircraft experience. The Army assigns enlisted personnel to this position and they receive no training on how to fly a manned-aircraft. Over the past decade, the size, sophistication, and cost of DOD’s UAS have grown to rival DOD’s portfolio of traditional manned-aircraft systems and UAS have become integral to warfighter operations. However, the demand for UAS has outpaced the Air Force’s ability to produce UAS pilots using the existing training pipeline. To meet the demand for UAS pilots, the Air Force has relied on support from the Air National Guard and has pursued efforts to increase the number of UAS pilots. For example, the Air Force trained traditional manned-aircraft pilots to fly UAS and placed graduates of manned-aircraft pilot training into UAS training rather than in advanced manned-aircraft training. In 2010, the Air Force created a dedicated UAS pilot career field and developed a training program for pilots who specialize in flying UAS. As of 2015, the Secretary of Defense had tasked the Air Force to provide 60 “combat lines” to combatant commanders, which is the measure of the capability to provide near- continuous 24-hour presence of a UAS over a specific region on Earth. At the same time, in March 2016, the Chief of Staff of the Air Force testified that the DOD-wide requirement is 90 combat lines and in addition to the Air Force, DOD is relying on the Army and private sector contractors, among others, to help meet this increased requirement. Various offices within the Air Force, the Army, and the Office of the Secretary of Defense have roles and responsibilities to evaluate the UAS pilot “workforce mix,” which is the mix of military, federal civilian, and contractors that might be used to fill UAS pilot positions. Air Force and Army: Section 129a of title 10 establishes that the Secretaries of the Air Force and the Army have overall responsibility for the requirements determination, planning, programming, and budgeting for policies and procedures for determining their most appropriate and cost-effective mix of personnel. DOD Directive 1100.4 directs the services to designate an individual with full authority for manpower management, and DOD Instruction 1100.22 directs the heads of DOD components to require their designated manpower authority to issue implementing guidance requiring the use of the instruction when determining the workforce mix for current, new, or expanded missions. DOD Instruction 7041.04 requires the component heads to use the business rules in the instruction when estimating the full costs of a workforce in support of force structure decisions and when performing a cost benefit analysis, an economic analysis, or a business analysis in support of workforce mix decisions—including when determining the workforce mix of new and expanding mission requirements not exempt from private-sector performance and when deciding whether to use federal civilians to perform functions that are being performed by contractors. Office of the Secretary of Defense: According to Section 129a of Title 10 of the United States Code, which governs DOD’s general policy for total force management, the Secretary of Defense is required to establish policies and procedures for determining the most appropriate and cost efficient mix of military, federal civilian, and contractor personnel to perform the missions of the department. The statute also requires that, within the Office of the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness has overall responsibility for guidance to implement such policies and procedures. DOD policies also establish roles and responsibilities for the Office of the Secretary of Defense: DOD Directive 1100.4 establishes DOD policy concerning manpower management. The directive also establishes multiple responsibilities for the Office of the Under Secretary of Defense for Personnel and Readiness, including that the office review the personnel management guidelines and practices of DOD components for compliance with established policies and guidance. DOD Instruction 1100.22 implements policy set forth under DOD Directive 1100.4 and establishes policy, assigns responsibilities, and prescribes procedures for determining the appropriate mix of military, federal civilian, and contractor personnel. The instruction assigns to the Under Secretary of Defense for Personnel and Readiness the responsibility for overseeing programs that implement the instruction for working with the heads of DOD components to ensure that they establish policies and procedures consistent with this instruction. DOD Instruction 7041.04 states that the Under Secretary of Defense for Personnel and Readiness, the Comptroller, and with the Director of Cost Assessment and Program Evaluation are responsible for developing a cost model applicable DOD-wide to employ business rules for estimating and comparing the full costs of DOD manpower and contract support. The Air Force and the Army have not fully applied four of the five key principles for effective strategic human capital planning in the actions taken to resolve the challenges that each faces in managing its UAS pilot workforce (see table 1 for a summary of our assessment). The Air Force has continued to experience challenges staffing its UAS pilot career field, and the Army has continued to experience challenges ensuring that units that operate the RQ-7B Shadow UAS conduct homestation training to address UAS unit readiness concerns. One key principle for effective strategic human capital planning is that organizations can benefit from ensuring that top leadership sets the overall direction and goals of human capital planning and that organizations can also benefit from including employees and stakeholders in developing and implementing human capital plans. Air Force—applied. We determined that the Air Force applied this principle in the actions taken to address UAS pilot shortages because the Air Force has involved top senior Air Force leaders, stakeholder offices, and UAS pilots in UAS units to develop a strategy (i.e., the Get Well Plan) to address UAS pilot shortages. In documentation of the Get Well Plan the Air Force describes its UAS pilot shortage, the plan’s goals, and initiatives to address the shortages, such as by reassigning some of the UAS workload to Air National Guard units and by supporting training and operations through the use of contractors. According to Air Force headquarters officials, in 2015 top senior Air Force leaders developed the Get Well Plan, and the Secretary of the Air Force and other top senior leadership helped develop the plan’s two goals to staff 100 percent of the positions for (1) instructors at the UAS pilot school and (2) combat UAS pilots. Further, stakeholder offices such as the Air Combat Command and the Air Force Special Operations Command participated in developing the plan, according to headquarters Air Force officials. In addition, the Air Combat Command’s Culture and Process Improvement Program Office surveyed and interviewed UAS pilots in UAS units from August 2015 through September 2015 to identify any challenges the pilots and units faced and subsequently developed over 150 initiatives to address these challenges. For example, according to a draft report of this effort, UAS pilots reported that their morale was low and some attributed this to the isolated locations of UAS bases. In response, the Air Force announced that it would establish new UAS units at up to two existing Air Force bases in possible locations that include Arizona, Georgia, and Idaho. Army—partially applied. Top senior Army leaders and stakeholders developed a strategy to address UAS unit training shortfalls and UAS unit readiness issues including UAS mishaps that the Army identified in 2015, but we determined that the Army had partially addressed this principle because the Army did not involve UAS pilots serving in UAS units in this effort. According to senior officials from the Army Aviation Center of Excellence, the Army’s top senior leaders, stakeholders from the Army Combat Readiness Center, and other organizations prepared a briefing in March 2015 that documented findings about UAS training shortfalls, UAS mishaps, and an Army strategy to address UAS training shortfalls. The strategy included initiatives to (1) increase the amount of flight training that UAS pilots conduct at their homestations, (2) issue guidance on UAS training requirements, and (3) establish a system to report the amount of training that UAS units complete to higher level commands. According to Army officials, by addressing UAS unit training shortfalls, the Army could address those UAS mishaps that are due to human error. Army officials told us that the Army had involved three senior enlisted UAS pilots serving in management support positions at the Army Aviation Center of Excellence. These three UAS pilots, who supported top senior leaders who developed the strategy communicated with UAS units to verify the amount of training that they had completed and collect information on unit needs, among other things, according to senior officials at the Aviation Center of Excellence. However, this approach does not constitute involving employees in developing a strategy to address UAS training shortfalls and mishaps. The senior enlisted UAS pilots involved in developing the Army’s strategy are not currently serving in UAS units but instead serve in a support role to senior leadership that oversee Army UAS programs. However, the Army was experiencing training shortfalls within UAS units, not at higher level commands that oversee these units. Without soliciting input directly from UAS pilots in UAS units, such as by conducting focus groups or surveys, the Army is not able to capture and incorporate the unique perspective of employees who are conducting the day-to-day work of serving as UAS pilots. Had it done so the Army may have been able to identify any challenges that these pilots might face in completing their training or in avoiding mishaps. By collecting input from personnel serving as unit-level UAS pilots, the Army could help ensure that any strategy developed might address root causes of training shortfalls and mishaps that top leadership and other stakeholders might not be aware of. For example, as discussed above, the Air Force involved UAS pilots in its planning to address quality-of-life challenges that those pilots face and these pilots were uniquely suited to identify those challenges. Responding to those challenges, the Air Force developed an initiative to establish additional UAS bases to address the low morale that was attributed to serving in the isolated locations of some UAS bases. Another key principle for effective strategic human capital planning is that it is important for organizations to develop human capital strategies that are tailored to organizations’ unique needs and these strategies can be used to address human capital conditions that need attention such as gaps, or shortages, in critical skills and competencies. Air Force—partially applied. The Air Force has developed a strategy designed to address UAS pilot shortfalls and the Air Force has increased the staffing levels of UAS pilots; however, we determined that the Air Force partially applied this principle because its strategy is not fully tailored to address persistent gaps such as continuing to rely on manned- aircraft pilots, limitations in cadet interest in the UAS pilot career field, and the high workload of UAS pilots. Since we reported on UAS pilot shortages in April 2014, the Air Force has developed a personnel strategy designed to help improve the staffing level of the UAS pilot career field. For example, the Air Force’s UAS workload was reduced when the Secretary of Defense reduced the number of UAS combat lines that Air Force military units fly from 65 to 60 and the active-duty UAS pilot workload was also reduced when the Air Force reassigned 3 combat lines from active-duty units to Air National Guard units. The Air Force also extended the assignments of manned- aircraft pilots who were serving as temporary UAS pilots and increased the number of UAS pilot candidates that it brought in to the Air Force. The Air Force as of July 2016 had met the goal in the Get Well Plan to staff 100 percent of the UAS pilot positions needed for combat. The Air Force has also made progress in achieving the second goal in the Get Well Plan, to staff 100 percent of the instructor pilot positions, staffing 93 percent of these positions as of July 2016. Further, the Air Force improved the overall staffing level of the UAS pilot career field staffing 90 percent of the total number of required UAS pilot positions with pilots who specialize in flying UAS with temporarily assigned manned-aircraft pilots as of March 2016. This is an improvement from the 85 percent of these positions that the Air Force had filled when we reported on UAS pilot shortages in 2014. However, we determined that the Air Force partially applied this principle because the Air Force has not developed human capital strategies that are fully tailored to address issues that the Air Force has to eliminate remaining shortfalls. For example, the Air Force continues to rely on a significant number of manned aircraft pilots who are temporarily reassigned to fly UAS. As of March 2016, 37 percent of the personnel filling UAS pilot positions were temporarily assigned manned-aircraft pilots. Air Force Headquarters officials told us that no other career field in the Air Force relies on temporary personnel to the extent that the UAS pilot career field does. Manned-aircraft pilots who are temporarily serving as UAS pilots acquire experience in flying UAS and the unique needs of how UAS operate in operational settings. When these manned aircraft pilots leave the UAS pilot career field and return to assignments flying manned aircraft, the UAS pilot career field loses that experience. Without developing strategies and tools that are more fully tailored to address this gap, the Air Force’s UAS pilot workforce will continue to lose the experience that temporarily assigned manned aircraft pilots have acquired. Further, the Air Force strategy is not fully tailored to address the issue of a lack of cadet interest in the UAS pilot career field at the Air Force Academy and in the Reserve Officer Training Corps, and Air Force headquarters officials told us that this is a challenge for the Air Force. Air Force officials at the Air Force Academy and Reserve Officer Training Corps told us that most cadets who join the Air Force express limited interest in becoming a UAS pilot and instead want to become a manned- aircraft pilot. Air Force headquarters officials told us that the Air Force has taken some steps to address this issue, including headquarters personnel visits to some Reserve Officer Training Corps units at several universities to discuss with cadets the merits of the UAS pilot career field. However, the Air Force’s strategies are not tailored to address the lack of cadet interest in the UAS pilot career field. In addition, the Air Force’s strategy has not been tailored to address the high workload of UAS pilots. For example, the Air Force estimates that its UAS pilots fly their aircraft in operations much more than other pilots in the Air Force. In particular, the Air Force estimates that UAS pilots fly an average of 900 hours annually, while fighter pilots fly an average of 200 hours annually, and pilots of cargo and air refueling tankers fly an average of 500 hours annually. Further, Air Force headquarters officials told us that most of the hours that fighter pilots fly are to conduct training exercises while virtually all of the hours that UAS pilots fly are to conduct operations (see fig. 1). Air Force officials stated that it is difficult to compare the number of hours that different types of pilots fly and draw conclusions about the comparative effects of differing workloads. However, as we reported in 2015, the amount of time that Air Force UAS pilots work leaves them little time to train. Air Force headquarters officials agreed with our assessment that UAS pilot shortages remain a significant challenge for the Air Force and called attention to the comments made by the Chief of Staff of the Air Force acknowledging these challenges in August 2016. Officials told us that the shortages in the UAS pilot and fighter pilot careers are the two areas of greatest concern regarding the Air Force operations career fields. In addition, an Air Force headquarters official told us that the Air Force has not advocated for providing additional personnel to fill the remaining unmet UAS pilot requirements because the Air Force would not be able to provide enough personnel to fully meet them. Without tailoring its strategy to address this shortfall between all UAS pilot position requirements and the actual positions filled, the Air Force risks continuing to not meet its requirements. Army—partially applied. The Army developed a strategy to address shortfalls in UAS unit training, but we determined that the Army partially applied this principle because its strategy is not fully tailored to address its issues such as a lack of adequate facilities and access to airspace, resulting in the Army experiencing considerable training shortfalls for UAS pilots. As discussed earlier, the Army’s strategy for addressing training shortfalls includes a number of initiatives: (1) increasing the amount of flight training that UAS pilots conduct at their homestation, (2) issuing guidance on UAS training requirements, and (3) establishing a system to report the amount of training that UAS units complete to higher level commands. However, according to data provided by the Army Aviation Center of Excellence, in fiscal year 2015 61 of the 73 RQ-7B Shadow units that were training at their homestation flew an average of 129 hours of the 340-hour unit goal, and as of the end of the third quarter in fiscal year of 2016, 68 of the 78 RQ-7B Shadow units flew an average of 79 hours of the 340-hour unit goal (see fig. 2). A senior Army official acknowledged that continued UAS unit training shortfalls is a concern for the Army. According to Army officials, a lack of adequate facilities, lack of access to airspace, and the inability to fly more than one UAS at a time contributed to the lack of progress toward improving UAS homestation training. Without revising its strategy to address root causes of training shortfalls to address these contributing factors, the Army risks that its Shadow units may continue to train at levels that are well below Army requirements. Another key principle for effective strategic human capital planning is that organizations should periodically measure (1) their progress toward achieving their human capital goals, and (2) the extent to which achieving those goals helps the organization achieve programmatic goals. Air Force—partially applied. Air Force officials at headquarters, Air Combat Command, Air Force Special Operations Command, and the Air National Guard monitor and evaluate progress toward meeting the human capital goals in the Get Well Plan. In particular, Air Force documentation shows that headquarters officials collect data from the Air Force Personnel Center on the extent to which positions for combat UAS pilots and instructors are filled—the two goals in the Air Force’s Get Well Plan. Officials in this headquarters office then provide these data to officials within the Air Combat Command, the Air Force Special Operations Command, the Air National Guard, and the Air Force Reserve Command, which also monitor these human capital goals according to an Air Force official. For example, officials from the Air Combat Command headquarters told us that they provide updates to the leadership of the Air Combat Command on the status of the Air Force Get Well Plan. In addition, officials at Air Combat Command told us that they use data from the Get Well Plan updates that show which units are more fully staffed to identify those that can support training personnel on any new equipment that the Air Force deploys while maintaining combat operations. However, we determined that the Air Force partially applied this principle because the Air Force does not monitor the extent to which achieving the human capital goals in its Get Well Plan helps it to achieve programmatic goals. According to headquarters Air Force officials, the Air Force has three program goals that are related to addressing UAS pilot shortfalls: to (1) meet combat demand, (2) staff enough personnel to UAS units to allow UAS pilots time to train and take part in development activities, and (3) provide surge UAS combat capabilities when needed. When we asked Air Force officials how the Air Force measures the extent that achieving goals in the Get Well Plan helps it to achieve its three programmatic goals, these officials provided documentation that shows the Air Force monitors the sequencing of requirements that it needs in its various UAS units. However, this approach does not constitute an approach to measure how achieving goals in its Get Well Plan helps it to achieve its three programmatic goals. For example, the documentation does not address how achieving goals it the Get Well Plan will help the Air Force provide UAS pilots time to train or help the Air Force provide surge UAS capabilities. Until the Air Force begins monitoring the extent to which achieving the human capital goals in its Get Well Plan helps it to achieve programmatic goals, the Air Force will not know whether its strategies are having the effect that the Air Force intends regarding its program goals. Army—applied. The Army Forces Command initiated a monthly aviation readiness review in May 2016 that is overseen by the Commanding General of the Army Forces Command to monitor the extent to which the Army is achieving its goal to increase UAS unit training, according to Army officials. During these monthly reviews, the Commanding General reviews the amount of training hours that UAS units have flown, according to Army officials. In addition, through weekly meetings senior Army officials including general officers from organizations that are stakeholders to UAS readiness, monitor progress regarding the extent to which the initiatives of the strategy are helping the Army to achieve its program goal for UAS units, which is to increase UAS unit readiness. During these meetings, Army officials monitor the status of the initiatives in the Army’s strategy, the status of UAS unit training, and the status of UAS unit readiness, according to Army officials. Another key principle for effective strategic human capital planning is that organizations should ensure that flexibilities are part of the overall human capital strategy to ensure effective workforce planning. Human capital flexibilities are any policies, practices or adjustments to existing policies and practices that an agency has the authority to implement and that it uses to manage its workforce to accomplish its mission. For example, agencies may implement policies related to recruiting, retention, work-life policies, and training, among other things. Air Force—partially applied. The Air Force has taken some steps to incorporate two flexibilities into its strategy to address UAS pilot shortages; however, we determined that the Air Force partially applied this principle because it is too early to assess whether these steps will result in effective workforce planning that reduces the Air Force UAS pilot shortages and the Air Force has not explored additional flexibilities that it may need to use to address additional requirements for UAS pilots. First, the Air Force is working on an initiative that would enable it to provide UAS pilots with “dwell time”—a time during which servicemembers are at their homestation during which they are able to take leave, attend training, and recuperate. As part of its Culture and Process Improvement effort, Air Force UAS pilots recommended that the Air Force provide them dwell time. Because most Air Force UAS pilots remotely operate UAS from Air Force bases in the United States they can live at home. However, the Secretary of the Air Force noted in January 2015 that UAS pilots fly 6 days in a row and work 13 to 14 hour days on average. The Secretary noted that an average manned-aircraft pilot flies between 200 and 300 hours per year. The Air Force provides dwell time to servicemembers who return from certain overseas deployments. In particular, an Air Force policy states that for every 1 year an active duty servicemember is deployed to certain overseas locations, they are required to be assigned for 2 years at their homestation. However, this requirement does not apply to UAS pilots because most operate their UAS remotely from the United States. In October 2016, the Commanding General of the Air Combat Command drafted a request to the Chief of Staff of the Air Force to provide dwell time to UAS pilots. According to a draft memorandum of the request, for every month that an Air Force UAS unit spends performing a combat role the personnel in that unit would subsequently receive half a month to focus solely on training. As of October 2016, the Air Force had not implemented this initiative and the Commanding General of the Air Force’s Air Combat Command testified before the Senate Armed Services Committee’s Subcommittee on Airland in March 2016 that to implement dwell time for UAS pilots the Air Force would need to increase the size of its UAS capability by 25 to 30 percent. Second, in September 2016, the Air Force increased the maximum annual retention pay for UAS pilots from $25,000 to $35,000, the maximum amount allowed under the authority provided in the National Defense Authorization Act for Fiscal year 2016. It is too early to assess the effectiveness of this flexibility in addressing the persistent UAS pilot shortages, because this flexibility was only recently incorporated and might be followed by a corresponding bonus for manned-aircraft pilots. Earlier in an April 2016 letter that the Secretary of the Air Force sent to the Chairman of the Senate Armed Services Committee, the Secretary expressed the need to ensure equity in the amount of retention bonuses that the Air Force pays UAS pilots and manned-aircraft pilots. However, during the course of our review, Air Force officials acknowledged that in March 2016 and April 2016 the Air Force had indicated to Congress the need to authorize an increase to the maximum annual amount of retention bonus that the Air Force pays to manned-aircraft pilots to $60,000 per year—about 70 percent more than the amount that the Air Force will pay UAS pilots. While the Air Force has taken some steps to incorporate the dwell time and retention pay flexibilities into its strategy to address UAS pilot shortages, it is too early to tell whether these steps will result in effective workforce planning outcomes that reduce Air Force UAS pilot shortages. While the Air Force has taken steps to implement flexibilities to its strategy, Air Force requirements for the number of UAS pilots it needs may underrepresent those needs and Air Force leadership expect demand for UAS pilots to grow, but the Air Force has not explored additional flexibilities to meet these needs. In 2014, we found that the Air Force had conducted a study in 2008 to determine the required number of UAS pilots in UAS units, but the study did not account for all tasks those units perform. Air Force officials stated that, as a result, the requirement was probably too low. We recommended that the Air Force update its requirement for UAS units and the Air Force concurred with our recommendation. However, since we issued our report, the Air Force has not updated its requirement, although it conducted a new study in 2015. In addition, in March 2016, the Chief of Staff of the Air Force testified that he expected that the Air Force will continue to experience growth in the demand for UAS capabilities in the long term, and that to meet this expected growth, the Air Force would need more personnel. Updating the requirement for the number of UAS pilots in a unit and growth in future demand for Air Force UAS capabilities could both result in an increase in the number of UAS pilots that the Air Force needs. However, the Air Force has not explored the potential of adding flexibilities related to recruiting, such as recruiting bonuses or other recruitment incentives according to an Air Force official. Without exploring additional flexibilities that the Air Force may need in the future, the Air Force may not be poised to meet future needs for additional pilots. Army—partially applied. The Army has taken some steps to incorporate flexibilities into its strategy to address UAS unit training shortfalls; however we determined that the Army partially applied this principle because it is too early to assess whether these steps will result in effective workforce planning that reduces Army UAS training shortfalls. As we noted earlier, Army officials told us that Army UAS units continue to face training shortfalls due to inadequate facilities and shortfalls in airspace. To address these factors, some Army units are implementing flexibilities to overcome these factors at their installations, according to Army officials. For example, to overcome airspace restrictions, a unit at Joint Base Lewis-McChord, Washington, travels to the Yakima Training Center in Washington where there is more available airspace to conduct training. In addition, personnel at the National Training Center at Fort Irwin, California launch UAS and then transfer control of the aircraft to UAS pilots at Fort Hood, Texas, which increases the opportunities for the pilots at Fort Hood to train. However, as we noted earlier, the Army continues to experience training shortfalls and, as of the end of the third quarter in fiscal year of 2016, 68 of the 78 RQ-7B Shadow units that were not deployed flew an average of 79 hours of the 340-hour minimum identified by the Army in its UAS Holistic Review. While the Army has taken steps to incorporate flexibilities into its strategy to address UAS unit training shortfall, it is too early to tell whether these steps will result in effective workforce planning outcomes that reduce these shortfalls. A final key principle for effective strategic human capital planning is that organizations should determine the skills and competencies that are critical to successfully achieving missions and goals. Air Force—partially applied. The Air Force has determined some competencies that UAS pilots need; however, we determined that the Air Force partially applied this principle because a multiservice research team identified additional competencies important for UAS pilots that the Air Force has not fully incorporated into its method to assess the competencies of its UAS pilot candidates. However, the Air Force has taken steps to ensure that its assessment approach is valid and the Air Force is working to incorporate findings from relevant research into the methods it uses to assess the competencies of UAS pilot candidates, according to Air Force researchers. The Air Force uses selection criteria to identify candidates who are more apt to succeed in UAS pilot training and perform well as a UAS pilot. To make its selections, the Air Force assesses whether candidates for UAS pilot training display a certain amount of aptitude in competencies such as instrument comprehension, time sharing, and spatial orientation. The Air Force evaluates whether UAS pilot candidates display these competencies to a sufficient degree using aptitude tests that are also used to assess the competencies of manned-aircraft pilot candidates including the Air Force Officer Qualification Test, the Test of Basic Aviation Skills, and the Multi-Tasking Test. Officials at the Air Force Personnel Center told us that their research has found that UAS pilots and manned-aircraft pilots need many of the same competencies to be successful. Air Force researchers told us that because the Air Force adopted the manned-aircraft pilot selection method to select UAS pilots, Air Force researchers conducted validation research to ensure that this approach was sound and found that this method is a valid predictor of whether UAS pilot candidates will successfully complete UAS training. According to the Society for Industrial Organizational Psychology—a professional organization of researchers devoted to the conduct and application of workplace research including personnel selection— validation is the most important consideration when developing a procedure to select employees because it provides evidence to provide sound scientific basis for organizations to interpret scores that candidates achieve on aptitude assessment tests. However, researchers have identified additional competencies that are important for UAS pilots to possess and the Air Force has not incorporated an assessment for all of these competencies into its method to select UAS pilots. Specifically, the Office of Naval Research initiated a multiphased research project in May 2014 to improve the processes of selecting, training, and equipping UAS pilots across the services and identified 78 competencies that are “moderately,” “highly,” or “extremely important” for UAS pilots. The team found that the Air Force tests measure 45 of the 78 important competencies, including some of the most important ones such as spatial orientation and time sharing. However, the team found other important competencies that are not measured by the Air Force’s tests, such as attention to detail. Air Force Personnel Center researchers told us that, while the Air Force has no measures that focus specifically on measuring attention to detail, another Air Force test partially measures attention to detail. The researchers noted that some of the competencies that Air Force tests do not specifically measure are related to other competencies that the Air Force tests do measure and that when two competencies are related, the Air Force may only need to assess if a candidate has aptitude for one of those competencies. Moreover, they told us that the Air Force’s tests do not measure all of the competencies that are important for UAS pilots. For example, they told us that the Air Force does not have a test to measure oral comprehension and listening that focuses on understanding messages similar in complexity to those that must be processed by UAS pilots. Air Force researchers acknowledge that Air Force tests do not measure all of the competencies that are important for UAS pilots. However, the Air Force has taken a number of positive steps to determine the skills and competencies important to UAS pilots. It has updated its personnel selection methods to incorporate findings from research it has conducted, and has efforts underway to improve the ability to select the best UAS pilot candidates, including by conducting additional research and testing a tool that measures multitasking ability, a competency important for UAS pilots, according to Air Force researchers. Army—partially applied. The Army has determined some competencies that UAS pilots need; however, we determined that the Army partially applied this principle because the multiservice research team we mentioned earlier identified additional competencies important for UAS pilots that the Army has not incorporated into its method to select UAS pilot candidates. In addition, an Army-funded research project recommended that the Army supplement the test the Army currently uses to select UAS pilot candidates with additional, existing tests that the Army does not use, but the Army has not taken action to implement this recommendation. In addition, the Army could not provide evidence that it has validated that its personnel selection method has utility in predicting the success of the UAS pilot candidates in training or on the job. The Army uses selection criteria to identify candidates that are more apt to succeed in UAS pilot training and perform well as a UAS pilots and to make its selections, the Army assesses whether candidates for UAS pilot training display a certain amount of aptitude in four competencies: Verbal expression: the ability to obtain information from written passages, select the correct meaning of words presented in context, and identify the best synonym for a given word; Arithmetic reasoning: the ability to solve arithmetic word problems; Auto and shop information: the knowledge of automobile technology, tools, and shop terminology and practices; and Mechanical comprehension: knowledge of mechanical and physical principles. Since at least 2002 the Army has evaluated whether UAS pilot candidates can display these competencies to a sufficient degree using the Armed Services Vocational Aptitude Battery, which is a test that measures the competencies of people who apply to join the military services as enlisted personnel. Officials at the Army Aviation Center of Excellence were not able to provide information to explain how the Army determined that its UAS pilots needed to possess these particular competencies because they told us that these actions took place over a decade ago when Army UAS were organized under the military intelligence branch of the Army. However, as we noted earlier, researchers from a multiservice research team have identified additional competencies that are important for UAS pilots to possess and the Army has not incorporated an assessment for most of these competencies into its method to select UAS pilots. Specifically, the Armed Services Vocational Aptitude Battery measures just 3 of the 78 competencies that the multiservice research team determined are “moderately,” “highly,” or “extremely important” for UAS pilots. We note, however, that the research team also reported that the battery may still be a valuable indicator of UAS pilot aptitude. In addition, researchers funded by the Army Research Institute found additional competencies that are important for Army UAS pilots to possess and recommended that the Army supplement the Armed Services Vocational Aptitude Battery with additional, existing measures to assess these important competencies. Specifically, the researchers reported in 2007 that the competencies that Army UAS pilots need had likely changed based on a change in the missions, operations, and the organization of Army UAS when responsibility for UAS training was reassigned from the Army’s Military Intelligence Branch to the Army’s Aviation Branch. The researchers identified 49 competencies that are critical for UAS pilots and recommended that the Army use existing tests that the Army and Navy use to measure additional competencies. However, the Army has not implemented this recommendation. An official at the Aviation Center of Excellence told us that senior officials in the Army decided not to use this test because the Army did not have any had not identified any problems in selecting UAS pilots using the Armed Services Vocational Aptitude Battery. However, Army officials could not provide evidence that the Army has validated that the Armed Services Vocational Aptitude Battery is a valid predictor of the training performance or job performance of UAS pilot candidates. According to the Society for Industrial Organizational Psychology, validation is the most important consideration when developing a procedure to select employees because it provides evidence to provide sound scientific basis for organizations to interpret scores that candidates achieve on aptitude assessment tests. However, officials we spoke with at Army headquarters, the Army Aviation Center of Excellence, and the Army Research Institute were not able to determine whether the Army had conducted such validation research to determine that the Armed Services Vocational Aptitude Battery is an effective predictor of success of UAS pilot candidates in training or job performance. Army officials told us that the Army is satisfied with its approach to selecting candidates for its UAS pilot training because UAS pilot candidates perform well in training and in operational units. However, other Army officials told us that senior Army leaders pressure officials at the schoolhouse to ensure that UAS pilot candidates make it through training, in some cases to provide enough personnel UAS units. Without validating that the Armed Services Vocational Aptitude Battery is an effective predictor of UAS candidate performance in UAS pilot training and job performance, the Army may not be basing decisions to select individuals for the UAS pilot career field on sound evidence. In addition, without incorporating findings from research that has identified additional, important UAS pilot competencies, the Army may not be taking advantage of key benefits associated with effective personnel selection that could include reducing training costs, improving job performance, and enhancing the effectiveness of the Army’s UAS organizations. The Air Force and the Army have not evaluated their workforce mix—that is the mix of military, federal civilian, and private sector contractor personnel—to determine the extent to which these personnel sources could be used to fly UAS. Furthermore, although neither the Air Force nor the Army has evaluated how and to what extent federal civilians could be used as UAS pilots, both services are using private sector contractors to fly some UAS. DOD Directive 1100.4 Guidance for Manpower Management articulates DOD policy that assigned missions shall be accomplished using the least costly mix of military, federal civilian and private sector contractor personnel consistent with military requirements and other needs of the department. Moreover, the Air Force and the Army have conducted limited analysis to determine whether federal civilians or private sector contractors would perform UAS pilot functions at a more efficient cost. DOD Instruction 1100.22 Policy and Procedures for Determining Workforce Mix establishes the workforce mix decision process, which includes the consideration of cost as a deciding factor in workforce mix decisions. DOD Instruction 1100.22 directs that among other considerations when establishing a workforce mix, DOD components shall conduct a cost analysis to determine the low-cost provider for all current, new or expanding mission requirements and for functions that have been contracted for but could be performed by federal civilian employees. Over time, the Air Force and Army UAS platform capabilities have evolved, but neither the Air Force nor the Army has evaluated its current UAS pilot workforce mix to determine an effective and efficient mix of personnel for meeting mission needs. The Air Force and Army UAS pilot workforces are primarily made up of military personnel–both active duty and National Guard and Reserve–for positions to fly UAS because the UAS pilot position includes functions that are designated for military personnel, such as direction and control of combat situations and laser designation of targets. As stated previously, the Air Force primarily uses officers to fly its UAS and the Army uses enlisted personnel to perform this function. In addition, both the Air Force and the Army use private sector contractors as UAS pilots in government-owned, private sector contractor operated (GOCO) units. According to Air Force and Army officials, the GOCO units only fly intelligence, surveillance, and reconnaissance missions on unarmed UAS. Air Force and Army UAS capabilities have evolved over time, but neither service has evaluated its UAS pilot workforce mix. For example, the MQ-1 Predator UAS was established in 1996 as a reconnaissance aircraft and was weaponized in 2002 with hellfire missiles, adding new capabilities such as precision-strike. In 2007 the Air Force added the MQ-9 Reaper UAS, which is similar to but larger and more powerful than the MQ-1 Predator UAS. DOD Instruction 1100.22 tasks the heads of DOD components to issue implementing guidance requiring the use of the instruction’s policies and procedures for workforce mix when determining the appropriate mix for current, new, or expanded missions. Despite the changes in capabilities and usage to both MQ-1 Predator and MQ-9 Reaper UAS, the Air Force has not evaluated its current workforce mix for UAS pilots as described in DOD Instruction 1100.22. According to an Air Force headquarters official, the Air Force has been focused on addressing its pilot shortages but agreed that it should also evaluate its workforce mix for UAS pilots. Army headquarters officials told us that a change in mission or a new airframe could trigger an evaluation. Since the Army first established a UAS pilot specialty in 1990, the Army has acquired new UAS platforms with additional mission capabilities, and has expanded its use of UAS. For example, when the Army UAS pilot career specialty was first established in 1990, the Army flew the RQ-2A Pioneer UAV, which performed missions such as reconnaissance, surveillance, and battle damage assessment. In contrast, some Army UAS pilots currently fly the MQ-1C Gray Eagle, which is a larger, weaponized UAS with longer endurance and additional mission capabilities, including attack capabilities. In addition, in 2003, the Army transferred its UAS program from its Military Intelligence Branch to the Aviation Branch. According to a 2007 Army Research Institute study on the selection of Army UAS pilots, with that shift there was also an increase in the number and types of UAS employed by the Army and changes in UAS missions and operations. Like the Air Force, despite changes to its UAS platforms and organization, the Army has not evaluated its UAS pilot workforce mix because, according to Army headquarters officials, its current workforce is working and meets mission requirements. However, evaluating its UAS pilot workforce mix could help the Army ensure that it is using the minimum personnel resources organized and employed to provide the maximum effectiveness and combat power, which DOD articulates as the guiding principle of DOD manpower management. The Air Force and the Army have not used federal civilians as UAS pilots or evaluated how and to what extent federal civilians may be used in the future, even though both services are using private sector contractors to fly UAS in GOCO units. DOD Directive 1100.4 articulates DOD policy that manpower shall be designated as federal civilian except when military personnel are required for such reasons as law, command and control of crisis situations, combat readiness, or when military-unique knowledge and skills are required for successful performance of the duties, among other reasons. Air Force headquarters officials stated that the Air Force had not evaluated the use of federal civilians as UAS pilots, but agreed that the Air Force should consider how federal civilians may be used for UAS pilot positions. During the course of our review, the Air Force began to take initial steps to evaluate the use of federal civilians to fly its UAS, providing a response in May 2016 and then again in July 2016 to a congressional inquiry regarding DOD’s plans to replace contracted UAS pilots with military UAS pilots. Specifically, in May 2016 the Air Force issued a 3-page response comprising fiscal year 2018 estimates for personnel, initial investment, and sustainment costs associated with using military, federal civilian, or private sector contractor personnel to fly 8 UAS combat lines and totaling the estimates for a period of 5 years. In July 2016, the Air Force updated the May 2016 response, issuing a 4-page document revising the cost estimates so that they included the respective personnel, initial investment, and sustainment costs for calendar year 2017, instead of for the 5-year time frame. The July 2016 document also included additional assumptions that the Air Force had used to inform its development of the cost estimates, such as assumptions related to the Air Force’s decision to exclude certain costs from the estimates when those costs were assumed to be common across the three personnel groups, and the assumptions regarding costs to acquire equipment for private sector contractor units and build facilities for military or federal civilian personnel. The Air Force headquarters official who provided us the documents said he was not aware of any plans to take additional steps to evaluate the use of federal civilians to fly UAS. The Air Force and the Army stated that federal civilians are limited in the UAS pilot functions that they can perform, but both services use private sector contractors to augment their UAS pilot personnel and private sector contractors are further restricted when compared with federal civilians. In its July 2016 congressional inquiry response, the Air Force stated that both federal civilians and private sector contractors would be limited to intelligence, surveillance, and reconnaissance missions. Army headquarters officials stated that the Army has not used federal civilians as UAS pilots because of limitations on the functions that federal civilians can perform that are needed for some Army UAS missions. For example, combat operations are designated as an “inherently governmental” activity that may only be performed by military personnel specifically. Private sector contractors are further restricted from performing any inherently governmental activities, such as federal procurement activities performed in operational environments, which federal civilians are permitted to perform. Army headquarters officials stated that the disadvantage to using private sector contractors is that GOCO units are less capable with respect to functions they may perform and more expensive than military units, but according to these officials, the Army continues to use them due to limits set by the administration on the number of uniformed personnel that can be used in conflicts in the Middle East. Similarly, one Air Force official we spoke with indicated that in some cases, these limitations on private sector contractors performing certain activities may impact the mission. An Air Force official who oversaw GOCO units operating overseas, which is similar to Army UAS GOCO units, stated that there were occasions when targets were lost because the private sector contractor operated units could not assist with pinpointing the target locations since private sector contractors are prohibited by regulation from using laser designators. The Under Secretary of Defense for Personnel and Readiness (Personnel and Readiness) is responsible for issuing guidance for the DOD components regarding manpower management and reviewing the DOD components’ manpower management guidelines and practices for compliance with established policies and guidance. DOD Instruction 1100.22, Policy and Procedures for Determining Workforce Mix, elaborates on the responsibilities of Personnel and Readiness, directing that the Under Secretary shall work with the heads of DOD components to ensure that the components establish policies and procedures consistent with the instruction and require the use of specific policies and procedures when determining the workforce mix for current, new, or expanded missions. Personnel and Readiness has made efforts to identify additional personnel options for UAS pilots. In June 2016, the Institute for Defense Analysis published a study commissioned by Personnel and Readiness and other Office of the Secretary of Defense entities on alternative staffing strategies to enable DOD to accomplish UAS-related missions more cost-effectively. The study found that using DOD federal civilians may be an option for realizing cost savings. Personnel and Readiness also sponsored a RAND Corporation study examining effective ways to convert military positions to positions filled by federal civilian personnel, referred to as military-to-civilian conversions. The study was published in June 2016 and recommended changes to statutes, policies, and business practices to facilitate military-to-civilian conversions. According to Personnel and Readiness officials, they have discussed implementing the RAND Corporation’s recommendations on developing guidance on the process to implement military-to-civilian conversions but have not yet done so. Personnel and Readiness has not directed the services to conduct an evaluation of their workforce mix and of using federal civilians for positions required to fly UAS. Personnel and Readiness officials stated that doing so would not be standard practice for Personnel and Readiness because such an evaluation is an activity that the services would typically initiate based on their authority to organize, train, and equip their own forces. However, the officials also stated that Personnel and Readiness can direct such an evaluation. DOD Instruction 1100.22 also directs component heads to provide sufficient oversight to ensure compliance with the instruction through periodic reviews of the component’s workforce. Without evaluating the workforce mix, the Air Force and the Army risk using a UAS pilot workforce mix that may not efficiently meet their mission needs. Without specifically evaluating how and to what extent federal civilians could be used as UAS pilots, the Air Force lacks information on another population that may be able to help address its UAS pilot shortages. In addition, the Army lacks information on a personnel population that may be able to help address the limitations on the use of military personnel due to force management levels. The Air Force has conducted limited analysis and the Army has conducted no analysis to ensure the efficiency and cost effectiveness of the UAS workforce mix, particularly in light of evolving UAS platform capabilities. DOD Instruction 1100.22 directs that DOD components shall conduct a cost analysis to determine the low-cost provider for all new or expanding mission requirements and for functions that have been contracted but could be performed by federal civilians. Neither service provided evidence that they had completed cost analyses prior to securing contracts for UAS pilots to determine whether federal civilians or private sector contractors would perform UAS pilot functions at a lower cost, a process that is part of ensuring an efficient use of personnel for new or expanded missions. Air Force officials stated that the Air Force has not analyzed the costs of its GOCO units as compared with the costs of using federal civilians prior to securing its contracts because it does not have a cadre of federal civilians trained to fly UAS. The Air Force began establishing the GOCO units for its 10 private sector contractor-supported combat lines in fiscal year 2014 and Air Force headquarters officials told us they anticipate it will not finish establishing those units until the end of fiscal year 2018. As mentioned above, in its July 2016 congressional inquiry response, the Air Force included cost estimates for active duty, federal civilian, and private sector contractor personnel and determined that using private sector contractors is the option with the lowest cost for calendar year 2017 for the additional 10 combat lines to help meet the DOD-wide 90 combat line requirement. The Air Force conclusion was based in part on the assumption that active duty and federal civilian personnel would increase long-term costs such as an enduring increase in force structure that private sector contractors would not similarly require. However, according to an Office of the Secretary of Defense official, federal civilians can be hired on a short-term basis. In addition, the Air Force response to the congressional inquiry assumes that the private sector contractors will be used only to meet a temporary increase in demand and as such includes cost estimates for one calendar year. However, in March 2016, the Secretary of the Air Force and the Chief of Staff of the Air Force testified that demand for UAS capabilities will likely continue to increase, calling into question whether the 10 private sector contractor-supported combat lines will remain temporary. While the use of private sector contractors might be a viable solution in the short-term, without a more in-depth cost analysis, the Air Force will lack information on the most cost-effective options in the long-term, particularly if the demand for UAS increases. Army headquarters officials said the Army has not completed a cost analysis of private sector contractors and federal civilians because its use of GOCO units was intended to be a short-term solution to meet mission needs. According to these officials, hiring federal civilians as UAS pilots would be a permanent action that would require a permanent personnel structure. However, as noted above, there are options for hiring federal civilians to meet short-term needs. In addition, while Army headquarters officials say the Army’s use of private sector contractors began as a short-term need, private sector contractors have been flying Army UAS for 8 years because of ongoing conflict in the Middle East. Completing a cost-analysis could better inform decision-making on the workforce, including continuing to rely on private sector contractors instead of exploring other options, such as using federal civilians. Without conducting a cost analysis, both the Air Force and the Army may not know whether they are using the most cost effective workforce mix for meeting mission needs. The demand for UAS capabilities has grown considerably in recent years to support combat operations, as has the demand for a sufficient number of trained UAS pilots needed to provide those capabilities. The Air Force has experienced challenges providing the required number of UAS pilots to meet that demand. In addition, the Army has experienced challenges in providing its goal number of training hours to its UAS pilots when not deployed. Both the Air Force and the Army have, in most cases, partially addressed strategic human capital planning principles to help them address those challenges. However, by not taking actions consistent with certain elements of the principles, the Air Force and the Army could hinder their ability to address their personnel challenges. For example, because the Army had not involved UAS pilots in UAS units in developing its strategy to address training shortfalls, it may have missed an opportunity to gain valuable information and insight from UAS pilots that may help address root causes of training shortfalls and mishaps. In addition, if the Air Force and the Army do not revise their strategies to fully tailor them to address remaining issues with gaps, the Air Force risks continuing to not meet its requirements and the Army risks continuing to train at levels that are below Army requirements. Moreover, because the Air Force has not monitored the extent to which achieving the human capital goals it has set also helps it achieve its programmatic goals, the Air Force may be limited in its understanding whether its goals and strategies are having their intended effects. Further, while the Air Force has taken steps to incorporated flexibilities into its human capital strategies, without exploring the potential to use additional flexibilities, such as recruiting bonuses or other recruitment incentives, it may not be poised to meet future needs for UAS pilots. For the Army, because it has not incorporated additional, important UAS pilot competencies in its UAS pilot candidate selection method and validated that selection method, it may be missing opportunities to improve its personnel selection and realize associated benefits, such as reduced training costs. The Air Force and the Army primarily use military personnel to fill UAS pilot positions and have also used contractors to fly UAS, yet neither service has evaluated its workforce mix for UAS pilot positions, including specifically evaluating the use of federal civilians, because the Office of the Secretary of Defense for Personnel and Readiness has not directed the services to conduct such an evaluation as part of its oversight responsibilities. Evaluating the workforce mix would help to ensure that the Air Force and the Army are using the mix of personnel best suited to meeting mission needs and would provide information on options for addressing shortages and limitations on using military personnel. In addition, the Air Force and Army did not inform their workforce decisions with cost analyses that would provide information on the most cost- effective workforce for meeting mission needs. We are making 11 recommendations to the Secretary of Defense to improve the strategic human capital planning of the Air Force’s and the Army’s UAS pilot workforces. To help the Air Force in its effort to address UAS pilot shortfalls, we are making the following 3 recommendations related to three of the five principles for effective strategic human capital planning. To help ensure that the Air Force strategies to address UAS pilot shortages are tailored to address remaining issues, such as the significant amount of pilots who are temporarily assigned to the UAS pilot career, the limited amount of cadet interest in the UAS pilot career, and the workload of UAS pilots, we recommend that the Secretary of Defense direct the Secretary of the Air Force to revise the Get Well Plan to address these issues. To help the Air Force ensure that its strategies are having the intended effects, we recommend that the Secretary of Defense direct the Secretary of the Air Force to monitor the extent to which that achieving the human capital goals in its strategy helps the Air Force achieve its programmatic goals. To help the Air Force ensure that it is poised to meet future needs for UAS pilots, we recommend that the Secretary of Defense direct the Secretary of the Air Force to explore the potential use of additional flexibilities that would enable it to increase the number of UAS pilots in its workforce. To help the Army in its effort to address UAS unit training shortfalls, we are making the following 6 recommendations related to three of the five principles for effective strategic human capital planning. To help the Army identify challenges that UAS pilots face in completing their training, we recommend that the Secretary of Defense direct the Secretary of the Army to collect feedback from UAS pilots in UAS units, such as by surveying, or conducting focus groups with them and incorporate such feedback into the Army’s strategy to address UAS training shortfalls. To help ensure that Army Shadow units meet minimum training requirements, we recommend that the Secretary of Defense direct the Secretary of the Army to revise its strategy to address UAS training shortfalls to ensure that it is fully tailored to address training issues and address factors such as lack of adequate facilities, lack of access to airspace, and the inability to fly more than one UAS at a time. To help the Army ensure that it is basing its decisions to select individuals for UAS pilot training on sound evidence and to help it take advantage of the key benefits associated with effective personnel selection that could include reducing training costs, improving job performance, improving retention of qualified personnel, enabling leadership development, and enhancing organizational effectiveness, we recommend that the Secretary of Defense direct the Secretary of the Army to validate that the Armed Services Vocational Aptitude Battery is an effective predictor of UAS pilot candidate performance in UAS pilot training and job performance; assess existing research that has been performed that identifies UAS pilot competencies; and incorporate relevant findings from such research into the Army’s approach for selecting UAS pilot candidates, as appropriate. To help address personnel shortages and meet mission needs cost effectively, we are making two recommendations that the Office of the Secretary of Defense, through the Under Secretary of Defense (Personnel & Readiness) direct the Air Force and the Army to: evaluate the workforce mix and the use of federal civilians for UAS conduct cost analyses consistent with DOD guidance to inform their workforce decisions and ensure cost effectiveness of the UAS pilot workforce mix. We provided a draft of this report to DOD for comment. In its written comments, DOD partially concurred with nine recommendations and concurred with two recommendations. For the nine recommendations with which DOD partially concurred, DOD noted actions that it had been taken that DOD believed addressed the intent of our recommendations. DOD’s comments are summarized below and reprinted in their entirety in appendix III. DOD partially concurred with our recommendation that the Air Force revise the Get Well Plan to help ensure that the Air Force strategies to address UAS pilot shortages are tailored to address the significant amount of pilots who are temporarily assigned to the UAS pilot career, the limited amount of cadet interest in the UAS pilot career, and the workload of UAS pilots. In its comments, DOD stated that it does not disagree with our recommendation. However, DOD believes that the Get Well Plan addresses these issues and significant steps have already been taken to fulfill the intent of our recommendation; therefore, no further direction is needed in response to our recommendation. We disagree. The Get Well Plan has two stated goals: to staff 100 percent of the positions for (1) instructors at the UAS pilot school; and (2) combat UAS pilots, and does not address the three issues we discuss in this recommendation. We continue to believe that the Air Force needs to take action to help ensure that its strategy is fully tailored to address the challenges we identified and that the Air Force acknowledged existed. DOD also partially concurred with our recommendation that the Air Force monitor the extent to which achieving the human capital goals in its strategy helps the Air Force achieve its programmatic goals. DOD stated that it agrees that continuous monitoring of the Air Force Get Well Plan is critical and noted that the Air Force provides regular updates to the senior leadership of the department on the goals and status of the Get Well Plan. DOD also stated that based on those updates, the Office of the Secretary of Defense will provide additional direction as necessary and appropriate. As we noted in the report, the Air Force does not measure how achieving goals in its Get Well Plan helps it to achieve its three programmatic goals: (1) meeting combat demand, (2) staffing enough personnel to UAS units to allow UAS pilots time to train and take part in development activities, and (3) providing surge UAS combat capabilities when needed. For example, the Air Force’s current monitoring does not address how achieving goals in the Get Well Plan will help the Air Force provide UAS pilots time to train or help the Air Force provide surge UAS capabilities. We continue to believe that until the Air Force develops such an approach and begins monitoring the extent to which achieving the human capital goals in its strategy helps the Air Force achieve its programmatic goals, the Air Force will not know whether its strategies are having the intended effect on its program goals. DOD partially concurred with our recommendation that the Air Force explore the potential use of additional flexibilities to enable it to increase the number of UAS pilots in its workforce to meet future needs. DOD stated that the Air Force is exploring additional measures with the potential to increase the number of pilots in the UAS pilot workforce. It stated that, as needed, the Air Force will engage with the Office of the Secretary of Defense to secure authorities necessary to implement desired measures relating to the workforce, but that further direction from the Secretary of Defense is not necessary at this time. As we stated in the report, the Air Force has taken some steps to incorporate two flexibilities—providing “dwell time” and retention bonuses—into its strategy to address UAS pilot shortages. We continue to believe that exploring the use of additional flexibilities to increase the number of UAS pilots is important given that current Air Force requirements for the number of UAS pilots it needs may underrepresent those needs, and Air Force leadership expects demand for UAS pilots to grow. DOD partially concurred with our recommendations that the Army (1) collect feedback from pilots in UAS units to help the Army identify challenges faced in completing their training and (2) incorporate such feedback into the Army’s strategy to address UAS training shortfalls. DOD stated that incorporating feedback from the field is already an element of the Army’s strategy for improving the sustainability, maturity, and health of its UAS workforce. DOD stated that our findings will reinforce the importance of using feedback to improve and refine the Army's overall strategy. DOD also stated that it does not believe that further direction is necessary. We disagree that additional direction is not necessary for addressing UAS training shortfalls. While it is encouraging that the Army is incorporating feedback from the field to improve the sustainability, maturity, and health of its UAS workforce, we specifically address training shortfalls in UAS units in our findings, which the Army does not discuss in its response to this recommendation. As noted in our report, we believe that by collecting input through focus groups or surveys of UAS pilots serving in UAS units, the Army could identify the root causes of chronic training shortfalls in RQ-7B Shadow units and use its findings to shape its strategy to address its documented training shortfalls. DOD partially concurred with our recommendation that the Army revise its strategy to address UAS training shortfalls to ensure that it is fully tailored to address training issues and address factors such as lack of adequate facilities, lack of access to airspace, and the inability to fly more than one UAS at a time. DOD stated that the Army has already taken steps to continuously improve its training strategy and that our findings will underline the importance of those initiatives, but that additional direction related to our recommendation is not necessary. We disagree. We acknowledge in our report that the Army has taken steps to overcome some of its training challenges. For example, to overcome airspace restrictions, a unit at Joint Base Lewis-McChord, Washington, travels to the Yakima Training Center in Washington where there is more available airspace to conduct training. However, these steps have not resulted in Army RQ-7B Shadow units meeting homestation training goals since at least 2013. Given this, we believe that the Army needs to revise its strategy to more fully tailor it to address the barriers to help it address these training shortfalls. DOD partially concurred with our recommendation that the Army validate that the Armed Services Vocational Aptitude Battery is an effective predictor of UAS pilot candidate performance in UAS pilot training and job performance. DOD stated that it believes that the current graduation rate of soldiers from its UAS pilot school of 98 percent is an indication that the existing personnel resource predictors and practices are sufficient. It also stated that periodic re-validation is prudent, but specific direction to do so is not necessary. We disagree. Regarding the Army’s graduation rate of personnel attending UAS pilot training, Army officials told us that senior Army leaders pressure officials at the Army UAS pilot schoolhouse to ensure that UAS pilot candidates make it through training. As a result, this statistic may not provide the Army with reliable evidence that its approach to selecting personnel to serve as UAS pilots is providing the Army with personnel who have the aptitude for this career. Validating that the Armed Services Vocational Aptitude Battery is an effective predictor of training and job performance of UAS pilot is an important step that would help the Army ensure that it is basing its decisions to select individuals for the UAS pilot career field on sound evidence. DOD partially concurred with our recommendations that the Army (1) assess existing research that has been performed that identifies UAS pilot competencies and (2) incorporate relevant findings from such research into the Army’s approach for selecting UAS pilot candidates, as appropriate. DOD stated that incorporating findings regarding UAS pilot competencies is already an integral part of both workforce and community management and that effective and efficient resource management, as well as force shaping and management processes, will help ensure that the Army's selection of candidates is consistent with the findings of existing research in this area. DOD stated that it does not believe it is necessary to provide additional direction or guidance to the Army to leverage existing research that identifies UAS pilot competencies. We disagree. As we noted in our report, the Army has used the same approach to assess the competencies of UAS pilot candidates since at least 2002 and has not incorporated findings from scientific research, such as results from an Army Research Institute study conducted in 2007, on UAS pilot candidates. We believe that by assessing existing research that identifies UAS pilot competencies and incorporating relevant findings from such research into the Army’s approach for selecting UAS pilot candidates that the Army could take advantage of the benefits associated with effective personnel selection. Assessing and incorporating such findings may allow the Army to reduce training costs, improve job performance, improve retention of qualified personnel, enable leadership development, and enhance organizational effectiveness. Finally, DOD concurred with our two recommendations that the Air Force and the Army evaluate the UAS workforce mix and the use of federal civilians for their UAS pilot positions and that the Air Force and Army conduct cost analyses consistent with DOD guidance to inform their workforce decisions and ensure cost effectiveness of their UAS pilot workforce mix. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretaries of the Air Force and the Army; and the Under Secretary of Defense for Personnel and Readiness. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or 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 key contributions to this report are listed in appendix IV. In April 2014, we found that the Air Force had shortages of pilots of unmanned aerial systems (UAS) and faced challenges to recruit, develop, and retain pilots and build their morale. We also found that Air Force UAS pilots experienced potentially challenging working conditions and were promoted at lower rates than personnel in other career fields. In particular, we found that the Air Force (1) had operated below its optimum crew ratio, which is a metric used to determine the personnel needs for Air Force aviation units; (2) had not developed a minimum crew ratio; (3) had not tailored its recruiting and retention strategy to align with the specific needs and challenges of UAS pilots; (4) had not considered the viability of using personnel other than officers such as enlisted or civilians as UAS pilots; (5) had not incorporated feedback from UAS pilots into efforts to manage the career field; (6) had not fully analyzed the effects of being deployed-on-station on UAS pilots’ quality of life; and (7) had not analyzed the effect of being a UAS pilot on the chances for promotion. We made seven recommendations related to these findings. Since we issued our report in April 2014, the Air Force has fully implemented two of the recommendations, taken action on three recommendations, and has not taken action on two others. In May 2015, we found that the Air Force and the Army faced challenges ensuring that their UAS pilots completed their required training. We also found that Army unit status reports did not require UAS pilot training information and that the Army had not fully addressed the risks of using less experienced instructor pilots. We made three recommendations related to these findings. Since we issued our report in May 2015, the Army and the Office of the Under Secretary of Defense for Personnel and Readiness have taken actions to address the three recommendations but have not fully implemented any of the recommendations. In table 2, we list the seven recommendations that we made in the April 2014 report and the three recommendations that we made in the May 2015 report and summarize the actions that the Air Force, the Army, and the Office of the Under Secretary of Defense for Personnel and Readiness have taken to address those recommendations. We focused our review on the personnel programs for unmanned aerial system (UAS) pilots in the Army and the Air Force. We focused our review on the Army and the Air Force programs because these services have significantly more UAS pilots than the Navy and the Marine Corps. We also included efforts that the Office of the Under Secretary of Defense for Personnel and Readiness had taken because that office is responsible for developing guidance to implement policies and procedures for determining the most appropriate and cost efficient mix of military, civilian, and contractor personnel to perform the missions of the department. To assess the extent to which the Air Force and the Army have applied key principles of effective strategic human capital planning in the actions taken to address challenges with managing UAS pilots, we compared criteria that we previously developed on key principles of effective strategic human capital planning with actions the Air Force and the Army have taken to address challenges that each has faced with managing the UAS pilot workforce. In our prior work, we found that strategic human capital planning is an important component of an agency’s effort to develop long-term strategies for acquiring, developing, and retaining staff needed for an agency to achieve its goals and of an agency’s effort to align human capital activities with the agency’s current and emerging mission. Specifically, we have found that an agency’s efforts to conduct strategic human capital planning should be characterized by five key principles: (1) involving top senior leaders, employees, and other stakeholders in developing, communicating, and implementing strategic workforce plans; (2) developing strategies tailored to address gaps in critical skills and competencies that need attention; (3) monitoring and evaluating progress toward meeting workforce planning goals; (4) building the capability needed to address administrative, educational, and other requirements important to supporting workforce strategies; and (5) determining the critical skills and competencies needed to achieve goals. To identify the extent to which the Air Force and the Army have implemented these key principles in actions to address challenges with managing UAS pilots, we reviewed Air Force and Army documentation related to these services challenges and the actions taken to address those challenges. These documents include data on the number of required and actual UAS pilots in the Air Force for fiscal year 2016, Air Force data on the number of personnel filling UAS pilot instructor positions as of July 2016, and Air Force data on the number of hours that UAS pilots and manned-aircraft pilots fly on average per year from fiscal year 2015. These documents also included Army data on the number of personnel filling UAS pilot positions as of May 2016 and the average number of training hours completed by certain UAS units for fiscal year 2013 through the third quarter of fiscal year 2016. We assessed the reliability of these data by reviewing related documentation and interviewing agency officials knowledgeable about the data. We determined that these data were sufficiently reliable for the purposes of our reporting objectives. We determined that the services “applied” a key principle for strategic human capital planning when their actions generally demonstrated the characteristics specified in the principle, we determined that the services “partially applied” a key principle for strategic human capital planning when their actions explicitly demonstrated at least one characteristic of the principle, and we determined that the services did “not apply” a key principle for strategic human capital planning when their actions did not demonstrate any characteristics of the principle. To assess the extent to which the Air Force and the Army have evaluated the workforce mix to meet UAS pilot requirements, we compared Air Force and Army efforts to determine the type of personnel to use for UAS pilots positions with criteria in Department of Defense (DOD) Directive 1100.4 Guidance for Manpower Management which articulates DOD policy that assigned missions shall be accomplished using the least costly mix of military, civilian, and contract personnel consistent with military requirements and other needs of the department and DOD Instruction 1100.22 Policies and Procedures for Determining Workforce Mix, which establishes the workforce mix decision process, including the consideration of cost as a deciding factor in workforce mix decisions, and states that manpower authorities consider all available personnel when determining the workforce mix, including active military, federal civilians, and contractors. We also reviewed documentation and data on the use of additional sources of personnel, such as performance work statements for contractors and hours flown for some contractors. In addition, we requested documentation on efforts to reevaluate personnel determinations for UAS pilot positions and interviewed knowledgeable officials. We compared the documentation, or lack thereof, and information obtained from the officials to criteria in DOD Instruction 1100.22, which directs component heads to provide sufficient oversight to ensure compliance with the Instruction through periodic reviews of the component’s workforce. For both objectives, we interviewed officials from the Office of the Under Secretary of Defense for Personnel and Readiness; the Headquarters Air Force Office of the Deputy Chief of Staff for Manpower, Personnel, and Services; the Headquarters Air Force Office of the Deputy Chief of Staff for Operations; the Air Combat Command; the Air Education and Training Command; the Air Force Personnel Center, the Air Force Academy, the Air Force Reserve Officer Training Corps program; the Air Force Recruiting Service, the Headquarters Army Deputy Chief of Staff for Operations; the Headquarters Army Deputy Chief of Staff for Personnel; the Army Research Institute, the Army Aviation Center of Excellence; and the Army Human Resources Command. We conducted this performance audit from June 2015 to December 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributors to this report were Lori Atkinson, Assistant Director; Mae Jones, James P. Klein, Amie Lesser, Kelly Liptan, Felicia Lopez, Shari Nikoo, and Mike Silver. | The demand for UAS combat operation support has grown dramatically in the last decade. Since 2008, the Air Force has more than quadrupled its requirements for UAS pilots but faced challenges meeting the requirements due to UAS pilot shortages. Meanwhile, a 2015 Army review found that Army UAS units' mishap rate was higher than for other aircraft and Army officials stated that training shortfalls had contributed to the mishaps. Senate Report 114-49 included a provision that GAO review Air Force and Army UAS personnel strategies. GAO assesses the extent to which the Air Force and the Army have (1) applied key principles of effective strategic human capital planning for managing UAS pilots and (2) evaluated the workforce mix to meet UAS pilot requirements. GAO compared its previously developed key principles of effective strategic human capital planning with Air Force and Army actions. GAO analyzed data on required and actual Air Force UAS pilots and data on Army UAS training. The Air Force and the Army have not fully applied four of the five key principles for effective strategic human capital planning for managing pilots of unmanned aerial systems (UAS) that are important for resolving the Air Force's pilot shortages and the Army's training shortfalls (see table below). Consistent with the first principle, the Air Force involved top senior leaders, UAS pilots, and stakeholders to develop a plan to resolve its UAS pilot shortages—including reassigning UAS workload to Air National Guard units and supporting training and operations with contractors. The Air Force partially applied the second principle to tailor its strategy to address gaps, or shortages, in UAS pilots, such as by using temporary personnel. As of March 2016, 37 percent of the personnel filling UAS pilot positions are temporarily assigned manned-aircraft pilots. Air Force headquarters personnel stated that no other career field in the Air Force relies on temporarily assigned personnel to this extent. Without tailoring its strategy to provide more permanently assigned pilots, the Air Force risks losing the experience that temporarily assigned manned-aircraft pilots have acquired. The Army partially applied the second principle because its strategy is not fully tailored to address its shortages in unit training. The Army experienced training shortfalls—61 of 73 UAS units flew fewer than half of the 340-flight-hour per unit annual minimum training goal in fiscal year 2015. A Senior Army official acknowledged the continued training shortfalls was a concern for the Army. Without revising its strategy to address the remaining training shortfalls, the Army risks that its UAS units may continue to train at levels below Army goals. The Air Force and the Army have not evaluated their workforce mix—that is the mix of military, federal civilian, and private sector contractor personnel—to determine the extent to which these personnel sources could be used to fly UAS. Furthermore, although neither the Air Force nor the Army have evaluated how and to what extent federal civilians could be used as UAS pilots, both services are using private sector contractors to fly some UAS. Without evaluating their workforce mix, the Air Force and the Army do not have information on alternatives for meeting UAS pilot personnel requirements to meet mission needs. In addition, although the Air Force and the Army deci use private sector contractors to meet mission needs, they did not conduct cost analyses to inform this decision. Without such an analysis, the Air Force and the Army may not be using the most cost-effective workforces to achieve UAS missions. GAO's 11 recommendations include that the Air Force tailor its strategy to address UAS pilot shortages; the Army revise its strategy to address UAS training shortfalls; and that both services evaluate their workforce mix for UAS pilot positions and conduct analysis to ensure cost effectiveness of workforce decisions. DOD concurred with 2 recommendations and partially concurred with 9, noting actions that it believed addressed the intent of GAO's recommendations. GAO continues to believe that DOD needs to take actions to fully address the recommendations. |
Despite a substantial investment in IT, the federal government’s management of information resources has produced mixed results. Although agencies have taken constructive steps to implement modern strategies, systems, and management policies and practices, we continue to find that agencies face significant challenges. The CIO position was established by the Congress to serve as the focal point for information and technology management issues within an agency, and CIOs can address these challenges with strong and committed leadership. The Congress has assigned a number of responsibilities to the CIOs of federal agencies. (See app. I for a summary of the legislative evolution of agency CIO responsibilities.) In addition, we have identified other areas of information and technology management that can contribute significantly to the successful implementation of information systems and processes. Altogether, we identified the following 13 major areas of CIO responsibilities as either statutory requirements or critical to effective information and technology management: IT/IRM strategic planning. CIOs are responsible for strategic planning for all information and information technology management functions— referred to by the term information resources management (IRM) strategic planning . IT capital planning and investment management. CIOs are responsible for IT capital planning and investment management [44 U.S.C. 3506(h) and 40 U.S.C. 11312 & 11313]. Information security. CIOs are responsible for ensuring their agencies’ compliance with the requirement to protect information and systems [44 U.S.C. 3506(g) and 3544(a)(3)]. IT/IRM human capital. CIOs have responsibilities for helping their agencies meet their IT/IRM workforce needs [44 U.S.C. 3506(b) and 40 U.S.C. 11315(c)]. Information collection/paperwork reduction. CIOs are responsible for the review of their agencies’ information collection proposals to maximize the utility and minimize public paperwork burdens . Information dissemination. CIOs are responsible for ensuring that their agencies’ information dissemination activities meet policy goals such as timely and equitable public access to information . Records management. CIOs are responsible for ensuring that their agencies implement and enforce records management policies and procedures under the Federal Records Act . Privacy. CIOs are responsible for their agencies’ compliance with the Privacy Act and related laws . Statistical policy and coordination. CIOs are responsible for their agencies’ statistical policy and coordination functions, including ensuring the relevance, accuracy, and timeliness of information collected or created for statistical purposes . Information disclosure. CIOs are responsible for information access under the Freedom of Information Act . Enterprise architecture. Federal laws and guidance direct agencies to develop and maintain enterprise architectures as blueprints to define the agency mission and the information and IT needed to perform that mission. Systems acquisition, development, and integration. GAO has found that a critical element of successful IT management is effective control of systems acquisition, development, and integration [44 U.S.C. 3506(h)(5) and 40 U.S.C. 11312]. E-government initiatives. Various laws and guidance direct agencies to undertake initiatives to use IT to improve government services to the public and internal operations [44 U.S.C. 3506(h)(3) and the E-Government Act of 2002]. The agency CIOs were generally responsible for most of the 13 key areas we identified as either required by statute or among those critical to effective information and technology management, and most of these CIOs reported directly to their agency heads. We found that only 2 of these 13 areas were cited as the responsibility of fewer than half of the CIOs, and 19 of the CIOs reported directly to their agency heads. Their median tenure was about 2 years—less than the 3 to 5 years that CIOs and former senior agency IT executives said were necessary for a CIO to be effective; this gap could be problematic because it could inhibit CIOs’ efforts to address major challenges, including IT management and human capital. As figure 1 illustrates, CIOs were responsible for key information and technology management areas. In particular, 5 of the 13 areas were assigned to every agency CIO. These areas were capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT workforce planning. However, of the other 8 areas, 2 of them—information disclosure and statistics—were the responsibility of fewer than half of the CIOs. Disclosure is a responsibility that has frequently been assigned to offices such as general counsel and public affairs in the agencies we reviewed, while statistical policy is often the responsibility of separate offices that deal with the agency’s data analysis, particularly in agencies that contain Principal Statistical Agencies. Nevertheless, even for those areas of responsibility that were not assigned to them, the CIOs generally reported that they contributed to the successful execution of the agency’s responsibility. In those cases where the CIOs were not assigned the expected responsibilities, and they expressed an opinion about the situation, more than half of the CIO responses were that the applicable information and technology management areas were appropriately held by some other organizational entity. Moreover, one of the panels of former agency IT executives suggested that not all 13 areas were equally important to CIOs. A few of the former agency IT executives even called some of the areas relating to information management a distraction from the CIO’s primary responsibilities. Those sentiments, however, are not consistent with the law, which envisioned that having a single official responsible for the various information and information technology functions would provide integrated management. Specifically, one purpose of the Paperwork Reduction Act of 1980 (PRA) is to coordinate, integrate, and—to the extent practicable and appropriate— make federal information resources management policies and practices uniform as a means to improve the productivity, efficiency, and effectiveness of government programs by, for example, reducing information collection burdens on the public and improving service delivery to the public. Moreover, the House committee report accompanying the PRA in 1980 asserted that aligning IRM activities under a single authority should provide for both greater coordination among an agency’s information activities and higher visibility for these activities within the agency. In addition to specifying areas of responsibility for the CIOs of major departments and agencies, the Clinger-Cohen Act calls for certain CIOs to have IRM as their primary duty. All but a few of the agencies complied with this requirement. The other significant duties reported by some CIOs generally related to other administrative or management areas, such as procurement and human capital. We and Members of Congress have previously expressed concern about agency CIOs having responsibilities beyond information and technology management and have questioned whether dividing time between two or more kinds of duties would allow CIOs to deal effectively with their agencies’ IT challenges. Federal law—as well as our guide based on CIOs of leading private sector organizations—generally calls for CIOs to report to their agency heads, forging relationships that ensure high visibility and support for far- reaching information management initiatives. Nineteen of the CIOs in our review stated that they had this reporting relationship. In the other 8 agencies, the CIOs stated that they reported instead to another senior official, such as a deputy secretary, under secretary, or assistant secretary. The views of current CIOs and former agency IT executives about whether it is important for the CIO to report to the agency head were mixed. For example, of the 8 CIOs who did not report directly to their agency heads, (1) 3 stated it was important or critical, (2) 2 stated it was not important, (3) two stated it was generally important but that the current reporting structure at their agencies worked well, and (4) 1 stated it was very important that a CIO report to at least a deputy secretary. In contrast, 15 of the 19 CIOs who reported to their agency heads stated that this reporting relationship was important. However, 8 of the 19 CIOs who said they had a direct reporting relationship with the agency head noted that they also reported to another senior executive, usually the deputy secretary or under secretary for management, on an operational basis. Finally, members of our Executive Council on Information Management and Technology told us that what is most critical is for the CIO to report to a top level official. The members of our panels of former agency IT executives also had a variety of views on whether it was important that the CIO report to the agency head. At the major departments and agencies included in our review, the current CIOs had diverse backgrounds, and since the enactment of the Clinger- Cohen Act, the median tenure of permanent CIOs whose time in office had been completed was about 2 years. Both of these factors can significantly influence whether a CIO is likely to be successful. First, the background of the current CIOs varied in that they had previously worked in the government, the private sector, or academia, and they had a mix of technical and management experience. Virtually all of them had work experience and/or educational backgrounds in IT or IT-related fields. For example, 12 current agency CIOs had previously served in a CIO or deputy CIO capacity. Moreover, most of the CIOs had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency’s mission. Second, the median time in the position for agencies’ permanent CIOs was 23 months. For career CIOs, the median was 32 months; the median for political appointees was 19 months. When asked how long a CIO needed to stay in office to be effective, the most common response of current CIOs and former agency IT executives was 3 to 5 years. Between February 10, l996 and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly had stayed in office for a minimum of 3 years. The gap between actual time in office and the time needed to be effective is consistent with the views of many agency CIOs, who believed that the turnover rate was high and that the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face contributed to this rate. Current CIOs reported that they faced major challenges in fulfilling their duties. In particular, two challenges were cited by over 80 percent of the CIOs: implementing effective information technology management and obtaining sufficient and relevant resources. This indicates that CIOs view IT governance processes, funding, and human capital as critical to their success. Other common challenges they cited were communicating and collaborating internally and externally and managing change. Effectively tackling these reported challenges can improve the likelihood of a CIO’s success. The challenges the CIOs identified were as follows: IT Management. Leading organizations execute their information technology management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully executed the IT management areas that were most frequently cited as challenges by the CIOs—information security, enterprise architecture, investment management, and e-gov. Sufficient and Relevant Resources. One key element in ensuring an agency’s information and technology success is having adequate resources available. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether to pursue them. Additionally, there is a great deal of uncertainty about the funding levels that may be available from year to year. The government also faces long- standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and 2001, we reported the importance that leading organizations placed on making sure they had the right mix of skills in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Other challenges included recruiting, retention, training and development, and succession planning. Communicating and Collaborating. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our CIO guide focuses on the CIO’s ability to establish his or her organization as a central player in the enterprise. Ten agency CIOs reported that communication and collaboration were challenges. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two-way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities as challenges, including sharing information with partners and influencing the Congress and the Office of Management and Budget (OMB). Managing Change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization’s natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing changes originating both from their own initiative and from outside forces. Implementing major IT changes can involve not only technical risks but also nontechnical risks, such as those associated with people and the organization’s culture. Six CIOs cited dealing with the government’s culture and bureaucracy as challenges to implementing change. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. The Congress and agencies can take various actions to assist CIOs in fulfilling their vital roles. With respect to the Congress, hearings such as this, Mr. Chairman, help to raise issues and suggest solutions. Also, the report we are releasing today contains a Matter for Congressional Consideration in which we suggest that, as you hold hearings on and introduce legislation related to information and technology management, you consider whether the existing statutory requirements related to CIO responsibilities and reporting to the agency head reflect the most effective assignment of information and technology management responsibilities and the best reporting relationship. To further assist in your oversight role, as you requested, we are beginning work on the development of a set of CIO best practices, based on the practices of leading organizations in the private sector, to complement the report we are releasing today. Agencies, too, can take action to improve their information and technology management. First, to address concerns about the high CIO turnover rate, agencies may be able to use human capital flexibilities— which represent the policies and practices that an agency has the authority to implement in managing its workforce—to help retain its CIOs. For example, our model on strategic human capital management notes that recruiting bonuses, retention allowances, and skill-based pay can attract and retain employees who possess the critical skills the agency needs to accomplish its mission. We have also issued several reports that discuss these issues in more depth and provide possible solutions and recommendations. Second, we have issued various guides to assist CIOs in tackling the major challenges that they have cited. This guidance includes (1) information security best practices to help agencies with their information security challenges; (2) an IT investment management framework, including a new version that offers organizations a road map for improving their IT investment management processes in a systematic and organized manner; and (3) a framework that provides agencies with a common benchmarking tool for planning and measuring their efforts to improve their enterprise architecture management. In summary, the report we are issuing today indicates that CIOs generally stated that they had most of the responsibilities and reporting relationships required by law, but that there were notable exceptions. In particular, some agency CIOs reported that, contrary to the requirements in the law, they were not responsible for certain areas, such as records management, and that they did not report to their agency head. However, views were mixed as to whether CIOs could be effective leaders without having responsibility for each individual area. In addition, most CIOs did not stay in office for 3 to 5 years—the response most commonly given when we asked current CIOs and former agency IT executives how long a CIO needed to be in office to be effective. Agencies’ use of various mechanisms, such as human capital flexibilities, could help reduce the turnover rate or mitigate its effect. Reducing turnover among CIOs is important because the amount time CIOs are in office can affect their ability to successfully address the major challenges they face. Some of these challenges—such as how IT projects are originated—may not be wholly within their control. Other challenges—such as improved IT management—are more likely to be overcome if a CIO has sufficient time to more effectively address these issues. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have at this time. For more than 20 years, federal law has structured the management of information technology and information-related activities under the umbrella of information resources management (IRM). Originating in the 1977 recommendations of the Commission on Federal Paperwork, the IRM approach was first enacted into law in the Paperwork Reduction Act of 1980 (PRA). The 1980 act focused primarily on centralizing governmentwide responsibilities in the Office of Management and Budget (OMB). The law gave OMB specific policy-setting and oversight duties with regard to individual IRM areas—for example, records management, privacy, and the acquisition and use of automatic data processing and telecommunications equipment (later renamed information technology). The law also gave agencies the more general responsibility to carry out their IRM activities in an efficient, effective, and economical manner and to comply with OMB policies and guidelines. To assist in this effort, the law required that each agency head designate a senior official who would report directly to the agency head to carry out the agency’s responsibilities under the law. Together, these requirements were intended to provide for a coordinated approach to managing federal agencies’ information resources. The requirements addressed the entire information life cycle, from collection through disposition, in order to reduce information collection burdens on the public and to improve the efficiency and effectiveness of government. Amendments to the PRA in 1986 and 1995 were designed to strengthen agency and OMB implementation of the law. Most particularly, the PRA of 1995 provided detailed agency requirements for each IRM area, to match the specific OMB provisions. The 1995 act also required for the first time that agencies develop processes to select, control, and evaluate the results of major information systems initiatives. In 1996, the Clinger-Cohen Act supplemented the information technology management provisions of the PRA with detailed Chief Information Officer (CIO) requirements for IT capital planning and investment control and for performance and results-based management. The 1996 act also established the position of agency chief information officer by amending the PRA to rename the senior IRM officials CIOs and by specifying additional responsibilities for them. Among other things, the act required IRM to be the “primary duty” of the CIOs in the 24 major departments and agencies specified in 31 U.S.C. 901. Accordingly, under current law, agency CIOs are required to carry out the responsibilities of their agencies with respect to information resources management, including information collection and the control of paperwork; statistical policy and coordination; privacy, including compliance with the Privacy Act; information security, including compliance with the Federal Information Security Management Act; information disclosure, including compliance with the Freedom of Information Act; and information technology. Together, these legislated roles and responsibilities embody the policy that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. 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. | Federal agencies rely extensively on information technology (IT) to effectively implement major government programs. To help agencies manage their substantial IT investments, the Congress has established a statutory framework of requirements, roles, and responsibilities relating to IT management. GAO was asked to summarize its report, being issued today, on federal chief information officers' (CIO) responsibilities, reporting relationships, and tenure and on the challenges that CIOs face ( Federal Chief Information Officers: Responsibilities, Reporting Relationships, Tenure, and Challenges, GAO-04-823 , July 21, 2004) and to offer suggestions for actions that both the Congress and the agencies can take in response to these findings. In looking at 27 agencies, GAO found that CIOs generally were responsible for most of the 13 areas that had been identified as either required by statute or critical to effective information and technology management and that about 70 percent reported directly to their agency heads. Among current CIOs and former agency IT executives, views were mixed on whether it was important for the CIO to have responsibility for each of the 13 areas and a direct reporting relationship with the agency head. In addition, current CIOs come from a wide variety of professional and educational backgrounds and, since the enactment of the legislation establishing this position, the permanent CIOs who had completed their time in office had a median tenure of about 2 years. Their average time in office, however, was less than the 3 to 5 years that both current CIOs and former agency IT executives most commonly cited as the amount of time needed for a CIO to be effective. Too short of a tenure can reduce a CIOs' effectiveness and ability to address major challenges, including implementing effective IT management and obtaining sufficient and relevant resources. Both the Congress and the federal agencies can take various actions to address GAO's findings. First, as the Congress holds hearings on and introduces legislation related to information and technology management, there may be an opportunity to consider the results of this review and whether the existing statutory framework offers the most effective structure for CIOs' responsibilities and reporting relationships. Second, agencies can use the guidance GAO has issued over the past few years to address, for example, agencies' IT management and human capital challenges. Finally, agencies can also employ such mechanisms as human capital flexibilities to help reduce CIO turnover or to mitigate its effect. |
As part of its fiscal year 2012 budget request, DOD outlined estimated savings of about $178 billion to be realized over a 5-year time period beginning in fiscal year 2012. According to DOD, these savings included about $154 billion from the Secretary’s initiative and about $24 billion from other sources. Specifically, The military departments and SOCOM identified a total of $100 billion in savings as a result of their efforts to support the Secretary’s initiative. A majority of the projected savings identified by the military departments and SOCOM (approximately $70 billion, or 70 percent) was planned to be reinvested in high-priority military needs—such as enhancing weapon systems—while the remainder was planned to be used to address operating costs resulting from areas such as health care and training. In addition to the $100 billion from the military departments and SOCOM, DOD proposed a $78 billion reduction in its overall budget plan over a 5-year time period, covering fiscal years 2012 through 2016, which reflected a 2.6 percent reduction from DOD’s fiscal year 2011 budget submission over the same time period. Of this amount, $54 billion reflected projected savings identified from a health care policy assessment, government-wide civilian pay freeze, and other specific areas identified by the Secretary where immediate action could be taken department-wide. The remaining $24 billion reflected revised economic assumptions, projected savings from restructuring the Joint Strike Fighter weapon program, and projected savings from reducing the size of the Army and Marine Corps. Information accompanying DOD’s fiscal year 2012 budget request catalogued the $100 billion in savings from the military departments and SOCOM under the following four categories: reorganizations, such as restructuring headquarters management and eliminating unneeded task forces; better business practices, such as reducing energy consumption; program reductions and terminations, such as terminating weapon system programs; and reductions in lower priority programs, such as shifting funding requests from military construction projects to base operations. Table 1 shows the specific amounts of projected savings reported for each category and military department. Among other things, the the budget account from which each savings identified will be derived; the number of military personnel and full-time civilian employees of the federal government affected by such savings; the estimated reductions in the number and funding of contractor personnel caused by such savings; a specific description of activities or services that will be affected by such savings, including the locations of such activities or services; and certain information regarding each reinvestment planned to be funded with efficiency initiative savings. In June 2012, DOD submitted its report to the congressional defense committees and provided some information on the categories above. Among other things, at that time, DOD reported that it was on track to meet estimated savings targets for all of its efficiency initiatives. However, the report did not include a comprehensive analysis of reinvestments because, according to DOD, many areas in which reinvestments had occurred due to the efficiency initiatives included in the fiscal year 2012 President’s Budget request had been offset by major force structure changes and other reductions in its fiscal year 2013 budget request. In briefings to the Comptroller delivered in February 2013 and March 2013, the military departments and SOCOM reported that they remain, with a few exceptions, on track to meet original savings estimates associated with their individual efficiency initiatives. At the time of our review, DOD had not compiled DOD-level summary information on its progress in achieving its original savings estimate of $100 billion. DOD officials cited various reasons why compiling and reporting on this information may not be feasible. For example, they noted that the need to apply spending reductions in response to sequestration affected funding levels for many programs, including areas targeted for efficiency initiatives. As a result, DOD had to adjust plans for executing programs as well as for implementing initiatives, such as adjusting the scope of initiatives or the timing of actual or planned actions for implementation. Because of the variability in its programs and funding amounts, DOD officials stated that, at a certain point, it becomes difficult to isolate whether savings were achieved solely due to implementing initiatives rather than a combination of factors. We have previously reported on opportunities for DOD to improve tracking and reporting on cost savings and efficiencies. For example, in March 2012, we reported that DOD took steps to examine its headquarters resources for potential efficiencies, but that it faced an underlying challenge of not having complete and reliable headquarters information available to make related assessments and decisions. To improve DOD’s ability to identify how many headquarters personnel it has, we recommended that the Secretary of Defense direct the Director of Administration and Management, in consultation with the Under Secretary of Defense for Personnel and Readiness, to revise its DOD Instruction 5100.73, Major DOD Headquarters Activities, to, among other things, include all major DOD headquarters activity organizations. DOD partially concurred with our recommendation and commented that the shortcomings in the instruction have limited impact on the management of the department. In July 2012, we reported that, as part of one of its efficiency initiatives, the Air Force estimated it could save about $1.7 billion in its training program by reducing live flying hours and taking other steps, such as increasing the use of virtual training, but lacked a methodology for determining the costs of virtual training and therefore, did not consider these costs in its estimate.visibility over the costs related to virtual training, we recommended that the Secretary of Defense direct the Secretary of the Air Force to develop a methodology for collecting and tracking cost data for virtual training and use this cost data to help inform future decisions regarding the mix of live and virtual training. DOD concurred with our recommendation and To improve decision makers’ identified actions being taken to enhance its ability to capture costs related to virtual training. Additionally, in December 2012, we reported that DOD had developed an approach for the military departments and SOCOM to follow in tracking and reporting on the status of efficiency initiatives; however, DOD’s approach had some limitations that resulted in incomplete reporting which could limit the visibility of senior leaders in monitoring progress toward achieving programmatic and financial goals. Specifically, the offices of the Comptroller and DCMO had provided general direction through emails, briefings, and training, and, according to officials, had given the military departments and SOCOM flexibility to report on the efficiency initiatives that they felt were most important. In practice, the Army, Air Force, and SOCOM had reported on all of their efficiency initiatives, while the Navy reported on a subset of its initiatives based on what it deemed to be at medium or high risk of experiencing implementation issues or adversely affecting the Navy’s ability to carry out its mission. With respect to realized savings, we reported that the military departments and SOCOM told us they were on track to realize estimated savings, but found some instances where certain costs were not considered. For example, for its initiative to reduce fleet shore command personnel from U.S. Pacific Fleet and U.S. Fleet Forces Command, the Navy did not account for potential increases in relocation costs for moving personnel to other areas within the Navy. We found that the military departments and SOCOM were not reporting consistent information or complete cost information because they had not received written guidance with standardized definitions and methodologies. Rather, the direction provided by the offices of the Comptroller and DCMO did not specify whether all of the costs associated with implementing an efficiency initiative, including costs not initially identified, should be included. To ensure more complete and consistent reporting, we recommended that DOD develop guidance with standardized definitions and methodologies for the military departments and SOCOM to use in reporting. Further, we recommended that guidance should define reporting requirements for such things as the specific types of costs associated with implementing the initiatives, including implementation costs that were not initially identified in calculations of net savings. DOD agreed with the spirit and intent of our recommendation and indicated it planned to issue additional formal guidance in the February 2013 timeframe. The status of DOD’s implementation of this recommendation is discussed in more detail later in this report. Since initiating its initial round of initiatives for fiscal year 2012, DOD has continued to identify and implement efficiency initiatives. Specifically, in information accompanying its fiscal years 2013 and 2014 budget requests, DOD identified additional efficiency initiatives, referred to as More Disciplined Use of Resources (MDUR) initiatives. These initiatives are expected to generate $60 billion in savings for the period of fiscal years 2013 through 2017 and an additional $34 billion for the period of fiscal years 2014 through 2018. While savings generated by the Secretary’s fiscal year 2012 efficiency initiatives were to be reinvested, savings from the MDUR initiatives were intended to help the department meet reductions to its budget, and therefore will not be reinvested. More recently, on July 31, 2013, as part of DOD’s Strategic Choices and Management Review, the Secretary announced his plan to implement an additional round of efficiency initiatives in fiscal year 2015. According to the Secretary, a tenet of the review was the need to maximize savings from reducing DOD’s overhead, administrative costs, and other institutional expenses. These initiatives would include management reforms, coupled with consolidations, personnel cuts, and spending reductions that would reduce DOD’s overhead and operating costs by some $10 billion over the next 5 years and almost $40 billion over the next decade. DOD has taken steps to further refine its approach to its tracking and reporting on the implementation of its efficiency initiatives. Specifically, DOD issued written guidance that standardizes and expands the type of information on efficiency initiatives that the military departments and SOCOM are expected to report, which may improve visibility on the progress and risks in implementation for DOD decision makers. Moreover, in commenting on a draft of this report, DOD stated that it will cease to track initiatives once they have been implemented and will select for detailed tracking only those initiatives where this information will help it manage more effectively. Following our December 2012 report, the Comptroller issued written guidance in February 2013 establishing a standardized format for reporting on the fiscal year 2012 efficiency initiatives as well as the fiscal year 2013 MDUR initiatives. According to DOD officials, this guidance is also applicable to initiatives identified in fiscal year 2014 and any future initiatives. In contrast to the way they reported before, the military departments and SOCOM were now expected to report consistently and provide the status of their efficiency initiatives, including summary information related to (1) whether original net savings projections across the Future Years Defense Program are being met, (2) risks to program(s), mission(s), or resources associated with the efficiency initiative (characterized as “low”, “medium”, or “high” risk), and (3) any risks to “milestones” or the implementation status of the efficiency initiative (e.g., characterized as “on track,” “off track but can meet major milestones,” or “off track and cannot meet major milestones”). Only in instances where the military departments and SOCOM identified programs that were not achieving original net savings estimates or where program or milestone risk had been identified, the guidance requires further detail, including how implementation would be achieved. Further, all of the information was to be reported in a manner that mirrored the descriptions contained in DOD’s fiscal year 2012 budget request justification book for the efficiency initiatives, whereby some of the efficiency initiatives were collapsed into broader groups of initiatives referred to by descriptive titles. In February and March 2013, using the new February 2013 guidance, the military departments and SOCOM completed the first round of semi-annual reporting on the fiscal year 2012 efficiency initiatives and fiscal year 2013 MDUR initiatives. In reviewing the military departments’ and SOCOM’s February 2013 and March 2013 reports, we observed that, consistent with the aforementioned February 2013 guidance, the military departments and SOCOM reported details associated with only those efficiency initiatives that were not achieving original net savings estimates or where program or milestone risk had been identified. As a result, detailed information on the full range of efficiency initiatives and related programs was not included in their reports. For example, the Air Force has as many as 10 individual initiatives that comprise its acquisition management initiative. Absent a requirement in the February 2013 guidance to report on each of those underlying initiatives, DOD decision makers would only receive information on the overall acquisition management initiative. Moreover, as a result of the reporting direction, DOD decision makers would receive detailed information on the overall acquisition management initiative only if the initiative is not meeting original savings estimates, or where program or milestone risk had been identified. Prior to the February 2013 guidance, some departments and SOCOM had previously chosen to report on all their initiatives. In reviewing the reports developed by the military departments and SOCOM in February 2013 and March 2013, we observed that information on all initiatives was now unavailable to DOD decision makers, thus hindering their ability to assess implementation progress across the full range of efficiencies. We discussed with DOD Comptroller officials whether reporting on only those efficiency initiatives not achieving their original estimates or facing risk had provided the Comptroller with sufficient details to oversee all of the initiatives. Comptroller officials agreed that reporting on each of the individual efficiency initiatives would improve DOD decision makers’ visibility and therefore provide information needed for their oversight. They also noted that it would facilitate DOD’s ability to address any future congressional reporting requirements. As a result, the Comptroller’s office subsequently issued guidance in October 2013 that, according to these officials, superseded the February 2013 guidance and expanded the amount of information to be reported. Specifically, this guidance directed the military departments and SOCOM to submit further detail for all efficiency initiatives, rather than merely those not achieving the original estimates or at risk. Beginning in October 2013, the military departments and SOCOM began submitting reports that included this broader set of information. While obtaining this broader set of information, DOD stated in its written comments on a draft of this report, provided on January 6, 2014, that it will narrow the scope of efficiency initiatives that will be tracked due to the period of constrained resources it is experiencing. DOD stated that it will cease tracking initiatives once they have been implemented, and will select for detailed tracking only those initiatives where this information will help it manage more effectively. In clarifying its written comments, DOD officials stated that all of its efficiency initiatives, except those implemented or which strictly call for terminations of programs, such as weapons systems, will be selected for detailed tracking. While the October 2013 guidance, which requires the military departments and SOCOM to report more detailed information on the full range of ongoing efficiency initiatives, does not specify that initiatives that strictly call for program terminations should no longer be tracked, we believe it is reasonable for DOD to cease the tracking of initiatives that strictly call for program terminations. We note that, in issuing additional guidance on its tracking and reporting on efficiency initiatives, DOD did not include any direction as to the specific types of costs that the military departments and SOCOM should consider in determining realized savings associated with implementation, such as costs that were not initially identified in calculations of net savings, as we had recommended in our December 2012 report. According to a Comptroller official, DOD has various guidance on developing cost estimates that the military departments and SOCOM can use in determining savings associated with the implementation of their efficiency initiatives. We reviewed the documents and discussed with the efficiency initiative focal points how, or if, this guidance was applied in developing their cost estimates. Some of the program managers with whom we spoke confirmed that while they were aware of existing guidance on developing cost estimates, they had not been instructed to use this guidance to determine specific types of costs that should be considered in calculating net savings. As a result, we continue to believe that our prior recommendation in our December 2012 report has merit and should be implemented. The military departments and SOCOM have taken steps to evaluate some of their efficiency initiatives, such as establishing performance measures and collecting performance data. However, these efforts have largely occurred on an ad hoc basis and vary by efficiency initiative because DOD has not established a requirement for performing such evaluations. As a result, DOD lacks a systematic basis for evaluating the impact of its efficiency initiatives on improving program efficiency or effectiveness. In setting forth the initial efficiency initiatives, the Secretary of Defense intended for DOD to improve the effectiveness and efficiency of its programs and activities. The Secretary also directed that any efficiency initiative must be specific, actionable, and measurable. Our prior review of federal agencies’ efficiency efforts concluded that an improvement in efficiency need not only involve a reduction in costs, but also can be achieved by maintaining federal government services or outcomes with fewer resources (such as time or money), or improving or increasing the quality or quantity of services while maintaining (or reducing) resources. In addition, we and other agencies, such as the Office of Management and Budget (OMB), have documented the need to develop performance measures for evaluating progress toward achieving desired outcomes. For example, as we have previously concluded, performance measures should be measurable, outcome-oriented, and actively tracked and reported. As our prior work has shown, leading organizations that employ result-oriented management use performance information as a basis for decision making and have found this approach improves program results. As previously discussed, the Comptroller’s October 2013 guidance provides direction on how the military departments and SOCOM are to approach reporting on the status of their efficiency initiatives, but does not require them to develop approaches for evaluating the impact of initiatives on achieving desired outcomes. In practice, we found that the military departments and SOCOM varied in the extent to which they evaluated individual efficiency initiatives, including whether they had established measures or indicators to gauge the impact on program efficiency or effectiveness beyond savings. The following paragraphs provide examples of the services’ and SOCOM’s efforts to evaluate certain efficiency initiatives. Air Force’s Facility Sustainment Initiative: This initiative is intended to reduce infrastructure maintenance costs by a total of $1.4 billion during the period of fiscal years 2012 through 2016 by performing preventative maintenance before critical failures occur. The Air Force uses a model to predict and prioritize infrastructure most at risk for critical failures and then focuses preventive maintenance efforts on such infrastructure. Furthermore, the Air Force has established measures to track the amount of hours spent performing preventive and corrective maintenance over the course of the initiative to determine whether this effort achieved the intended outcome, which was to reduce the amount of more costly corrective maintenance performed. We have previously concluded that deferring facility sustainment can lead to shortened facility service lives and increased future costs for recapitalization. SOCOM’s Information Technology Services Efficiency Initiative: SOCOM established a new approach for its information technology services that is intended to reduce costs by a total of $394 million during the period of fiscal years 2012 through 2016. According to SOCOM officials, the new approach involved a contract framework for information technology services that reduces costs by awarding funds directly to the organizations that provide the services on a competitive basis, rather than through an intermediary that selects the organizations that provide the information technology services. The approach also adopts other best practices for procurement, such as providing performance-based incentives. As part of this initiative, SOCOM established multiple individual measures to assess contractor performance, such as answering a help desk call within a set amount of time or tracking trends on resolving information technology issues such as user access, but does not have measures in place to evaluate how the overall impact of the initiative affects the delivery of information technology services relative to the previous approach. SOCOM officials explained that because the implementation of its Information Technology Services Efficiency Contract occurred prior to it being identified as an efficiency initiative, methods of evaluating its effectiveness or efficiency, other than cost, were not established. Navy’s Total Ownership Cost Initiative: This initiative seeks to achieve efficiencies through life cycle management of the Navy’s ships and encompasses multiple underlying initiatives, such as the Navy’s Revised Virginia Class Drawings Efficiency Initiative. This initiative is intended to reduce costs of $30.3 million during the period of fiscal years 2012 through 2016 by moving away from reliance on paper documents toward an electronic system that allows multiple users to make revisions and access up-to-date documents. The Navy has not yet identified measures to evaluate how increasing the use of the electronic system to process technical documents will maintain or improve work processes. Navy officials indicated the same is true for other fiscal year 2012 initiatives that make up the Navy’s Total Ownership Cost initiative and commented that the focus was on tracking savings and not on developing efficiency measures to assess whether its initiatives, once implemented, improve the effectiveness or efficiency of these programs. Army and Air Force Data Center Consolidation Efficiency Initiatives: These initiatives are part of the larger Federal Data Center Consolidation Initiative, directed by OMB, that seeks to consolidate information technology infrastructure and activities to save energy costs, among other goals, and are expected to reduce the Army and Air Force’s costs by $490 million and $180 million, respectively, during fiscal years 2012 through 2016. Both the Army and Air Force have taken steps to implement these initiatives. According to Air Force officials, they had begun to establish measures that could be used to evaluate the impact of these initiatives, but faced some challenges due to changing guidance. For example, officials discussed that OMB guidance issued after the initiatives were underway expanded the definition of a data center and effectively increased the scope of the military departments’ consolidation effort after these initiatives were submitted in the fiscal year 2012 budget request. This resulted in the reconfiguration of planning and implementation schedules. Air Force officials also stated that they had begun to develop performance measures to assess impact when a new DOD effort to establish a secure, joint information environment was put in place. Therefore, the Air Force had to adjust their implementation plans and postpone the development of their measures to ensure actions taken on this initiative conformed to the new DOD requirement. While the focus of DOD’s effort was to quickly identify funds that could be reinvested into other higher priority programs, military department and SOCOM officials explained that because the initial effort to identify efficiency initiatives occurred late at the end of the cycle they used to build their fiscal year 2012 budget submission, their effort focused on tracking savings targets and not on developing measures to evaluate impact. In the subsequent budget cycles that included the MDUR initiatives, the focus remained on identifying areas for reductions in spending. DOD officials agreed that additional measures could be useful to evaluate impacts—beyond savings—of their efficiency initiatives. Our prior work concluded that such measures can assist managers in determining whether desired outcomes were being achieved or if adjustments were needed, such as in the scope of the initiative or to the nature or timing of implementation actions. Without a systematic way to evaluate the impact of its efficiency initiatives, DOD is limited in its ability to assess whether the efficiency initiatives have improved the effectiveness or efficiency of its programs and activities. Over the past few years, in light of mounting fiscal pressures, DOD has continued to identify and implement efficiency initiatives with certain goals in mind, including achieving cost savings and seeking opportunities to enhance the efficiency or effectiveness of its programs and activities. DOD’s recent efforts to refine its approach for tracking and reporting on its current efficiency initiatives has the potential for providing greater oversight to decision makers on progress of the military departments and SOCOM on the status of their implementation efforts. However, its efforts to date do not sufficiently ensure that leaders have the information they need to fully assess the impact these initiatives are having on DOD’s programs and activities. Having a systematic way to evaluate the impact of its efficiency initiatives beyond cost savings could provide DOD the ability to determine whether or not its initiatives are improving the efficiency and effectiveness of its programs and activities while also achieving savings. Such information could also inform DOD as to whether actions are needed to make adjustments to the scope of any given initiative and related programmatic actions necessary for implementation. To enhance DOD’s ability to determine whether its efficiency initiatives are having the desired effect of improving efficiency and effectiveness, we recommend that the Secretary of Defense require the military departments and SOCOM to develop approaches for evaluating the impact of their efficiency initiatives, such as establishing performance measures or other indicators, collecting related performance information, and using this information to measure progress in achieving intended outcomes associated with their initiatives until implemented. In written comments on a draft of this report, DOD concurred with our recommendation and provided additional comment. Specifically, DOD concurred with having the military departments and SOCOM develop performance measures and other indicators for evaluating the impact of its efficiency initiatives, and commented that it has decided to cease tracking initiatives once they have been implemented. DOD also provided technical comments, which were incorporated as appropriate. The full text of DOD’s comments is reprinted in appendix II. In its overall comments, DOD stated it intends to continue to refine its procedures, guidance, and oversight in order to achieve its goal of identifying and implementing efficiencies. DOD also stated that during this period of constrained resources, it must avoid creating a costly and redundant oversight process. To that end, DOD stated that it will cease tracking initiatives once they have been implemented, and will select for detailed tracking only those initiatives where this information will help it manage more effectively. We have modified the report to reflect DOD’s decision. In clarifying its written comments, DOD officials stated that DOD will select for detailed tracking all of its efficiency initiatives except those implemented or which strictly call for terminations of programs, such as weapons systems. While the October 2013 guidance does not specify that initiatives that strictly call for program terminations should no longer be tracked, in a resource-constrained environment, we believe it is reasonable for DOD to do so. We also expect that DOD will clarify this revised approach in any future guidance to the military departments and SOCOM. In addition, we have modified the recommendation to clarify its intent that DOD should develop an approach for evaluating the impact of its efficiency initiatives until those initiatives have been implemented. We are sending copies of this report to the Secretary of Defense 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 have any questions about this report, please contact me at (202) 512-5257 or merrittz@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 III. To determine the progress DOD has made in adjusting its approach to tracking and reporting on the implementation of its efficiency initiatives since we last reported in December 2012 and to assess the extent to which DOD is evaluating the impact of its efficiency initiatives on DOD programs and activities, we reviewed guidance and documentation issued at the department-wide level as well as within the military departments and SOCOM. We also interviewed officials from the offices of the Comptroller and DCMO, the military departments, and SOCOM who are involved in monitoring the implementation of its efficiency initiatives to discuss their approach to tracking and reporting on the initiatives. Specifically, we obtained available information from each of the military departments and SOCOM, including briefings prepared for senior DOD officials, on the current status of initiatives, how original estimates of savings compared with savings realized to date, and any program or timeline risks associated with implementing the efficiency initiatives. Additionally, we reviewed existing guidance to identify any requirements for evaluation of the efficiency initiatives. We then analyzed information provided by each of the military departments and SOCOM as well as interviewed officials from each of the military services and SOCOM serving as focal points for the efficiency initiatives to determine the expected outcome or impact for individual initiatives, and what steps they have taken to evaluate the impact of efficiency initiatives. We conducted this performance audit from May 2013 through 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 contact named above, Tina Won Sherman, Assistant Director; Grace Coleman; Susan Langley; Ricardo A. Marquez; Sharon L. Pickup; Mike Silver; Michael Shaughnessy; Susan Tindall; and Sarah Veale made key contributions to this report. | In May 2010, the Secretary of Defense announced a department-wide initiative with the goal of achieving efficiencies and reducing excess overhead costs while reinvesting those savings in sustaining DOD's force structure and modernizing its weapons portfolio. The Secretary tasked the military departments and SOCOM to find estimated savings of about $100 billion over the period of fiscal years 2012 to 2016. For fiscal years 2013 and 2014, DOD identified additional efficiency initiatives. The National Defense Authorization Act for Fiscal Year 2012 mandated that GAO assess the extent to which DOD has tracked and realized savings proposed pursuant to the initiative to identify $100 billion in efficiencies. As the second report in response to this mandate, this report addresses 1) DOD's progress in adjusting its approach to tracking and reporting on the implementation of its efficiency initiatives since GAO's December 2012 report, and 2) the extent to which DOD is evaluating the impact of its initiatives. GAO reviewed guidance, and analyzed and discussed information developed after December 2012 with DOD officials. The Department of Defense (DOD) has refined its approach for tracking and reporting on the status of efficiency initiatives by establishing specific requirements to standardize and expand the type of information that the military departments (Army, Navy, and Air Force) and U.S. Special Operations Command (SOCOM) report to senior decision makers. Initially, DOD provided general direction through emails, briefings, and training, which gave the military departments and SOCOM flexibility to selectively report on the initiatives that they believed were important, resulting in inconsistencies. For example, prior to February 2013, all but the Navy had chosen to report on all their initiatives. In February 2013, the DOD Comptroller issued written guidance that specified the type of information to be reported, including 1) whether original net savings projections are being met, and 2) any associated program or milestone risks. In instances where original net savings projects were not met or risks were identified, the guidance required further detail such as how implementation would be achieved. As a result, in their March 2013 reports, the military departments and SOCOM only reported details on those initiatives that were not achieving original net savings estimates or where risk had been identified. GAO observed, during this review, that information on all initiatives was now unavailable to DOD decision makers, thus hindering their ability to assess implementation progress across the full range of initiatives. Comptroller officials agreed that such information would enhance DOD's oversight, and in October 2013, the DOD Comptroller issued updated guidance, directing that this information also be reported on initiatives on track to achieve savings or not experiencing risk. The military departments and SOCOM subsequently began submitting reports with this broader set of information. The military departments and SOCOM have taken steps to evaluate the impact of some of their efficiency initiatives, such as establishing performance measures to assess their impact on achieving desired outcomes. However, this has largely occurred on an ad hoc basis and varies by initiative because DOD has not required such evaluations. As a result, DOD lacks a systematic basis for evaluating whether its various initiatives have improved the efficiency or effectiveness of its programs or activities. In setting forth initiatives, the Secretary of Defense intended for DOD to improve the effectiveness and efficiency of its programs and activities, and that related initiatives should be specific, actionable, and measurable. While DOD has provided direction on how the military departments and SOCOM are to report on implementation status, this direction does not require them to develop approaches for evaluating the impact of their initiatives. In practice, the military departments and SOCOM varied in the extent to which they evaluated initiatives, including whether they had established measures or other indicators to assess outcomes. For example, GAO found instances where the military departments and SOCOM had established measures and assessed progress for some but not all initiatives. Developing a more systematic approach to evaluating the impact of its initiatives could provide DOD with more complete information to assess whether the initiatives are accomplishing desired outcomes, beyond achieving savings, and whether adjustments are needed in the scope of implementing the initiatives. GAO recommends that DOD establish a requirement for the military departments and SOCOM to develop approaches for evaluating the impact of their efficiency initiatives, such as developing performance measures or other indicators. DOD concurred with GAO's recommendation, and provided additional comments that it will cease tracking initiatives that strictly call for program terminations. GAO believes this to be a reasonable approach. |
DOD is one of the largest and most complex organizations in the world. Overhauling its business operations will take many years to accomplish and represents a huge management challenge. Execution of DOD’s operations spans a wide range of defense organizations, including the military services and their respective major commands and functional activities, numerous large defense agencies and field activities, and various combatant and joint operational commands that are responsible for military operations for specific geographic regions or theaters of operation. To support DOD’s operations, the department performs an assortment of interrelated and interdependent business functions—using more than 3,700 business systems—related to major business areas such as weapon systems management, supply chain management, procurement, health care management, and financial management. The ability of these systems to operate as intended affects the lives of our warfighters both on and off the battlefield. For fiscal year 2006, Congress appropriated approximately $15.5 billion to DOD, and for fiscal year 2007, DOD has requested another $16 billion in appropriated funds to operate, maintain, and modernize these business systems and associated infrastructure. Until DOD can successfully transform its operations, it will continue to confront the pervasive, decades-old management problems that cut across all of DOD’s major business areas. Since our report on the financial statement audit of a major DOD component over 16 years ago, we have repeatedly reported that weaknesses in business management systems, processes, and internal controls not only adversely affect the reliability of reported financial data, but also the management of DOD operations. In March 2006, I testified that DOD’s financial management deficiencies, taken together, continue to represent the single largest obstacle to achieving an unqualified opinion on the U.S. government’s consolidated financial statements. These issues were also discussed in the latest consolidated financial audit report. To date, none of the military services or major DOD components has passed the test of an independent financial audit because of pervasive weaknesses in internal control and processes and fundamentally flawed business systems. DOD’s financial management problems are pervasive, complex, long- standing, deeply rooted in virtually all of its business operations, and challenging to resolve. The nature and severity of DOD’s financial management business operations and system deficiencies not only affect financial reporting, but also impede the ability of DOD managers to receive the full range of information needed to effectively manage day-to-day operations. Such weaknesses have adversely affected the ability of DOD to control costs, ensure basic accountability, anticipate future costs and claims on the budget, measure performance, maintain funds control, prevent fraud, and address pressing management issues, including supporting warfighters and their families. Transformation of DOD’s business systems and operations is key to improving the department’s ability to provide DOD management and Congress with accurate, timely, reliable, and useful information for analysis, oversight, and decision making. This effort is an essential part of the Secretary of Defense’s broad initiative to “transform the way the department works and what it works on.” The savings resulting from an effective business transformation effort could be significant. I would like to take a few minutes to briefly discuss two critical elements that are still needed at DOD to ensure successful and sustainable business transformation before turning to DOD’s business modernization and financial management accountability improvement efforts. First, DOD needs a comprehensive, integrated, and enterprisewide plan to guide its overall business transformation efforts. Second, a chief management official with the right skills and at the right level of the department is essential for providing the leadership continuity needed to sustain the momentum for business transformation efforts across administrations and ensure successful implementation. DOD has not fully developed a comprehensive, integrated, and enterprisewide strategy or action plan for managing its overall business transformation effort. The lack of a comprehensive, integrated, and enterprisewide action plan linked with performance goals, objectives, and rewards has been a continuing weakness in DOD’s overall business transformation efforts that I have been testifying on for years. I recognize that DOD’s efforts to plan and organize itself to achieve business transformation are continuing to evolve. However, I cannot emphasize enough how critical to the success of these efforts are top management attention and structures that focus on transformation from a broad perspective and a clear, comprehensive, integrated, and enterprisewide plan that, at a summary level, addresses all of the department’s major business operations. This plan should cover all of DOD’s key business functions; contain results-oriented goals, measures, and expectations that link institutional, unit, and individual performance goals and expectations to promote accountability; identify people with needed skills, knowledge, experience, responsibility, and authority to implement the plan; and establish an effective process and related tools for implementation and oversight. Such an integrated business transformation plan would be instrumental in establishing investment priorities and guiding the department’s key resource decisions. While DOD has developed plans that address aspects of business transformation at different organizational levels, these plans have not been clearly aligned into a comprehensive, integrated, and enterprisewide approach to business transformation. As I will shortly discuss in more detail, DOD recently issued an enterprise transition plan (ETP) that is to serve as a road map and management tool for sequencing business system investments in the areas of personnel, logistics, real property, acquisition, purchasing, and financial management. As Business Transformation Agency (BTA) officials acknowledge, the ETP does not contain all of the components of a comprehensive and integrated enterprisewide transformation plan as we envision. BTA officials stated that, while the ETP is integrated with the Financial Improvement and Audit Readiness Plan, the ETP is not as integrated with other enterprisewide, high-risk area improvement plans, such as the Supply Chain Plan. However, BTA officials consider the ETP to be an evolving plan and are currently analyzing other enterprisewide plans aimed at improving and transforming DOD’s business operations in order to improve the degree of alignment between those plans and the ETP. Finally, BTA officials indicate that the department is moving toward a family of linked plans that could be used to guide and monitor business transformation, rather than one comprehensive plan that addresses all aspects of DOD’s business operations. To develop a family of linked plans, the enterprise transition plan would also need to be aligned with the high-level Quadrennial Defense Review (QDR) strategic plan and its initiatives, which so far is not the case. For example, the QDR highlights the need for transforming the way the department works and what it works on, but it does not contain supporting details such as key metrics, milestones, and mechanisms to guide and direct the business transformation effort. Moreover, the QDR’s business transformation initiative, the Institutional Reform and Governance project, is not clearly aligned with the ETP. This initiative is intended to (1) establish a common and authoritative analytical framework to link strategic decisions to execution, (2) integrate core decision processes, (3) and align and focus the department’s governance and management functions under an integrated enterprise model. Finally, the QDR and other DOD planning documents do not address the ongoing gap between wants, needs, affordability, and sustainability in what is likely to be a resource-constrained environment. While DOD has established leadership and oversight mechanisms to address transformation, DOD lacks the sustained leadership at the right level needed to achieve successful and lasting transformation. Due to the complexity and long-term nature of DOD’s business transformation efforts, we continue to believe DOD needs a chief management officer (CMO) to provide sustained leadership and maintain momentum. Without formally designating responsibility and accountability for results, choosing among competing demands for scarce resources and resolving differences in priorities among various DOD organizations will be difficult and could impede DOD’s ability to transform in an efficient, effective, and reasonably timely manner. In addition, it may be particularly difficult for DOD to sustain transformation progress when key personnel changes occur. This position would elevate, integrate, and institutionalize the attention essential for addressing key stewardship responsibilities, such as strategic planning, enterprise architecture development and implementation, information technology management, and financial management, while facilitating the overall business management transformation effort within DOD. I would also like to articulate what this position would not do. The CMO would not be another layer in DOD’s day-to-day management structure. Specifically, the CMO would not assume the responsibilities of the undersecretaries of defense, the service secretaries, or other DOD officials for the day-to-day management of the department, nor would the CMO supervise those officials in connection with their ongoing responsibilities. Instead, the CMO would be responsible and accountable for planning, integrating, and executing the overall business transformation effort. The CMO also would develop and implement a strategic plan for the overall business transformation effort. As required by Congress, DOD is studying the feasibility and advisability of establishing a CMO to oversee the department’s business transformation process. As part of this effort, the Defense Business Board, an advisory panel, examined various options and, in May 2006, endorsed this concept. The Institute for Defense Analysis is scheduled to issue a report on this issue before the end of this year. In addition, McKinsey and Company recently endorsed the CMO concept. The Secretary of Defense, Deputy Secretary of Defense, and other senior leaders have clearly shown a commitment to business transformation and addressing deficiencies in the department’s business operations. During the past year, DOD has taken additional steps to address certain provisions and requirements of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, including establishing the Defense Business Systems Management Committee (DBSMC), which is intended to be DOD’s primary transformation leadership and oversight mechanism, and creating the BTA to support the DBSMC, a decision-making body. However, these organizations do not provide the sustained leadership needed to successfully achieve the needed overall business transformation. The DBSMC’s representatives consist of political appointees whose terms expire when administrations change. Furthermore, it is important to remember that committees do not lead, people do. Thus, DOD still needs to designate a person to provide sustained leadership and have overall responsibility and accountability for this effort. In addition, we testified in November 2005 that DOD’s BTA offers potential benefits relative to the department’s business systems modernization efforts if the agency can be properly organized, given resources, and empowered to effectively execute its roles and responsibilities and is held accountable for doing so. However, the department has faced challenges in making the BTA operational. For example, we previously testified that there are numerous key acquisition functions that would need to be established and made operational for the BTA to effectively assume responsibility for 21 DOD-wide projects, programs, systems, and initiatives, and our experience across the government shows that these functions can take considerable time to establish. To assist the department, the Fiscal Year 2004 National Defense Authorization Act gives DOD the authority to hire up to 2,500 highly qualified experts from outside the civil service and uniformed services without going through the normal civil service hiring system. Earlier this year, the BTA had yet to take advantage of this authority because of certain departmental obstacles concerning, for example, the roles that these experts could perform. However, it is our understanding that this is no longer the case, and to date the BTA has hired 9 of these individuals. Moreover, we were told that the BTA has also obtained direct hiring authority from the Office of Personnel Management. The BTA’s total projected end strength is 235 personnel. As of November 2006, the BTA had hired 128 personnel; agency officials anticipate hiring the remaining 107 personnel, including 16 additional highly qualified subject experts by September 30, 2007. While achieving the BTA’s initial staffing goals would represent a major accomplishment and is extremely important to its ability to perform its business transformation and business systems modernization roles and responsibilities, BTA human capital management is not a one-time event but rather an essential BTA function that needs to be managed strategically. Our research shows that to be successful, organizations need to treat human capital as strategic assets—continuously working to understand gaps between future needs and on-board capabilities and establish plans for filling gaps through a combination of, for example, training, retention incentives, hiring, and performance-related rewards. By employing such an approach, the BTA can be better positioned to make sure that it has the right people, with the right skills, when it needs them not only today but in the future. The Deputy Undersecretary of Defense for Financial Management stated that the BTA is currently developing a human capital strategy that is expected to be completed by January 2007. It will to (1) provide for rotating staff between BTA and the DOD components to infuse talent into the BTA and to develop a change- oriented culture, (2) align individual and team performance to already established organizational mission outcomes, and (3) employ OPM’s Human Capital Assessment and Accountability Framework and the DOD Human Capital Strategy. The department has made important progress in complying with legislation pertaining to its financial management improvement and business systems modernization efforts. However, formidable challenges remain relative to extending the architecture and implementing its tiered accountability investment approach across the military services and defense agencies, and ensuring that the department’s thousands of business system investments are implemented on time and within budget and provide promised capabilities and benefits. The Fiscal Year 2005 National Defense Authorization Act contained provisions aimed at establishing some of the tools needed to accomplish this. As our evaluations of federal information technology (IT) management and our research of successful organizations show, other tools necessary for successfully modernizing systems will also be needed. As we reported earlier this year, DOD also made important progress in complying with the Fiscal Year 2005 National Defense Authorization Act pertaining to its business systems modernization. For example, on March 15, 2006, DOD released updates to its business enterprise architecture (Version 3.1) and its ETP. These updates added previously missing content to the architecture and transition plan, such as identifying an enterprisewide data standard to support financial management and reporting requirements. Other business system modernization management improvements were also apparent, such as increased budgetary reporting of business system investments and additional investment review controls. More recently, DOD issued Version 4.0 of its business enterprise architecture and ETP. These latest versions provide additional content and clarity. For example, the transition plan now includes the results of ongoing analyses of gaps between existing business capabilities and needed capabilities. However, enormous challenges, such as extending the architecture across the military services and defense agencies, remain. To this end, the department defined a conceptual strategy in September 2006, for federating the architecture and adopting a shared services orientation. While we believe that the concepts have merit and are applicable to DOD, much remains to be decided and accomplished before they can be implemented in a way to produce architectures and transition plans for each DOD component that are aligned with the department’s corporate view and that can guide and constrain component-specific investments. At the same time, DOD components continue to invest billions of dollars in new and existing business systems each year. This means that the risks of investing in these programs ahead of the federated architecture need to be part of investment approval decisions. As we have previously reported, investment decision making based on architecture alignment is but one of many keys to success of any business system modernization. Other keys to the success in delivering promised system capabilities and benefits on time and within budget include having the right human capital team in place and following a range of essential program management and system and software acquisition disciplines. As I will discuss later, our experience in reviewing several DOD business system programs shows that these keys to success are not consistently practiced. While not a guarantee, our research of leading program management and system acquisition practices and evaluations of federal agencies shows that institutionalization of a family of well-defined management controls can go a long way in minimizing business system modernization risks. In May 2006, we reported on DOD’s efforts to address a number of provisions in the Fiscal Year 2005 National Defense Authorization Act. Among other things, we stated that the department had adopted an incremental strategy for developing and implementing its architecture, which was consistent with our prior recommendation and a best practice. We further stated that DOD had addressed a number of the limitations in prior versions of its architecture. For example, we reported that Version 3.1 of the architecture had much of the information needed, if properly implemented, to achieve compliance with the Department of the Treasury’s United States Standard General Ledger, such as the data elements or attributes that are needed to facilitate information sharing and reconciliation with the Treasury. In addition, we stated that the architecture continued to specify DOD’s Standard Financial Information Structure (SFIS) as an enterprisewide data standard for categorizing financial information to support financial management and reporting functions. Despite this progress, we also reported that this version of the architecture did not comply with all of the legislative requirements and related best practices. For example, while program officials stated that analyses of the current architectural environment for several of the enterprise-level systems had occurred, the architecture did not contain a description of, or a reference to, the results of these analyses. The architecture also did not include a systems standards profile to support implementation of data sharing among departmentwide business systems and interoperability with departmentwide IT infrastructure. Program officials acknowledged that the architecture did not include this profile and stated that they were working with the Assistant Secretary of Defense (Networks and Information Integration) and Chief Information Officer to address this in future versions. We also reported that the architecture was not, for example, adequately linked to the military service and defense agency component architectures and transition plans, which we said was particularly important given the department’s stated intention to adopt a federated approach to developing and implementing the architecture. In September 2006, DOD released Version 4.0 of its architecture, which according to the department, resolves several of the architecture gaps that were identified with the prior version. One example of a gap that DOD reports Version 4.0 is beginning to fill is the definition of a key business process area missing from prior versions—the planning, programming, and budgeting process area. In this regard, according to DOD, the architecture now includes departmental and other federal planning, programming, and budgeting guidance (e.g., OMB Circular A-11) and some high-level activities associated with this process area. In addition, DOD reports that Version 4.0 has restructured the business process models to reduce data redundancy and ensure adherence to process modeling standards (e.g., eliminated numerous process modeling standards violations and stand-alone process steps with no linkages). Despite these improvements, this version is still missing, for example, a depiction of the current environment (i.e., baseline of its current assets and current capabilities) that was analyzed against its target environment to identify capability gaps that the ETP is to address. Further, it does not include DOD component architectures (e.g., services and various DOD agencies) as distinct yet coherent members of a federated DOD business enterprise architecture. Recognizing the need to address component architectures, DOD released its business mission area federation strategy and road map in September 2006, which is intended to define how DOD will extend its business enterprise architecture across the military services and defense agencies. According to DOD, the strategy will provide for standardization across the federation of architectures by, for example, introducing a consistent set of standards for determining the status and quality of the member (component and program) architectures, a standard methodology for linking member architectures to the overarching corporate architecture, the capability to search member architectures, and a common method to reuse capabilities described by these architectures. In the end, the strategy is intended to link related business mission area services or capabilities in the various architectures by establishing a set of configuration standards for architecture repositories. Further, the strategy is also intended to support the development of the interoperable execution of enterprise and component systems by defining and disclosing common services that can be shared and reused by these systems. (See fig. 1 for a simplified and illustrative conceptual depiction of DOD’s federated business enterprise architecture.) The importance of extending the DOD business enterprise architecture to the military services is underscored by our recent findings about the military services’ management of their respective enterprise architecture programs. Specifically, in August 2006, we released an assessment of federal agency enterprise architecture programs’ satisfaction of the elements in our Enterprise Architecture Management Maturity Framework (EAMMF). Our EAMMF is a five-stage architecture framework for managing the development, maintenance, and implementation of an architecture and understanding the extent to which effective architecture management practices are being performed and where an organization is in its progression toward having a well-managed architecture program. In short, the framework consists of 31 core elements that relate to architecture governance, content, use, and measurement. These elements reflect research by us and others showing that architecture programs should be founded upon institutional architecture commitment and capabilities, and measured and verified products and results. With respect to the maturity of the military services’ respective enterprise architecture programs, we found that the departments of the Air Force, the Army, and the Navy had not satisfied about 29, 55, and 29 percent of the core elements in our framework, respectively. In addition, the Army had only fully satisfied 1 of the 31 core elements (3 percent). (See table 1 for the number and percentage of elements fully, partially, and not satisfied by each of the military services). By comparison, the other major federal departments and agencies that we reviewed had as a whole fully satisfied about 67 percent of the framework’s core elements. Among the key elements that all three services had not fully satisfied were developing architecture products that describe their respective target architectural environments and developing transition plans for migrating to a target environment, in addition to the following. The Air Force, for example, had not yet placed its architecture products under configuration management to ensure the integrity and consistency of these products and was not measuring and reporting on the quality of these products. The Army, for example, had yet to develop effective architecture development plans and had not developed architecture products that fully described its current architectural environment. The Navy, for example, had yet to describe its current architectural environment in terms of performance and had not explicitly addressed security in its architecture descriptions. Further, while the services had partially satisfied between 8 and 13 core elements in our framework, it is important to note that even though certain core elements are partially satisfied, fully satisfying some of them will not be accomplished quickly and easily. It is also important to note the importance of fully, rather than partially, satisfying certain elements, such as those that address architecture content, which can have important implications for the quality of an architecture and thus its usability and results. To assist the military services in addressing enterprise architecture challenges and managing their architecture programs, we recommended that the services develop and implement plans for fully satisfying each of the conditions in our framework. The department generally agreed with our findings and recommendations and stated that it plans to use our framework as one of the benchmark best practices as DOD components continuously work to improve enterprise architecture management maturity. Clearly, much remains to be accomplished to implement the federated strategy and create DOD’s federated business enterprise architecture. One key to making this happen, which we have previously recommended, is having a business enterprise architecture development management plan that defines what will be done, when, by whom, and how it will done to fully develop the architecture. Having and using such a plan is provided for in our EAMMF. Without one, the department is less likely to effectively accomplish its intended architecture evolution, extension, and improvement efforts. According to BTA officials, they are in the process of addressing this recommendation. We currently have ongoing work for this committee and others looking at, among other things, how the department plans to implement the federated strategy and the challenges that it faces in doing so. DOD has taken a number of steps to improve its ETP and address some of the missing elements that we previously identified relative to the Fiscal Year 2005 National Defense Authorization Act’s requirements and related transition planning guidance. For example, in May 2006, we reported that the transition plan included an initiative aimed at identifying capability gaps between the current and target architectural environments, and provided information on progress on major investments—including key accomplishments and milestones attained, and more information about the termination of legacy systems. However, we reported that it still did not identify, among other things, all legacy systems that will not be part of the target architecture, and it did not include system investment information for all the military services, defense agencies, and combatant commands. In September 2006, DOD released an updated revision to its ETP, which continues to include major investments—such as key accomplishments and milestones attained, as well as new information on near-term activities (i.e., within the next 6 months) at both the enterprise and component levels. For example, in an effort to improve visibility into personnel activities, DOD reported that, for the Defense Civilian Personnel Data System, it met the September 2006 milestone to implement enterprisewide tools for use in advanced reporting and data warehousing, and that it has set a September 2008 milestone for developing an implementation strategy for integrating modules supporting functionality that is currently provided by stand-alone applications. In addition, the updated plan provides information on business priorities supported by systems and initiatives and aligns these priorities with a set of business value measures (e.g., on- time customer request, payroll accuracy). Specifically, for each business enterprise priority, the plan now identifies the business capability improvements (e.g., manage personnel and pay) necessary to achieve the business enterprise priority (e.g., personnel visibility) objectives and the metrics for measuring progress towards achieving these objectives. In addition, the plan now identifies the relationship between target systems, business capabilities, operational activities, and the system functions they provide and specific organizations that will or plan to use the system. Further, the transition plan now includes the initial results of ongoing analyses of gaps between its current and target environments for most of the business enterprise priorities, in which capability and performance shortfalls and their root causes are described and the architecture solution component (such as business rules and transformation initiatives and systems) that are to address these shortfalls are identified. However, the current transition plan is still missing important elements. Specifically, the plan does not yet include system investment information for all the defense agencies and combatant commands. In addition, the planned investments in the transition plan are not sequenced based on a range of activities that are critical to developing an effective transition plan. As we have previously reported, a transition or sequencing plan should provide a temporal investment road map for moving between the current and target environments, based on such considerations as technology opportunities, marketplace trends, institutional system development and acquisition capabilities, legacy and new system dependencies and life expectancies, and the projected value of competing investments. According to a BTA official responsible for the ETP, the transition plan investments have not been sequenced based on these considerations. Rather, the ETP is based on fiscal year budgetary constraints. Program officials stated that the next version of the plan will enhance performance metric tracking, improve the quality of system functional scope and organizational span information, better integrate component plans with enterprise plans, enhance federating plans for each business capability, and possibly add other components to the enterprise transition plan. As the transition plan evolves and all system investments are validated against the architecture via capability gap analyses, the department should be better positioned to sequentially define and manage the migration and disposition of existing business processes and systems—and the introduction of new ones. To help improve the department’s control and accountability over its business systems investments, provisions in the Fiscal Year 2005 National Defense Authorization Act directed DOD to put in place a specifically defined structure that is responsible and accountable for controlling business systems investments to ensure compliance and consistency with the business enterprise architecture. More specifically, the act directs the Secretary of Defense to delegate responsibility for review, approval, and oversight of the planning, design, acquisition, deployment, operation, maintenance, and modernization of defense business systems to designated approval authorities or “owners” of certain business missions. DOD has satisfied this requirement under the act. On March 19, 2005, the Deputy Secretary of Defense issued a memorandum that delegated the authority in accordance with the criteria specified in the act, as described above. Our research and evaluation of agencies’ investment management practices have shown that clear assignment of senior executive investment management responsibility and accountability is crucial to having an effective institutional approach to IT investment management. The Fiscal Year 2005 National Defense National Authorization Act also required DOD to establish investment review structures and processes, including a hierarchy of investment review boards (IRB), each with representation from across the department, and a standard set of investment review and decision-making criteria for these boards to use to ensure compliance and consistency with DOD’s business enterprise architecture. In this regard, the act required the establishment of the DBSMC—which serves as the highest ranking governance body for business system modernization activities within the department. As of April 2006, DOD identified 3,717 business systems and assigned responsibility for these systems to IRBs. Table 2 shows the systems and the responsible IRB and component. A key element of the department’s approach to reviewing and approving business systems investments is the use of what it refers to as tiered accountability. DOD’s tiered accountability approach involves an investment control process that begins at the component level and works its way through a hierarchy of review and approval authorities, depending on the size and significance of the investment. Military service officials emphasized that the success of the process depends on them performing a thorough analysis of each business system before it is submitted for higher-level review and approval. Through this process, the department reported in March 2006 that 226 business systems, representing about $3.6 billion in modernization investment funding, had been approved by the DBSMC—the department’s highest-ranking approval body for business systems. According to the department’s March 2006 report, this process also identified more than 290 systems for phase out or elimination and approximately 40 business systems for which the requested funding was reduced and the funding availability periods were shortened to fewer than the number of years requested. For example, one business system investment that has been eliminated is the Forward Compatible Payroll (FCP) system. In reviewing the program status, the IRB determined that FCP would duplicate the functionality contained in the Defense Integrated Military Human Resources System, and it was unnecessary to continue investing in both systems. A major reason the department has thousands of business systems is that it has historically failed to consistently employ the range of effective institutional investment management controls, such as an architecture-centric approach to investment decision making, that our work and research show are keys to successful system modernization programs. Such controls help to identify and eliminate duplicative systems and this helps to optimize mission performance, accountability, and transformation. They also help to ensure that promised system capabilities and benefits are delivered on time and within budget. Furthermore, the BTA reports that the tiered accountability approach has reduced the level of funding and the number of years that funding will be available for 14 Army business systems, 8 Air Force business systems, and 8 Navy business systems. For example, the Army’s Future Combat Systems Advanced Collaborative Environment program requested funding of $100 million for fiscal years 2006 through 2011, but the amount approved was reduced to approximately $51 million for fiscal years 2006 through 2008. Similarly, Navy’s Military Sealift Command Human Resources Management System requested funding of about $19 million for fiscal years 2006 through 2011, but the amount approved was approximately $2 million for the first 6 months of fiscal year 2006. According to Navy officials, this system initiative will be reviewed to ascertain whether it has some of the same functionality as the Defense Civilian Personnel Data System. Funding system initiatives for shorter time periods can help reduce the financial risk by providing additional opportunities for monitoring a project’s progress against established milestones and help ensure that the investment is properly aligned with the architecture and the department’s overall goals and objectives. Besides limiting funding, the investment review and approval process has resulted in conditions being placed on system investments. These conditions identify specific actions to be taken and when the actions must be completed. For example, in the case of the Army’s Logistics Modernization Program (LMP) initiative, one of the noted conditions was that the Army had to address the issues discussed in our previous reports. In our May 2004 report, we recommended that the department establish a mechanism that provides for tracking all business systems modernization conditional approvals to provide reasonable assurance that all specific actions are completed on time. In response, the department has begun to track conditional approvals. Despite the department’s efforts to control its investments to acquire new business systems or to enhance existing business systems, formidable challenges remain. In particular, the reviews of those business systems that have modernization funding of less than $1 million, which represent the majority of the department’s reported 3,717 business systems, are only now being started on an annual basis, and thus the extent to which the review structures and processes will be applied to the department’s 3,717 business systems is not clear. Given the large number of systems involved, it is important that an efficient system review and approval process be effectively implemented for all systems. As indicated in table 2, there are numerous systems across the department in the same functional area. Such large numbers of systems indicate a real possibility for eliminating unnecessary duplication and avoiding unnecessary spending on the department’s multiple business systems. In support of this Subcommittee, we have work planned to address the extent to which these management controls are actually being implemented for both the enterprise-level investments and the thousands of other system investments that are being managed at the component level. As we have previously testified and reported, DOD has not effectively managed a number of business system programs. Among other things, our reviews of individual system investments have identified weaknesses in such things as architectural alignment and informed investment decision making, which are focus areas of the Fiscal Year 2005 National Defense Authorization Act provisions. Our reviews have also identified weaknesses in other system acquisition and investment management areas—such as requirements management, testing, and performance management—where good management is crucial for the successful implementation of any given DOD business system. I will describe examples of the weaknesses that we have recently reported on for five system investments. The system investments are the Defense Integrated Military Human Resources System (DIMHRS), Defense Travel System (DTS), the Army Logistics Modernization Program (LMP), the Navy Tactical Command Support System (NTCSS), and the Transportation Coordinators’ Automated Information for Movements System II (TC-AIMS II). The weaknesses that we have found raise questions as to the extent to which the structures, processes, and controls that DOD has established in response to the Fiscal Year 2005 National Defense Authorization Act are actually being implemented, and illustrate the range of system acquisition and investment management controls (beyond those provided for in the act) that need to be effectively implemented in order for a given investment to be successfully acquired and deployed. In 2005 we reported that DIMHRS—a planned DOD-wide military pay and personnel system—-was not being managed as a DOD-wide investment, to include alignment with a DOD-wide architecture and governance by a DOD-wide body. In addition, we reported that DIMHRS requirements had not been adequately defined, and not all acquisition best practices associated with commercial component-based systems were being followed. Accordingly, we made a number of recommendations. In response, DOD has elevated the system to an enterprise investment under the BTA, and established a DIMHRS steering committee that is chartered to include representation from the services. The BTA has also hired a DIMHRS program manager, and the Army and the Air Force, while continuing to evaluate their respective requirements, have determined that the commercial software product selected for DIMHRS can be used under certain conditions. The Army expects to deploy DIMHRS in April 2008 and the Air Force plans to begin deployment in May 2008. The Navy, on the other hand, assessed both DIMHRS and the Marine Corps Total Force System (MCTFS) and determined that MCTFS would better meet its requirements. According to a Navy official, the DBSMC has directed the Navy to research MCTFS and to fully evaluate the cost implications of the MCTFS option, but has not granted the Navy permission to deploy MCTFS. We plan to evaluate DOD’s implementation of our prior recommendations and the Navy’s analysis of the merits of pursuing the MCTFS option. In September 2006, we reported on limitations in the economic justification underlying DOD’s decision to invest in DTS, which is intended to be the standard departmentwide travel system. Specifically, we found that two key assumptions used to estimate cost savings in the September 2003 DTS economic analysis were not based on reliable information. Additionally, we reported that DOD did not have quantitative metrics to measure the extent to which DTS is actually being used. Moreover, we found that DOD had not adequately defined and tested the system’s requirements, an area of concern that was also discussed in our January 2006 report. These system acquisition management weaknesses introduce considerable risk to DOD’s ability to deliver promised DTS capabilities and benefits on time and within budget. Although the September 2003 economic analysis was not based on supportable data, the department’s criteria do not require that a new economic analysis be prepared. DTS has already completed all of the major milestones related to a major automated system which require that an economic analysis be prepared or at least updated to reflect the current assumptions and the related costs and benefits. However, the Fiscal Year 2005 National Defense Authorization Act requires the periodic review, but not less than annually, of every defense business system investment. Further, the department’s April 2006 guidance notes that the annual review process “provides follow-up assurance that information technology investments, which have been previously approved and certified, are managed properly, and that promised capabilities are delivered on time and within budget.” If effectively implemented, this annual review process provides an excellent opportunity for DOD management to assess whether DTS is meeting its planned cost, schedule, and functionality goals. Going forward, such a review could serve as a useful management tool in making funding and other management decisions related to DTS. We made recommendations to DOD aimed at improving the management oversight of DTS, including periodic reports on DTS utilization and resolution of inconsistencies in DTS’s requirements. DOD generally agreed with the recommendations and described its efforts to address them. In 2004 and 2005, we reported that the Army faced considerable challenges in developing and implementing LMP which is intended to transform the Army Materiel Command’s logistics operations. In particular, we reported that LMP will not provide intended capabilities and benefits because of inadequate requirements management and system testing. These problems prevented the Tobyhanna Army Depot from accurately reporting on its financial operations, which, in turn, adversely impacts the depot’s ability to accurately set prices. We found that the Army has not put into place an effective management process to help ensure that the problems with the system are resolved. While the Army developed a process that identified the specific steps that should be followed in addressing the problems identified, the process was not followed. We recommended improvements in the implementation of LMP as well as delaying implementation at the remaining four depots until problems encountered have been resolved. DOD concurred with all the recommendations. The Subcommittee has requested that we undertake a series of audits directed at DOD’s efforts to resolve long-standing financial management problems over the visibility of its assets. Our first such audit is evaluating the Army’s efforts in the area and will include follow-up work on LMP. In December 2005, we reported that DOD needed to reassess its planned investment in the NTCSS—a system intended to help Navy personnel effectively manage ships, submarines, and aircraft support activities. Among other things, we reported that the Navy had not economically justified its ongoing and planned investment in the NTCSS and had not invested in the NTCSS within the context of a well-defined DOD or Navy enterprise architecture. In addition, we reported that the Navy had not effectively performed key measurement, reporting, budgeting, and oversight activities, and had not adequately conducted requirements management and testing activities. We conclude that without this information, the Navy could not determine whether the NTCSS as defined, and as being developed, is the right solution to meet its strategic business and technological needs. Accordingly, we recommended that DOD develop the analytical basis to determine if continued investment in the NTCSS represents prudent use of limited resources and we also made recommendations to strengthen management of the program, conditional upon a decision to proceed with further investment in the program. In response, DOD generally concurred with the recommendations. In December 2005, we reported that TC-AIMS II—a joint services system with the goal of helping to manage the movement of forces and equipment within the United States and abroad—had not been defined and developed in the context of a DOD enterprise architecture. Similar to DIMHRS and DTS, TC-AIMS II was intended to be an enterprise-level system. However, the Army—DOD’s acquisition agent for TC-AIMS II—had pursued the system on the basis of an Army logistics-focused architecture. This means that TC-AIMS II, which was intended to produce a departmentwide military deployment management system, was based on a service-specific architecture, thus increasing the risk that this program, as defined, will not properly fit within the context of future DOD enterprisewide business operations and IT environments. In addition, the Army had not economically justified the program on the basis of reliable estimates of life-cycle costs and benefits, and as a result, the Army does not know if investment in TC-AIMS II, as planned, is warranted or represents a prudent use of limited DOD resources. Accordingly, we recommended that DOD, among other things, develop the analytical basis needed to determine if continued investment in TC-AIMS II, as planned, represents prudent use of limited defense resources. In response, DOD generally concurred with our recommendations and described efforts initiated or planned to bring the program into compliance with applicable guidance. A major component of DOD’s business transformation effort is the defense Financial Improvement and Audit Readiness Plan (FIAR), initially issued in December 2005 and updated in June 2006 and September 2006, pursuant to section 376 of the National Defense Authorization Act for Fiscal Year 2006. Section 376 limited DOD’s ability to obligate or expend funds for fiscal year 2006 on financial improvement activities until the department submitted a comprehensive and integrated financial management improvement plan to the congressional defense committees. Section 376 required the plan to (1) describe specific actions to be taken to correct deficiencies that impair the department’s ability to prepare timely, reliable, and complete financial management information and (2) systematically tie these actions to process and control improvements and business systems modernization efforts described in the business enterprise architecture and transition plan. Further, section 376 required a written determination that each financial management improvement activity undertaken is consistent with the financial management improvement plan and likely to improve internal controls or otherwise result in sustained improvement in DOD’s ability to produce timely, reliable, and complete financial management information. DOD had to submit each written determination to the congressional defense committees. Section 321 of the National Defense Authorization Act for Fiscal Year 2007 extended the written determination provision beyond fiscal year 2006. DOD intends the FIAR Plan to provide DOD components with a framework for resolving problems affecting the accuracy, reliability, and timeliness of financial information, and obtaining clean financial statement audit opinions. The FIAR Plan states that it prioritizes DOD’s improvement efforts based on the following criteria: (1) impact on DOD financial statements, (2) ability to resolve long-standing problems, (3) need for focused DOD leadership attention to resolve the problem, (4) dependency on business transformation initiatives and system solutions, and (5) availability of resources. The FIAR Plan outlines the business rules and oversight structure DOD has established to guide financial improvement activities and audit preparation efforts. According to DOD, its June and September 2006 FIAR Plan updates were intended to (1) begin identifying milestones that must be met for assertions about the reliability of reported financial statement information to occur on time, (2) develop greater consistency among components regarding their corrective actions and milestones, and (3) further describe how the FIAR Plan will be integrated with the enterprise transition plan. In addition, the September 2006 update outlines three key elements for achieving financial management transformation: accountability, integration, and prioritization. Although the FIAR Plan states that it is integrated with DOD component-level financial improvement plans and the ETP, DOD officials have acknowledged that the level of integration between the two efforts is not complete and is still evolving. The FIAR Plan is a high-level summary of DOD’s plans and reported actions to comply with financial management legislation and achieve clean financial statement audit opinions. We have reviewed the FIAR Plan and its updates and discussed the FIAR Plan with DOD and OMB. We cannot comment on specific focus areas or milestones because we have not seen any of the underlying component or other subordinate plans on which the FIAR Plan is based. However, we believe the incremental line item approach, integration plans, and oversight structure outlined in the FIAR Plan for examining DOD’s operations, diagnosing problems, planning corrective actions, and preparing for audit represents a vast improvement over prior financial improvement initiatives. We continue to stress that the effectiveness of DOD’s FIAR Plan will ultimately be measured by the department’s ability to provide timely, reliable, and useful information for day-to-day management and decision making. Nonetheless, I would like to see DOD place greater emphasis on achieving auditability by 2012. If DOD is able to achieve this date, and other impediments to an opinion on the consolidated financial statements of the U.S. government are also addressed, an opinion for the federal government may also be possible by 2012. We look forward to working with DOD and the new DOD inspector general, when appointed, in further developing DOD’s audit strategy. Lastly, you asked for my comments on two sections of the recently enacted John Warner National Defense Authorization Act for Fiscal Year 2007. The first provision, section 321, seeks to ensure that the department pursues financial management improvement activities only in accordance with a comprehensive financial management improvement plan that coordinates these activities with improvements in its systems and controls. The second provision, section 816, establishes certain reporting and oversight requirements for the acquisition of all major automated information systems (MAIS). Section 321 of the John Warner National Defense Authorization Act for Fiscal Year 2007 extends beyond fiscal year 2006 certain limitations and requirements placed on DOD’s financial management improvement and audit initiatives in section 376 of the National Defense Authorization Act for Fiscal Year 2006. Specifically, section 321 of the act limits DOD’s ability to obligate or expend any funds for the purpose of any financial management improvement activity relating to the preparation, processing, or auditing of financial statements until it has submitted to the congressional defense committees a written determination that each activity proposed to be funded is (1) consistent with the DOD financial management improvement plan required by section 376 of the National Defense Authorization Act for Fiscal Year 2006 and (2) is likely to improve internal controls or otherwise result in sustained improvements in the ability of the department to produce timely, reliable, and complete financial management information. I fully support the intent of legislation, such as section 321, which is aimed at directing DOD’s corrective actions towards the implementation of sustained improvements in its ability to provide timely, reliable, complete, and useful information. This is imperative not only for financial reporting purposes, but more importantly for daily decision making and oversight. Section 321 is consistent with and builds on existing legislation, in addition to section 376 of the National Defense Authorization Act for Fiscal Year 2006. For example, section 1008 of the National Defense Authorization Act for Fiscal Year 2002 currently requires DOD to limit resources used to prepare and audit unreliable financial information, thereby saving the taxpayers millions of dollars annually. In addition, the fiscal year 2002 act requires DOD to report to congressional committees and others annually on the reliability of DOD’s financial information and to provide a summary of improvement activities, including priorities, milestones, measures of success, and estimates of when each financial statement will convey reliable information. In my opinion, Congress has clearly articulated its expectation that DOD exercise prudence in its use of taxpayer money and focus only on those activities that will result in sustained improvements in its ability to produce timely and reliable financial management information. It is evident that DOD intends to use its FIAR Plan, which it plans to update semiannually, as a tool for complying with legislative requirements regarding its financial improvement efforts. However, as is true with most large initiatives, a comprehensive and integrated plan, sustained leadership, results-oriented performance measures, and effective implementation will be key to successful reform. The provisions in section 816 of the John Warner National Defense Authorization Act for Fiscal Year 2007 provide for greater disclosure and accountability of business system investment performance, and thus facilitate greater oversight. More specifically, the legislation establishes certain reporting and oversight requirements for the acquisition of MAIS that fail to meet cost, schedule, or performance criteria. In general, a MAIS is a major DOD IT program that is not embedded in a weapon system (e.g., a business system investment). As such, we believe that the provisions can increase oversight and accountability. Therefore, I also support this legislation. I would like to discuss the five remaining high-risk areas within DOD. These include weapon systems acquisitions and contract management; supply chain management; personnel security clearance program; and support infrastructure management. Two interrelated areas are the management of DOD’s major weapon systems acquisitions and its contracts. While DOD eventually fields the best weapon systems in the world, we have consistently reported that typically the programs take significantly longer, cost significantly more money, and deliver fewer capabilities than originally promised. DOD’s new weapon system programs are expected to be the most expensive and complex ever and will consume an increasingly large share of DOD’s budget. These costly current and planned acquisitions are running head-on into the nation’s unsustainable fiscal path. In the past 5 years, DOD has doubled its commitment to weapon systems from $700 billion to $1.4 trillion, but this huge increase has not been accompanied by more stability, better outcomes, or increased buying power for the acquisition dollar. Rather than showing appreciable improvement, programs are experiencing recurring problems with cost overruns, missed deadlines, and performance shortfalls. A large number of the programs included in our annual assessment of weapon systems are costing more and taking longer to develop than estimated. It is not unusual to see development cost increases between 30 percent and 40 percent and attendant schedule delays. These cost increases mean DOD cannot produce as many weapons as intended nor can it be relied on to deliver to the warfighter when promised. This causes DOD to either cut back on planned quantities or capabilities, or to even scrap multibillion dollar programs, after years of effort. If these systems are managed with the traditional margins of error, the financial consequences can be dire, especially in light of a constrained discretionary budget. It is within this context that we must engage in a comprehensive and fundamental reexamination of new and ongoing investments in our nation’s weapon systems. Success for acquisitions means making sound decisions to ensure that program investments are based on needs versus wants and getting promised results. In the commercial world, successful companies have no choice but to adopt processes and cultures that emphasize basing decisions on knowledge, reducing risks prior to undertaking new efforts, producing realistic cost and schedule estimates, and building in quality to deliver products to customers at the right price, time, and cost. However, this is not happening within DOD. The department has tried to embrace best practices in its policies and instill more discipline in setting requirements, among numerous other actions, but it still has trouble distinguishing wants from true needs. While DOD’s acquisition policy supports a knowledge-based, evolutionary approach to acquiring new weapons, its practice of making decisions on individual programs often sacrifices knowledge and executability in favor of revolutionary solutions. In an important sense, success has come to mean starting and continuing programs even when cost, schedule, and quantities must be sacrificed. Our reviews have identified a number of causes behind the acquisition problems just described, but I would like to focus on three. The first I refer to as “big A,” or acquisition with a capital “A.” What I mean by this is that DOD’s funding, requirements, and acquisition processes are not working synergistically. DOD does not clearly define and stabilize requirements before programs are started. Our work has shown that DOD’s requirements process generates more demand for new programs than fiscal resources can support. DOD compounds the problem by approving many highly complex and interdependent programs. Moreover, once a program is approved, requirements can be added along the way— significantly stretching technology, creating design challenges, exacerbating budget overruns, and enhancing accountability challenges. For example, in the F-22A program, after the program was started, the Air Force added a requirement for air-to-ground attack capability. In its Global Hawk program, after the start of the program, the Air Force added both signals intelligence and imagery intelligence requirements. Both programs have experienced serious schedule delays and significant unit cost increases. Customers often demand additional requirements fearing there may not be another chance to get new capabilities because programs can take a decade or longer to complete. Yet, perversely, these strategies delay delivery to the warfighter, often by years. The second cause I would refer to as “little a” or the acquisition process itself. DOD commits to individual programs before it obtains assurance that the capabilities it is pursuing can be achieved within available resources and time constraints. In particular, DOD routinely accepts high levels of technology risk at the start of major acquisition programs. Funding processes encourage this approach, since acquisition programs attract more dollars than efforts concentrating solely on proving out technologies. However, without mature technologies at the outset, a program will almost certainly incur cost and schedule problems. Only 10 percent of the programs in our latest annual assessment of weapon systems had demonstrated critical technologies to best practice standards at the start of development; and only 23 percent demonstrated them to DOD’s standards. The cost effect of proceeding without completing technology development before starting an acquisition can be dramatic. For example, research, development, test and evaluation costs for the programs included in our review that met best practice standards at program start increased by a modest average of 4.8 percent more than the first full estimate, whereas the costs for the programs that did not meet these standards increased by a much higher average of 34.9 percent more than the first full estimate. The bottom line is that these consequences are predictable and, thus, preventable. The third cause has to do with the lack of accountability. DOD officials are not always held accountable when programs go astray. Likewise, contractors are not always held accountable when they fail to achieve desired acquisition outcomes. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate contractor performance, such as evaluating contractor performance on award-fee criteria that are not directly related to key acquisition outcomes (e.g., meeting cost and schedule goals and delivering desired capabilities to the warfighter); paying contractors a significant portion of the available fee for what award-fee plans describe as “acceptable, average, expected, good, or satisfactory” performance, which sometimes did not require meeting the basic requirements of the contract; and giving contractors at least a second opportunity to earn initially unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD’s expectations. For example, we found that DOD paid its contractor for a satellite program— the Space-Based Infrared System High—74 percent of the award fee available, $160 million, even though research and development costs increased by more than 99 percent, and the program was delayed for many years and was rebaselined three times. In another instance, DOD paid its contractor for the F-22A aircraft more than $848 million, 91 percent of the available award fee, even though research and development costs increased by more than 47 percent, and the program had been delayed by more than 2 years and rebaselined 14 times. Despite paying billions of dollars in award and incentive fees, DOD has not compiled data or developed performance measures to validate its belief that award and incentive fees improve contractor performance and acquisition outcomes. Similarly, DOD officials are rarely held accountable when programs go astray. There are several reasons for this, but the primary ones include the fact that DOD has never clearly specified who is accountable for what, invested responsibility for execution in any single individual, or even required program leaders to stay until the job is done. Moreover, program managers are not empowered to make go or no-go decisions, they have little control over funding, they cannot veto new requirements, and they have little authority over staffing. Because there is frequent turnover in their positions, program managers also sometimes find themselves in the position of having to take on efforts that are already significantly flawed. There are many other factors that play a role in causing weapons programs to go astray. They include workforce challenges, poor contractor oversight, frequent turnover in key leadership, and a lack of systems engineering, among others. Moreover, many of the business processes that support weapons development—strategic planning and budgeting, human capital management, infrastructure, financial management, information technology, and contracting—are beset with pervasive, decades-old management problems, including outdated organizational structures, systems, and processes. In fact, all of these areas—along with weapon systems acquisition—are on our high-risk list of major government programs and operations. Our work shows that acquisition problems will likely persist until DOD provides a better foundation for buying the right things, the right way. This involves making tough trade-off decisions as to which programs should be pursued and, more importantly, not pursued, making sure programs are executable, locking in requirements before programs are started, and making it clear who is responsible for what and holding people accountable when these responsibilities are not fulfilled. These changes will not be easy to make. They require DOD to reexamine the entirety of its acquisition process and to make deep-seated changes to the setting, funding, and execution of program requirements. In other words, DOD would need to revisit who sets requirements and strategy, and who monitors performance, and what factors to consider in selecting and rewarding contractors. It also involves changing how DOD views success, and what is necessary to achieve success. I am encouraged by DOD’s recent efforts to improve the collaboration and consultation between the requirements and acquisition communities. The test of these efforts will be whether they produce better decisions. If they do, it is important that they are sustained by more than the force of personality. Buying major systems is not the only area where DOD needs to improve its acquisition practices. For example, DOD’s management of its contracts has been on our high-risk list since 1992. Our work has found that DOD is unable to ensure that it is using sound business practices to acquire the goods and services needed to meet the warfighter’s needs, creating unnecessary risks and paying higher prices than justified. In this regard, in a March 2005 report, we concluded that deficiencies in DOD’s oversight of service contractors could place DOD at risk of paying the contractors more than the value of the services they performed. In June 2006, we reported that personnel at the Defense Logistics Agency were not consistently reviewing prices for commodities acquired under its Prime Vendor Program. We noted that until DOD provides sufficient management oversight, the program will remain vulnerable to the systemic pricing problems that have plagued it in the past. Earlier this year, we reported that the Army acquired security guard services under an authorized sole-source basis, despite recognizing that it was paying about 25 percent more than it had under contracts that had been previously awarded competitively. We recommended that the Army reassess its acquisition strategy to help make the best use of taxpayer dollars and achieve its desired outcomes. In other reports, we identified numerous issues in DOD’s use of interagency contracting vehicles that contributed to poor acquisition outcomes. Until the department devotes sufficient management attention to address these long-standing issues, DOD remains at risk of wasting billions of dollars and failing to get the goods and services it needs to accomplish its missions. Since the January 2005 update of the high-risk series, DOD has made some progress toward addressing supply chain management problems. With the encouragement of OMB, DOD has developed a plan to show progress toward the long-term goal of resolving problems and removing supply chain management from our list of high-risk areas within the department. DOD issued the first iteration of the plan in July 2005 and, since then, has regularly updated it. Based on our initial review of the plan, we believe it is a solid first step toward improving supply chain management in support of the warfighter. For example, DOD’s plan identifies three key areas— requirements forecasting, asset visibility, and materiel distribution—that we believe are critical to DOD’s efforts to improve supply chain management. The plan highlights selected DOD supply chain initiatives, including key milestones in their development. Within the last year, for example, DOD has made some progress in streamlining the storage and distribution of defense inventory items on a regional basis as part of its Joint Regional Inventory Materiel Management initiative. DOD has completed a pilot for this initiative in the San Diego region and, in January 2006, began a similar transition for inventory items in Oahu, Hawaii. Notwithstanding this positive first step, the department faces challenges and risks in successfully implementing its proposed changes across the department and measuring progress in resolving supply chain management problems. It will be important for DOD to sustain top leadership commitment and long-term institutional support for the plan; obtain necessary resource commitments from the military services, the Defense Logistics Agency, and other organizations; implement its proposed initiatives across the department; identify performance metrics and valid data to use in monitoring the initiatives; and demonstrate progress toward meeting performance targets. We have been holding monthly meetings with DOD and OMB officials to receive updates on the plan and gain a greater understanding of the ongoing initiatives. In addition, we are continuing to review the performance measures DOD is using to track the plan’s progress in resolving supply chain problems and DOD’s efforts to develop a comprehensive, integrated, and enterprisewide strategy to guide logistics programs and initiatives. DOD is working on a logistics road map, referred to as the “To Be” road map, which provides a vision for future logistics programs and initiatives, including supply chain management; identifies capability gaps; and links programs with investments. However, the schedule for completing the initial road map has recently slipped. Until the road map is completed, we will not be able to assess how it addresses the challenges and risks DOD faces in its supply chain management efforts. DOD’s personnel security clearance program is another area that we continue to assess because of the risks it poses. For over two decades, we have reported on problems with DOD’s personnel security clearance program as well as the financial costs and risks to national security resulting from these problems. For example, at the turn of the century, we documented problems such as incomplete investigations, inconsistency in determining eligibility for clearances, and a backlog of overdue clearance reinvestigations that exceeded 500,000 cases. More recently in 2004, we identified continuing and new impediments hampering DOD’s clearance program and made recommendations for increasing the effectiveness and efficiency of the program. These long-standing delays in completing hundreds of thousands of clearance requests for servicemembers, federal employees, and industry personnel as well as numerous impediments that hinder DOD’s ability to accurately estimate and eliminate its clearance backlog led us to declare DOD’s personnel security clearance program a high-risk area in January 2005. Since then, we have issued a report and participated in four hearings that addressed issues related to DOD’s program. Among other things, our September 2006 report showed that the 2,259 industry personnel granted eligibility for a top secret clearance in January and February 2006 had waited an average of 471 days. Also, our reviews of 50 of the cases for completeness revealed that required information was not included in almost all of the cases. While positive steps—such as (1) the development of an initial version of a plan to improve security clearance processes governmentwide and (2) high-level involvement from OMB—have been taken toward addressing the problems, other recent events such as DOD halting the processing of all new clearance requests for industry personnel on April 28, 2006, reveal continuing problems with DOD’s personnel security clearance program. Since 1997, GAO has identified DOD’s management of its support infrastructure as a high-risk area because infrastructure costs continue to consume a larger than necessary portion of its budget. DOD officials have been concerned for several years that much of the department’s infrastructure is outdated, inadequately maintained, and that DOD has more infrastructure than needed, which impacts its ability to devote more funding to weapon systems modernization and other critical needs. Inefficient management practices and outdated business processes have also contributed to the problem. While DOD has made progress and expects to continue making improvements in its support infrastructure management, DOD officials recognize they must achieve greater efficiencies. To its credit, the department has given high-level emphasis to reforming its support operations and infrastructure since we last reported on this high-risk area, including efforts to reduce excess infrastructure, promote transformation, and foster jointness through the 2005 base realignment and closure (BRAC) process. Also, DOD is updating its Defense Installations Strategic Plan to better address infrastructure issues, and has revised its installations readiness reporting to better measure facility conditions, established core real property inventory data requirements to better support the needs of real property asset management, and continued to modify its suite of analytical tools to better forecast funding requirements for installation management services. It has also achieved efficiencies through privatizing military family housing and demolishing unneeded buildings at military installations. Our engagements examining DOD’s management of its facilities infrastructure indicates that much work remains for DOD to fully rationalize and transform its support infrastructure to improve operations, achieve efficiencies, and allow it to concentrate its resources on the most critical needs, as the following illustrates. In July 2005, we reported on clear limitations associated with achieving DOD’s projected $50 billion in savings from this BRAC round. While DOD offered many proposed actions in the 2005 round, these actions were more related to business process reengineering and realignment of various functions and activities than base closures and actual facility reductions. Moreover, sizable savings were projected from efficiency measures and other actions, but many underlying assumptions had not been validated and could be difficult to track over time. We have ongoing work monitoring actions emanating from the 2005 BRAC process and assessing costs and savings from those actions, and will be able to comment further on the status of these initiatives over the next several years as implementation actions progress. In June 2005, we reported that hundreds of millions of operation and maintenance dollars designated for facilities’ sustainment, restoration, and modernization and other purposes were moved by the services to pay for base operations support (BOS) due in part to a lack of a common terminology across the services in defining BOS functions, as well as the lack of a mature analytic process for developing credible and consistent requirements. While these funding movements are permissible, we found that they were disruptive to the orderly provision of BOS services and contributed to the overall degradation of facilities, which adversely affects the quality of life and morale of military personnel. In another report issued in June 2005, we reported that many of DOD’s training ranges were in deteriorated condition and lacked modernization, which adversely affected training activities and jeopardized the safety of military personnel. In an April 2006 report, we identified several opportunities for DOD and the services to improve their oversight and monitoring of the execution and performance of awarded privatized housing projects. We further reported that 36 percent of awarded privatization projects had occupancy rates below expectations even though the services had begun renting housing units to parties other than military families, including units rented to single or unaccompanied servicemembers, retired military personnel, civilians and contractors who work for DOD, and civilians from the general public. Factors contributing to occupancy challenges include increased housing allowances, which have made it possible for more military families to live off base thus reducing the need for privatized housing, and the questionable reliability of DOD’s housing requirements determination process, which could result in overstating the need for privatized housing. During recent visits to installations in the United States and overseas, service officials continue to report inadequate funding to provide both base operations support and maintain their facilities. They express concern that unless this is addressed, future upkeep and repair of many new facilities to be constructed as a result of BRAC, overseas rebasing, and the Army’s move to the modular brigade structure will suffer and the condition of their facilities will continue to deteriorate. We have also found that DOD’s outline of its strategic plan for addressing this high-risk area had a number of weaknesses and warranted further clarification and specification. We have met with OMB and DOD officials periodically to discuss the department’s efforts to address this high-risk area. Through our monitoring of DOD activities between now and the next several years for base closures and overseas basing, we will be able to determine what other work needs to be done on issues associated with DOD’s management of its support infrastructure, as well as provide a more complete assessment of costs, savings, and overall benefits realized from the department’s efforts to address these issues. Organizations throughout DOD will need to continue reengineering their business processes and striving for greater operational effectiveness and efficiency. DOD will also need to develop a comprehensive, long-range plan for its infrastructure that addresses facility requirements, recapitalization, and maintenance and repair, as well as to provide adequate resources to meet these requirements and halt the degradation of facilities and services. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. 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. | Of the 26 areas on GAO's high-risk list of federal programs or activities that are at risk for waste, fraud, abuse, or mismanagement, 8 are Department of Defense (DOD) programs or operations and another 6 are governmentwide high-risk areas that also apply to DOD. These high-risk areas relate to most of DOD's major business operations. DOD's failure to effectively resolve these high-risk areas has resulted in billions of dollars of waste each year, ineffective performance, and inadequate accountability. At a time when DOD is competing for resources in an increasingly fiscally constrained environment, it is critically important that DOD get the most from every defense dollar. DOD has taken several positive steps and devoted substantial resources toward establishing key management structures and processes to successfully transform its business operations and address its high-risk areas, but overall progress by area varies widely and huge challenges remain. This testimony addresses DOD's efforts to (1) develop a comprehensive, integrated, enterprisewide business transformation plan and its related leadership approach and (2) comply with legislation that addresses business systems modernization and improving financial management accountability. The testimony also addresses two sections included in recent legislation and other DOD high-risk areas. In the past year, DOD has made progress in transforming its business operations, but continues to lack a comprehensive, enterprisewide approach to its overall business transformation effort. Within DOD, business transformation is broad, encompassing people, planning, management, structures, technology, and processes in many key business areas. While DOD's planning and management continues to evolve, it has yet to develop a comprehensive, integrated, and enterprisewide plan that covers all key business functions, and contains results-oriented goals, measures and expectations that link organizational, unit, and individual performance goals, while also being clearly linked to DOD's overall investment plans. Because of the complexity and long-term nature of business transformation, DOD also continues to need a chief management official (CMO) with significant authority, experience, and tenure to provide sustained leadership and integrate DOD's overall business transformation effort. Without formally designating responsibility and accountability for results, reconciling competing priorities in investments will be difficult and could impede DOD's progress in its transformation efforts. DOD is taking steps to comply with legislative requirements aimed at improving its business systems modernization and financial management; however, much remains to be accomplished. In particular, DOD recently issued updates to both the business enterprise architecture and the transition plan, which are still not sufficiently complete to effectively and efficiently guide and constrain business system investments across the department. Most notably, the architecture is not adequately linked to DOD component architectures, and the plan does not include business system information for all major DOD components. To address these shortfalls, DOD issued a strategy for "federating" or extending its architecture to the defense components. But much remains to be accomplished before a well-defined federated architecture is in place, given that GAO recently reported that select components' architecture programs are not mature. However, DOD components continue to invest billions of dollars in thousands of new and existing business system programs. The risks associated with investing in systems ahead of having a well-defined architecture and transition plan are profound and must be managed carefully, as must the wide assortment of other risks that GAO's work has shown to exist on specific DOD business system investments. While not a guarantee, GAO's work and research has shown that establishing effective system modernization management controls, such as an architecture-centric approach to investment decision making, can increase the chances of delivering cost-effective business capabilities on time and within budget. Further, with regard to legislation pertaining to financial management improvement, DOD issued and updated its Financial Improvement and Audit Readiness Plan in fiscal year 2006 to provide components with a construct for resolving problems affecting the accuracy and timeliness of financial information and an improved audit strategy for obtaining financial statement audit opinions. |
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 2011 and 2010, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting. As a result, we were unable to provide an opinion on such statements. Further, significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 and 2010 Statements of Social Insurance, prevented us from expressing opinions on those statements, as well as on the 2011 Statement of Changes in Social Insurance Amounts. Given the importance of social insurance programs, such as 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 long-standing material weaknesses in internal control contributed to our disclaimers of opinion on the U.S. government’s accrual-based consolidated financial statements for the fiscal years ended 2011 and 2010. 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. Three long-standing major impediments continued to prevent us from expressing 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. In addition, while improvements were made, financial management issues at the Department of Homeland Security (DHS) also contributed to our inability to express 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. DOD leadership has, with oversight and reinforcement from Congress, committed DOD to the long-term goal of full financial statement auditability. The National Defense Authorization Act for Fiscal Year 2010, as amended, requires that DOD’s financial statements be validated as a date that has been DOD’s ready for audit by September 30, 2017,stated goal since 2008. DOD’s Financial Improvement and Audit Readiness (FIAR) Plan and semiannual status reports define the activities, corrective actions, and interim milestones necessary to achieve auditability and the availability of reliable, useful, and timely information for management decision making. The most recent update of the plan also emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DOD’s goals, and it links accountability to performance appraisals. Under its FIAR Plan, DOD is focusing on improving controls and processes relied on to provide financial information in two areas it says are most critical to managing its operations: (1) budgetary information and (2) accountability over its military equipment. With respect to budgetary information, in October 2011, the Secretary of Defense directed the DOD Comptroller to provide him with a plan to achieve audit readiness for the Statement of Budgetary Resources (SBR) by the end of 2014. The SBR is important because it is intended to show the flow of money in and out of DOD consistent with the budgetary information reported in the Budget The Secretary’s directive also called of the United States Government.for increased emphasis on accountability for assets, a full review of DOD’s financial controls over the next 2 years and the establishment of interim goals, mandatory training for audit and key financial efforts, and establishing a pilot certification program for financial managers by the end of calendar year 2012. DOD recently updated its FIAR Guidance, which provides a standardized methodology for DOD components to follow in planning and carrying out their FIAR efforts aimed at achieving audit readiness. However, as we reported in September 2011, we found that the Air Force and the Navy were not always effectively implementing the FIAR Guidance, presenting Specifically, we found a risk of not achieving DOD’s overall FIAR goals. that although the Air Force asserted audit readiness for its military equipment and the Navy asserted audit readiness for its civilian pay, neither of these areas were audit-ready because the Air Force and Navy had not fully carried out FIAR Guidance procedures. We recommended actions for improving the development, implementation, documentation, and oversight of DOD’s financial management improvement efforts. In addition, the Marine Corps’ attempt to achieve an audit opinion on its SBR is still in process. In that regard, we recently recommended that the Marine Corps develop a risk-based remediation plan and confirm that its actions fully respond to auditor recommendations and that DOD direct other military services to consider key lessons learned in their audit readiness plans as appropriate. GAO, DOD Financial Management: Improvement Needed in DOD Components’ Implementation of Audit Readiness Effort, GAO-11-851 (Washington, D.C.: Sept. 13, 2011). checkbook with a bank account.) Because of the fundamental importance of the reconciliation, GAO reviewed the processes used by the Navy, Marine Corps, and the Defense Finance and Accounting Service, which processes much of DOD components’ financial data, including transactions that affect FBWT. We recommended that the Navy and Marine Corps improve policies and procedures that guide the FBWT reconciliation process, provide training to communicate these policies and procedures to staff, and resolve system deficiencies. The effective implementation of Enterprise Resource Planning (ERP) systems will be critical to the success of all of DOD’s planned long-term financial improvement efforts. ERP systems are integrated, multifunction systems that perform business-related tasks such as general ledger accounting and supply chain management. DOD considers their implementation essential to transforming its business operations. However, DOD continues to encounter difficulties in implementing its planned ERP systems on schedule and within budget. For example, in October 2010, we reported that six of nine critical DOD ERPs We also experienced schedule delays ranging from 2 to 12 years. reported that five of these ERPs incurred cost increases totaling an estimated $6.9 billion. We made eight recommendations to DOD aimed at improving schedule and cost practices and the development of performance measures to evaluate whether the ERPs’ intended goals are being accomplished. Another key to effectively transforming DOD’s financial management will be its ability to ensure that it has sufficient staff with the appropriate skills necessary to carry out financial and budgetary accounting duties. To that end, DOD is establishing a Financial Management Certification Program to be mandatory for its personnel in financial management positions. However, DOD has not yet performed a competency gap analysis for its Further, financial management workforce as we reported in July 2011. GAO, DOD Business Transformation: Improved Management Oversight of Business System Modernization Efforts Needed, GAO-11-53 (Washington, D.C.: Oct. 7, 2010). the House Armed Services Committee (HASC) Panel on Defense Financial Management and Auditability Reform, which held several hearings on DOD financial management, recently reported that DOD personnel in other functional areas, such as logistics and acquisition, should also have the skills necessary to maintain appropriate controls and ensure that financial-related information is accurately recorded. The HASC Panel made several recommendations about DOD’s workforce, including recommending that DOD assess its financial management workforce with respect to existing skills and the critical skills and competencies that will be needed over the next decade. While we are encouraged by DOD’s recent plans and efforts to fundamentally transform its financial management operations, several DOD business practices, including financial management, remain on GAO’s list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement or in need of transformation. size, complexity, and interrelated nature of DOD’s financial management and other business process control deficiencies, the sustained commitment by DOD’s leaders will be critical to effectively building on DOD’s initial momentum to transform its financial management operations and ultimately achieve auditability. Further, we agree with the recommendation by the HASC Panel on Defense Financial Management and Auditability Reform that strong congressional oversight must To assist Congress in its oversight efforts, we plan to continue.reassess the FIAR Plan, associated guidance, and DOD’s related actions as they continue to evolve. GAO, High-Risk Series: An Update, GAO-11-278 (Washington, D.C.: February 2011). reporting entity as if the entity were a single enterprise. Therefore, when preparing the consolidated financial statements, intragovernmental activity and balances between federal entities and between federal entities and the General Fund should be in agreement and must be subtracted out, or eliminated, from the financial statements. If the two federal entities engaged in an intragovernmental transaction do not both record the same intragovernmental transaction in the same year and for the same amount, the intragovernmental transactions will not be in agreement, resulting in errors in the consolidated financial statements. Treasury has grouped intragovernmental activity and balances into the following five categories and established focus groups to work with federal entity personnel to identify and resolve reported unreconciled differences. Fiduciary activities include investments in Treasury securities with the Bureau of the Public Debt (BPD), borrowing from BPD and the Federal Financing Bank and related interest receivable and payable, interest expense and revenue, and federal loans receivable and payable. Benefit activities include contributions by federal entities into employee benefit programs (retirement, life insurance, workers’ compensation, and health benefits) administered by the Office of Personnel Management and the Department of Labor. Buy/Sell activities between entities include buy and sell costs and revenues, accounts receivable and payable, and advances to and from others. Transfers of funds include transfers payable and receivable, and transfers in and out without reimbursement. General Fund transactions and balances include fund balance with Treasury, appropriations received and warrants, and custodial and non-entity collections. The federal government has made progress in reconciling intragovernmental differences and the degree of progress varies by category. However, the federal government continues to be unable to adequately account for and reconcile intragovernmental activity and balances. For both fiscal years 2011 and 2010, amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. 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 the required year-end reconciliations for fiscal years 2011 and 2010. Further, there continue to be hundreds of billions of dollars of unreconciled differences between the General Fund of the U.S. government and federal entity trading partners related to appropriation and other intragovernmental transactions. Currently, federal entities report their activity with the General Fund; however, the General Fund activity is not centrally accounted for, and therefore, there is no existing reporting process for which entities can confirm and reconcile all of their activity and balances with the General Fund. 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. Over the years, we have identified and reported on numerous intragovernmental activities and balances issues and have made several related recommendations to Treasury. Treasury has taken or plans to take actions to address these recommendations. During fiscal year 2011, Treasury furthered its commitment to resolve differences in intragovernmental activity and balances, which included several short- and long-term initiatives. For example, Treasury expanded focus groups’ monitoring and outreach efforts that included quarterly analysis and ongoing collaboration with entities to resolve intragovernmental differences. Such focus groups made significant progress in understanding reasons for material differences and determining corrective actions to be taken, which resulted in adjustments to eliminate certain differences. Also, Treasury identified deficiencies in the intragovernmental process and is planning to develop governmentwide systems to improve intragovernmental transactions data. Further, Treasury is currently working to develop a complete set of financial statements for the General Fund, including intragovernmental transactions that will be audited. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong and sustained commitment by federal entities, as well as continued strong leadership by Treasury and OMB. While Treasury, in coordination with OMB, implemented corrective actions during fiscal year 2011 to address certain internal control deficiencies detailed in our previously issued report, 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 2011 and 2010 consolidated financial statements balance, Treasury recorded net increases of $15.6 billion and $0.8 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 $6.0 billion and $3.8 billion of unmatched transactions in the Statement of Net Cost for fiscal years 2011 and 2010, respectively. 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. Until these and other internal control deficienciesaddressed, the federal government’s ability to ensure that the consolidated financial statements are consistent with the underlying audited federal entities’ financial statements, properly balanced, and in conformity with U.S. GAAP will be impaired. Resolving some of these internal control deficiencies will be a difficult challenge and will require a have been fully strong and sustained commitment from Treasury and OMB as they continue to execute and implement their corrective action plans. Improvements in DHS’s financial management during fiscal year 2011 contributed to DHS receiving a qualified opinion on its Balance Sheet and Statement of Custodial Activity for the fiscal year. These statements were qualified because of certain matters related to property, plant, and equipment; environmental liabilities; and other related balances. This qualified opinion represents a significant achievement for DHS. However, the remainder of its financial statements for fiscal year 2011 were not subjected to audit by the agency auditors, and the auditor was unable to form an opinion on DHS’s internal control over financial reporting due to pervasive material internal control weaknesses over key financial reporting processes. It will be important that DHS continues to resolve its internal control deficiencies and build upon the progress it has accomplished as it moves forward to expand the audit to all financial statements and achieve its ultimate goal of obtaining a clean audit opinion on the full set of financial statements and on internal control over financial reporting. Significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2011 and 2010 Statements of Social Insurance, prevented us from expressing opinions on the 2011 and 2010 Statements of Social Insurance, as well as on the 2011 Statement of Changes in Social Insurance Amounts.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 The 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 2011 and 2010 Statements of Social Insurance were based on full implementation of the provisions of the Patient Protection and Affordable Care Act, as amended (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 almost 30 percent in January 2012) 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 2011 and 2010 Statements 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-term 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 $24.6 trillion estimate in the 2011 Statement of Social Insurance by $12.4 trillion. Projections of Medicare costs are sensitive to assumptions about future decisions by policymakers and about the behavioral responses of consumers, employers, and health care providers as policy, incentives, and the health care sector change over time. For example, behavioral responses of health care providers could affect Medicare beneficiaries’ access to care. Such secondary impacts are not reflected in the Statement of Social Insurance projections but could be expected to influence the excess cost growth rate used in the projections. Key drivers of uncertainty about the excess cost growth rate include the future development and deployment of medical technology, the evolution of personal income, and the cost and availability of insurance, as well as federal policy change, such as the PPACA. In August 2010, the Secretary of the Department of Health and Human Services, working on behalf of the Board of Trustees, established an independent panel of expert actuaries and economists to review the assumptions and methods used by the Trustees to make projections of the financial status of the trust funds. The work of the 2010 Technical Review Panel on the Medicare Trustees Report could provide additional guidance to management concerning ways to incorporate secondary impacts into future Statement of Social Insurance projections and related disclosures. As noted in our audit report, in preparing the Statements of Social Insurance, management considers and selects assumptions and data that it believes provide a reasonable basis for the assertions in the statement. The statement is not a forecast or prediction, but is intended to illustrate the potential impact of the continuation of current scheduled benefits and financing. The Financial Report includes a summary of the assumptions used by management and unaudited information concerning how changes in various key assumptions, such as health care cost growth, would affect the Statement of Social Insurance. Both the Statement of Social Insurance projections and the illustrative alternative estimate summarized in Note 26 in the Financial Report indicate that the Social Security and Medicare programs are not sustainable under current financing arrangements. The federal government’s financial condition continued to be significantly affected by the last economic recession and the federal government’s actions to stabilize financial markets and promote economic recovery, among other factors. For fiscal year 2011, the federal government reported a net operating cost of about $1.3 trillion and a unified budget deficit of approximately $1.3 trillion. In addition, federal debt held by the public increased to about 68 percent of gross domestic product (GDP) as of September 30, 2011. The federal government undertook an array of unprecedented actions to help stabilize the financial markets and promote economic recovery. As of September 30, 2011, the federal government reported assets of over $295 billion, which is net of about $95 billion in valuation losses, as a result of these actions. In addition, the federal government reported incurring significant liabilities resulting from these actions as of September 30, 2011, including approximately $316 billion of liabilities for future payments to the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Because the valuation of these 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 the government’s costs and contributed to growing federal debt held by the public. The economic downturn and the nature and magnitude of the actions taken to stabilize the financial markets and to promote economic recovery, as well as challenges in the housing market, will continue to affect the federal government’s near-term budget and debt outlook. In addition, the future structure of Fannie Mae and Freddie Mac and the roles they will serve in the mortgage markets may also affect the federal government’s financial condition. 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 2012 and later. Looking ahead, the federal government will face the challenge of determining the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. The 2011 Financial Report includes comprehensive long-term fiscal projections for the U.S. government that, consistent with GAO simulations, show that without changes in current policy, the federal government continues to face an unsustainable fiscal path. Such reporting provides a much needed perspective on the federal government’s long-term fiscal position and outlook. The projections included in the Financial Report and our simulations both reflect an improvement resulting from provisions of the Budget Control Act of 2011 (BCA). The BCA set limits on discretionary spending for fiscal years 2012-2021 and created the Joint Select Committee on Deficit Reduction. Under the enacted discretionary spending limits, discretionary spending as a share of the economy in 2021 would be lower than any level seen in the last 50 years. The fact that the Joint Select Committee did not reach agreement on a package triggered automatic procedures that would lead to additional spending reductions. Together, the provisions of the BCA would reduce deficits over the 2012-2021 decade by $2.1 trillion—largely through reductions in discretionary spending. Both the Financial Report and GAO’s simulations assume these reductions occur, and that the savings as a share of GDP continue beyond the decade. Even with the reductions from the BCA, the government continues to face a significant structural imbalance between revenues and spending, driven on the spending side largely by rising health care costs and the aging of the U.S. population. We have already begun to see the impact of this structural imbalance—Social Security is now in a negative cash flow position. The growing gap between revenues and spending that is built into the current structure of the budget leads to continued growth in debt held by the public as a share of GDP; this is not sustainable. Changing this path will not be easy, and it will likely require difficult decisions affecting both federal spending and revenue. While delay increases the size of the changes that must be made, it is also important to recognize current economic conditions. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal government’s long-term fiscal path. 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 Congress, the administration, and federal managers to have reliable, useful, and timely financial and performance information to effectively meet these challenges. Sound decisions on the current and future direction of vital federal government programs and policies are more difficult without reliable, useful, and timely financial and performance information. DOD, in particular, faces many difficult challenges in this area. We are encouraged by DOD’s efforts toward addressing its long- standing financial management weaknesses and its efforts to achieve auditability. However, sustained and diligent DOD top management oversight toward achieving financial management capabilities, including audit readiness, will be critical going forward. Moreover, in addition to annual financial statements that can pass the scrutiny of a financial audit, the civilian CFO Act agencies must continue to strive toward routinely producing reliable, useful, and timely 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 for their agency and the government as a whole. The last economic recession and the federal government’s actions to stabilize financial markets continued to significantly affect the federal government’s financial condition. Continued focus and attention is needed to ensure (1) that sufficient internal controls and transparency are established and maintained for all financial stabilization efforts; and (2) that all related financial transactions are reported on time, accurately, and completely. In addition, the federal government will face the challenge of determining the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. Further, 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 by policymakers. Finally, I want to emphasize the value of sustained congressional interest in federal financial management issues, as demonstrated by this Subcommittee’s leadership. It will be key that, going forward, the appropriations, budget, authorizing, and oversight committees continue to support improvement efforts and to hold the top leadership of federal entities accountable for resolving the remaining problems. 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 Robert F. Dacey, Chief Accountant, or Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-3406. Key contributions to this testimony were also made by staff on our Consolidated Financial Statement audit team. Principal auditor Office of Inspector General (OIG) Reported noncompliance with applicable laws and regulations and/or substantial noncompliance with one or more of the Federal Financial Management Improvement Act requirements. The auditors expressed an unqualified opinion on the Department of Health and Human Services’ fiscal year 2011 accrual-based financial statements, but were unable to express opinions on the department’s 2011 Statement of Social Insurance and 2011 Statement of Changes in Social Insurance Amounts. For fiscal year 2011, only the Consolidated Balance Sheet and the related Statement of Custodial Activity of the Department of Homeland Security were subject to audit. The auditors expressed a qualified opinion on these two financial statements. The auditors of the Department of State’s fiscal year 2011 financial statements issued a qualified opinion because of the effect of certain matters related to after-employment actuarial liabilities and benefit plan assets and net position balances. 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. 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. However, 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 governments ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal governments 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 GAOs audit for fiscal year 2011 and discusses certain of the federal governments significant long-term fiscal challenges. Three long-standing major impediments continued to prevent GAO from expressing an opinion on the federal governments accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense (DOD) that have prevented DODs financial statements from being audited, (2) federal entities inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal governments ineffective process for preparing the consolidated financial statements. GAO also reported material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. Also, GAO was prevented from expressing opinions on the 2011 and 2010 Statements of Social Insurance and the 2011 Statement of Changes in Social Insurance Amounts because of significant uncertainties primarily related to the achievement of projected reductions in Medicare cost growth reflected in the statements. GAO is encouraged by the commitment of DOD leaders to improving DODs financial management and achieving auditiability and by the congressional attention being given to this important matter. The Congress set statutory deadlines for DOD auditability, convened a congressional panel to focus on the issue, and held several hearings on DOD financial management. The Secretary of Defense accelerated the timeline for DOD auditability, setting a 2014 deadline for audit readiness of the Statement of Budgetary Resources, and DOD has issued a plan for meeting that date, which GAO is in the process of reviewing. The plan emphasizes the importance of leadership, including senior leaders and field commanders, to achieving DODs goals, and it links accountability to performance appraisals. To meet their financial management and auditability goals, DOD and its components will need to overcome significant challenges, including implementation of its financial improvement plan, deployment of supporting automated systems, and assessment and resolution of gaps in workforce skills. The Department of the Treasury (Treasury) furthered its commitment to resolve unreconciled differences between federal entities regarding intragovernmental activity and balances, which included several short- and long-term initiatives. In addition, Treasury, in coordination with the Office of Management and Budget (OMB), implemented corrective actions during 2011 to address certain deficiencies regarding the preparation of the consolidated financial statements. Fully addressing the numerous issues in these areas will require a strong and sustained commitment by federal entities and leadership by Treasury and OMB. The 2011 Financial Report of the United States Government included comprehensive long-term fiscal projections for the U.S. government, which provides a much needed perspective on the federal governments long-term fiscal position and outlook. These, like GAOs simulations, include the savings provided by the Budget Control Act of 2011. While assuming that the savings as a share of gross domestic product continue beyond the decade leads to an improvement in the long-term fiscal path, it does not make the path sustainable. Addressing the long-term fiscal imbalance is made more difficult by the need to balance achieving the goals of sustaining economic growth in the near term, while producing a plan to change the federal governments 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 GAOs recommendations. |
GPRAMA requires OMB to annually determine whether agencies have met the performance goals and objectives outlined in their performance plans and submit a report on unmet goals. In implementing this provision, OMB’s guidance directs agencies to continue reporting on unmet performance goals in their annual performance reports, as has been required since fiscal year 1999. In addition, OMB’s guidance directs agencies to conduct leadership-driven, annual reviews of progress towards each strategic objective—the outcome or impact the agency is intending to achieve—established in the agency’s strategic plan. Figure 1, an illustrative example from OMB’s guidance, shows how strategic objectives relate to other goals within an agency’s performance management structure. Agencies began conducting these reviews in fiscal year 2014. The results from their first round of reviews were published in their annual performance reports in February 2015, as well as on Performance.gov, the central governmentwide performance reporting website implemented by OMB to meet GPRAMA requirements. OMB’s guidance directs agencies to provide a progress update for each strategic objective, including a brief summary of what progress was made and an explanation of the achievements made or challenges that have impeded progress. As part of their reporting, agencies were to identify a portion of their objectives as (1) having demonstrated noteworthy progress and (2) focus areas for improvement. According to OMB’s guidance, the results of these reviews should (1) inform long-term strategy; (2) inform annual planning and budget formulation; (3) facilitate identification and adoption of opportunities for improvement, including risk management; (4) identify areas where additional program evaluation, other studies, or analyses of performance data are needed to determine effectiveness or set priorities; (5) identify where additional skills or other capacity are needed; (6) improve decision- making response time; (7) strengthen collaboration on crosscutting issues; and (8) improve transparency. The PIC also provided support to agencies as they began planning for and implementing their strategic reviews. According to OMB and PIC staff, through the PIC’s Internal Reviews Working Group, agency officials shared information about their planned strategic review processes as well as lessons learned from the initial round of reviews. The PIC also hosted several summits focused on strategic reviews and published a guide in August 2014 on leading effective strategic reviews, based on agencies’ initial experience. Moving forward, OMB staff told us that they expect agencies’ strategic review processes will mature over time, and as such expect the results of those reviews to mature over time as well. According to OMB staff, they used the information conveyed in figure 2 to communicate to agencies that they likely would not be able to fulfill all requirements in OMB’s guidance in initial implementation, but instead should develop a maturity model to ensure they continue to strengthen the reviews over time. Sufficient planning and preparation is important to ensure that the agency’s strategic review process is successful. Our February 2013 report on data-driven performance reviews found this was critical to a successful review. Planning enhances the quality, credibility, and usefulness of the review, and helps ensure that participants’ time and resources are used effectively. Establishing common purposes for strategic review meetings can build trust and encourage active participation by participants. In addition, developing common terminology, policies, and procedures, and clarifying roles and responsibilities helps facilitate collaboration for productive meetings. Participants need to be prepared to review progress towards their strategic objectives and determine any subsequent actions. Key features for planning the strategic review include: Leadership commitment and involvement. Agency leadership should be directly and visibly engaged in the review process and invest the time necessary to understand and interpret the evidence being presented. This involvement fosters ownership among those involved in the review and helps ensure that participants take the reviews seriously and can make decisions and commitments with the knowledge and backing of leadership. Communication of expectations and time frames. Guidance and agendas provided in advance of review meetings can establish a common understanding of the purpose of the review, the process to be used, and time frames for completing the review. In addition, standardized templates used to collect and share key information are helpful to facilitate strategic review discussions and help to ensure consistency across reviews. Accountability for results. The focus of accountability should be on the responsible objective leader’s role in credibly assessing progress in achieving a strategic objective using evidence. Agency leaders should hold objective leaders and other responsible managers accountable for knowing the progress being made in achieving outcomes and, if progress is insufficient, understanding why and having a plan for improvement. If evidence is insufficient for assessing progress, managers should be held accountable for improving the availability and quality of the evidence so that it can be used effectively for decision making. Managers should also be held accountable for identifying and replicating effective practices to improve performance. In addition, OMB’s guidance strongly encourages agencies to leverage existing decision-making processes to conduct strategic reviews. According to the guidance, in most cases, the strategic reviews should be integrated into existing agency management processes to raise key decisions, issues, and analysis to agency leadership. OMB’s guidance also provides agencies flexibility in developing their processes, stating that agencies should use a tailored approach that is appropriate for the nature of the agency’s programs, operations, and strategic objectives and evidence available. In developing the agency’s strategic review process in late 2013, NASA’s Performance Improvement Officer (PIO) at the time and her staff sought input on the process from NASA senior leaders. This group included the leaders for each of NASA’s strategic objectives who typically represent the most senior official with direct oversight of the programs and activities supporting each objective, such as division directors and deputy associate administrators, among other senior positions. According to PIO staff, all of NASA’s guiding principles for the strategic review process were informed by senior leadership, such as using existing management processes and structures, promoting transparency, and making the process intuitive and easy to understand. NASA PIO staff told us that this helped create buy-in and understanding for the strategic review process. Each strategic objective leader, along with deputy objective leaders and relevant NASA staff, was involved in conducting individual assessments of each objective and provided a suggested rating. For example, the Director of the Heliophysics Division was the strategic objective leader for the strategic review of the objective “Understand the Sun and its interactions with the Earth and the solar system, including space weather.” NASA’s PIO and her staff then led crosscutting reviews of these individual assessments to identify themes and provide an independent rating recommendation. Following the crosscutting review, NASA’s Chief Operating Officer (COO) determined final ratings during a briefing attended by the PIO and each of the strategic objective leaders. At that meeting, a member of NASA’s PIO staff summarized review findings and results to the COO. The COO then asked each strategic objective leader clarifying questions and sought suggestions that would lead to performance improvements before settling on the final rating. According to NASA PIO staff, this approach of having all strategic objective leaders (and relevant program staff) attend the entire briefing encouraged transparency, and the personal involvement of the COO encouraged accountability for results and performance improvements. DHS’s Office of the Chief Financial Officer/Office of Program Analysis and Evaluation (CFO/PA&E) leads departmental implementation of performance management activities, including strategic reviews. In addition, each component agency has a designated PIO and performance staff who coordinate efforts in their component agency as part of department-wide performance management activities. For example, for U.S. Citizenship and Immigration Services (USCIS), this role is performed by the Office of the USCIS CFO. In early January 2014, CFO/PA&E met with component PIOs to provide a basis for understanding and participating in the department’s first strategic reviews. Recognizing the important role that they played in the initial reviews, CFO/PA&E revised its orientation process for the 2015 strategic reviews to include a separate briefing for assessment leads—the senior executives who lead teams reviewing progress towards each strategic goal. The DHS briefing slides informed participants about the related GPRAMA requirement and OMB’s guidance, as well as the purpose and expected benefits of the department’s strategic reviews, such as informing the next DHS strategic plan, strengthening collaboration, and informing program and budget reviews. The briefing provided an overview of the department’s strategic review process, describing a structured methodology for conducting the reviews and samples of four standard deliverables (templates) to be used to collect information from each assessment team. It also identified the roles and responsibilities for various participants in the process, including assessment leads and teams conducting the review of each goal, the component and DHS PIOs, and CFO/PA&E staff. The briefing also provided a timeline for implementing the department’s strategic reviews, with specific dates for key activities to be completed. Among other responsibilities, USDA’s Office of Budget Policy and Analysis (OBPA) oversees implementation of the department’s performance management activities. According to the Associate Director of OBPA, who also serves as USDA’s PIO, his office and relevant component agencies provide regular performance updates to the Secretary on key initiatives, such as the Blueprint for Stronger Service, an effort launched in 2012 to enhance administrative services and management operations. For these updates, which primarily occur monthly, depending on the initiative, USDA uses a standard template, known as a “quad chart,” to collect and present information to the Secretary for decision making. Because of the Secretary’s familiarity with the quad chart format, the department adapted the chart for use in its strategic review process, known as the strategic objective annual review (SOAR) (see figure 3). As illustrated in figure 3, the SOAR quad chart includes the following information: the relevant agency or office within USDA responsible for the objective and the officials leading the efforts, known as objective owners and lieutenants; the strategic objective and the strategic goal it supports; a summary of progress towards the objective and related achievements; key performance indicators along with actual performance results compared to targets; a discussion of challenges that could affect program outcomes; and a description of next steps, crosscutting analysis, or evaluations to improve objective performance. Objective owners and lieutenants are responsible for populating the information in the quad charts. Subsequently, OBPA reviews the quad charts before they go to the Secretary to ensure consistency in information reported and progress assessments, identify any needed changes, and determine if the information provided could impact other initiatives across the department. According to OBPA officials, the quad charts provide USDA leadership with succinct and sufficient information to make decisions to improve performance, such as approving new or modifying existing strategies, or adjusting time frames. A strategic review starts with framing the outcome or impact the agency seeks to achieve. According to OMB guidance, strategic objectives should be relatively simple statements that break down the broader, mission-oriented strategic goals to a level that reflects the impact or outcome the agency is trying to achieve through its programs. Objectives should be framed so they can serve as standards against which an assessment can reasonably be performed to determine the effectiveness of the agency’s implementation of its programs, as well as progress toward the ultimate outcome. In some cases, defining and measuring the outcome related to a strategic objective may be relatively straightforward. For example, increasing employment rates for participants who completed a training program is an outcome defined in a way that can be measured. However, where agencies are focused on more long-term or complex outcomes, determining if the agency is making progress each year can be more challenging. In these instances, the agency may need to break the strategic objectives into pieces that can be more easily be measured or assessed. As part of its performance framework, NASA has associated time frames with its goals, as illustrated in figure 4. For the agency’s planning process for its 2014 strategic plan and annual strategic review, strategic objective leaders developed success statements that covered up to a 10-year time frame for each of their objectives. According to PIO staff, for the success statements, objective leaders and staff were asked to characterize or define the outcomes of success in implementing their objectives in the next 10 years by answering questions such as, “What will the agency have completed, obtained, contributed, advanced?” NASA officials told us that because it can be difficult to measure progress towards long-term, scientific discovery-oriented outcomes, they also rely on underlying multiyear performance goals, annual performance indicators, and milestones to better plan for and understand near-term progress towards those objectives. Table 1 illustrates how NASA clarified long-term and near- term progress for its objective to Understand the Sun. To frame DHS strategic goal 3.1, “Strengthen and Effectively Administer the Immigration System,” in more concrete terms, the lead agency, USCIS, focused on three sub-goals. Table 2 identifies the sub-goals and describes them. In addition to the sub-goals, USCIS also developed performance measures (known as strategic measures) as part of its ongoing performance monitoring efforts for this goal. For example, one measure is the average processing cycle time (in months) for naturalization applications. Taken together, the sub-goals and performance measures show how DHS has identified measureable pieces of its efforts related to the larger goal. It is critical to identify, at a conceptual level, the various strategies and factors that can help or hinder achievement of the strategic objective. The federal government uses numerous activities and policy implementation tools, such as loans, grants, contracts, social and economic regulations, insurance, and tax expenditures, among others (hereafter strategies) to help address public problems. However, since 2011, our annual series of reports examining federal programs has found that agencies often employed overlapping or fragmented program strategies that were poorly coordinated. In addition, because the federal government rarely works in isolation, the efforts of other levels of governments (local, state, and international) and sectors (private and nonprofit) frequently contribute to the achievement of an outcome as well. Beyond these strategies and efforts, factors both within and beyond the control of any particular agency—generally referred to as internal and external factors—may influence an outcome. Internally, these factors could include an agency’s culture, management practices, and business processes. External factors may include the economy, demographic trends, technological advances, and the natural environment. The strategic review for each objective should take into account the comprehensive set of federal strategies, nonfederal efforts, and factors within and outside an agency’s control related to the outcome. The more complex the outcome, the more likely it is to be influenced by multiple strategies, nonfederal efforts, and factors. Although these influences may have been previously identified through an agency’s strategic planning process or similar vehicle, they should be revisited as part of the strategic review to determine if anything has changed. OMB’s guidance directs agencies to identify in their strategic plans the various organizations and policy tools, both within and external to the agency, that contribute to their strategic objectives. However, our work reviewing GPRAMA implementation has found weaknesses in agencies’ abilities to identify contributors to their goals. For example, in our April 2013 report on agency priority goals (APG), we found that agencies had not always identified external organizations and policy tools that contributed to their goals, although required by GPRAMA and OMB’s guidance. We recommended that OMB ensure agencies adhere to its guidance by providing complete information about the contributors to their APGs. OMB staff agreed with this recommendation. According to information provided by OMB staff in April 2015, agencies were asked to identify organizations, program activities, regulations, policies, tax expenditures, and other activities contributing to their 2014-2015 APGs, first as part of the September 2014 update to Performance.gov, with opportunities for revisions in subsequent quarterly updates. Our analysis found that agencies have made progress in identifying external organizations and programs for their APGs, but they did not present this information consistently on Performance.gov. Although each APG webpage has a location where agencies are to identify contributing programs, agencies did not always identify external organizations and programs there. Instead, they identified these external contributors elsewhere, such as APG overview or strategy sections, which could limit the ability of users to easily locate this information. We will continue to monitor progress on implementation of this recommendation. Using existing knowledge, expertise, and evidence, those involved in the review should identify the strategies, nonfederal efforts, and factors that are likely to have the strongest influence on the outcome. This information will help to establish priorities for the scope of the review. There are a number of methods that can be used to map or model the causal relationships among the inputs, processes, and outputs produced by various strategies and the forces that influence achievement of outcomes, such as results mapping and logic modeling. These methods can help to clarify the issues that must be addressed conceptually to create change or achieve the intended outcome. By identifying and examining the various influences on the strategic objective or expected outcome during the strategic review, an agency can better understand how the existing set of program outputs and activities are contributing to the achievement of outcomes and whether gaps exist or changes are needed in light of all the other factors that are influencing outcomes. Recognizing that some of these influences may present risks or challenges to achieving expected outcomes, OMB’s 2014 update to its guidance (covering agency’s strategic reviews in 2015) states that while agencies cannot mitigate all risks related to achieving strategic objectives and performance goals, they should identify, measure, and assess To that challenges related to mission delivery, to the extent possible. end, the guidance encourages agencies to institute an Enterprise Risk Management (ERM) approach, and leverage such efforts when conducting strategic reviews. The guidance defines ERM as an effective agency-wide approach for addressing the full spectrum of the organization’s risks by understanding their combined impact as an interrelated portfolio, rather than addressing risks within silos. The guidance further states that with an ERM approach, agencies can be better positioned to quickly gauge which risks are directly aligned to strategic objectives, and which have the highest probability of impacting the agency’s mission.opportunities and challenges are routinely identified, analyzed, and Such an approach can help ensure that addressed, as appropriate, enhancing the agency’s capacity to more efficiently and effectively determine priorities and allocate resources. DHS’s review of its strategic goal 2.2 “Safeguard and Expedite Lawful Trade and Travel” involved four component agencies: Customs and Border Protection (CBP, the designated lead agency for the review), the Transportation Security Administration (TSA), Immigration and Customs Enforcement (ICE), and the U.S. Coast Guard (Coast Guard). According to CBP officials, each of these component agencies plays a role in implementing strategies supporting this goal. According to DHS’s Strategic Plan for fiscal years 2014-2018, the strategies for this goal are to (1) safeguard key nodes, conveyances, and pathways; (2) manage the risk of people and goods in transit; and (3) maximize compliance with U.S. trade laws and promote U.S. economic security and com- petitiveness. The goal leader—CBP’s Executive Director for Planning, Program Analysis, and Evaluation, within the Office of Field Operations, who also led the assessment team—asked participating officials from the four contributing agencies to identify which of their programs and activities contributed to the achievement of the goal, and then subsequently to rank them by level of influence. Table 3 provides illustrative examples of programs and activities that support this goal from each of the four contributing component agencies. According to CBP officials who coordinated the review, participating officials determined that a few of the programs and activities they initially identified as contributing to the goal had relatively minor influence towards the outcome. In these instances, the programs and activities primarily supported another DHS goal. DHS officials decided to include only those programs that primarily supported the goal under review. For example, CBP officials determined that CBP’s Container Security Initiative, which works with foreign governments to examine potentially high-risk cargo prior to departure from the foreign port of origin, may have had influence on safeguarding trade and travel, but more directly supported another DHS goal, “Secure U.S. Air, Land, and Sea Borders and Approaches.” USDA’s Food and Nutrition Service (FNS) seeks to increase food security and reduce hunger by providing children and low-income people access to food, a healthful diet, and nutrition education in a way that supports American agriculture and inspires public confidence. FNS uses a logic model (figure 5) to understand how its programs and other factors influence outcomes related to USDA’s objective to “improve access to nutritious food.” FNS first developed the logic model in the early 2000s as part of an effort to better integrate performance measurement into its operations. FNS officials told us that the concepts included in the logic model are often used when the agency is making decisions about performance measurement and evaluation because it shows the connections among program inputs, outputs, and overall outcomes. By making those linkages explicit, decision makers can have more focused and meaningful discussions for how proposed strategies are tied to desired results and how to measure the success of strategy execution and impact, according to FNS officials. As part of the strategic review process, FNS used its logic model to reaffirm the connections between program outputs and related outcomes. As illustrated in figure 5, the logic model shows how the output of FNS’s programs (left column) contribute to relevant near-term and long-term outcomes (the three columns to the right). The model covers five contributing FNS programs: Child and Adult Care Food Program (CACFP), Fresh Fruit and Vegetable Program (FFVP), National School Lunch Program (NSLP), Supplemental Nutrition Assistance Program (SNAP), and Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). At each level, the logic model identifies related performance measures as well as external factors that could influence progress, such as FNS and state implementing agency resource levels, competing priorities and policies, and food price and availability. Because the achievement of outcomes may be complex and involve a variety of contributors from within an agency, or include other federal agencies, levels of government, and sectors, it is critical to consider which key stakeholders should be involved in a strategic review. Each of these stakeholders provides a unique perspective on their contribution or view of progress of the outcome under review. OMB’s guidance and our past work reinforce the importance of including key stakeholders in the review. OMB’s guidance states that the analysis of each objective should be conducted at the objective lead level, with support from relevant bureaus and programs, and that the COO and PIO office should be involved in analysis and decision making across all objectives. Our prior report on effective practices for data-driven performance reviews also indicated that performance review participants should include high-level leaders and managers with an agency-wide perspective, as well as those with programmatic knowledge and responsibility for the specific performance issues likely to be raised. Each of the six agencies covered by our work for this report developed strategic review processes that involved relevant internal stakeholders, from contributing program officials to the agency head or COO. Agencies should also consider including the perspectives of relevant third-party policy experts, academics, professional associations, end users/clients or advocacy groups that represent them in the review process. When outcomes are complex and involve multiple organizations, it is also important to establish how existing collaboration mechanisms can facilitate joint data collection, analysis, and reporting, or if new networks should be established. In some cases, there may be an existing interagency group, such as a task force, that has been formed to achieve an outcome. Our prior work has shown that agencies that participated in various planning and decision-making forums together—such as interagency councils or planning bodies—reported that such interactions contributed to achieving their goals. Specifically, agencies reported that such participation opened lines of communication, fostered trust, and helped build relationships, which can in turn lead to more effective collaboration across agency lines. In spite of the compelling rationale for all parties contributing to an outcome to collaborate, our past work on GPRAMA implementation has found that agencies generally have not included external stakeholders when reviewing progress on an outcome. In our report on implementation of data-driven reviews in February 2013, we concluded that as the implementation of various GPRAMA provisions continues, agencies may need to reevaluate the most effective way to engage outside stakeholders in the performance review processes for APGs and other performance goals that depend on other organizations to achieve desired outcomes. We recommended that OMB work with the PIC and other relevant groups to identify and share promising practices to help agencies extend their quarterly performance reviews to include, as relevant, representatives from outside organizations that contribute to achieving their agency performance goals. OMB staff generally agreed with this recommendation. As of April 2015, OMB staff told us that agencies continue to find that most APG reviews are appropriately focused on internal agency management, rather than involving external stakeholders. Therefore, OMB and the PIC have focused recent efforts on developing and sharing promising practices related to conducting reviews internal to the agencies or on improving evidence/measurement. We will continue to monitor progress on implementation of this recommendation. GAO-13-228. Office of the Secretary, who serves as the objective leader. The review involved officials from the Office of Special Needs Assistance Programs within the Office of Community Planning and Development, which administers the department’s homelessness programs, such as the Continuum of Care Program, which funds local networks of organizations to quickly rehouse individuals and minimize the trauma and dislocation caused to individuals, families, and communities by homelessness. In addition, the review included participants from other HUD offices, such as the Office of Public and Indian Housing and the Office of Multifamily Housing, whose programs can assist in ending homelessness. For example, the Office of Public and Indian Housing’s Housing Choice Voucher Program provides rental subsidies for low-income families, which may include families experiencing homelessness. This crosscutting and inclusive approach reinforced one of HUD’s strategies supporting this objective—to fully engage and leverage mainstream housing assistance to build capacity among public housing agencies and multifamily owners to admit homeless households into their units. Although no one outside of HUD directly participated in the review, HUD officials stated that they leveraged their existing relationship with officials at the U.S. Interagency Council on Homelessness (Interagency Council) and the 18 other federal agencies that comprise it to better understand how other federal programs are contributing to progress in ending This included attending and homelessness for the target populations.participating in various meetings, including quarterly meetings with the Interagency Council principals, staff-level coordinating meetings, and targeted working groups, such as bimonthly meetings of the chronic and family homelessness working group. In addition, as part of this objective, HUD and the Department of Veterans Affairs (VA) share an APG to end veterans homelessness. HUD officials described regular coordination between the two agencies, in conjunction with Interagency Council officials, to monitor progress towards the goal. In its strategic review of DHS strategic goal 3.1, “Strengthen and Effectively Administer the Immigration System,” USCIS involved two organizations that understand and promote the appropriate level of attention to the rights and views of USCIS customers—DHS’s Office for Civil Rights and Civil Liberties (CRCL) and the Office of the Citizenship and Immigration Services Ombudsman (CISOMB). While both offices are within DHS, organizationally they are located outside of USCIS. CRCL supports the department’s mission to secure the nation while preserving individual liberty, fairness, and equality under the law. CISOMB, which was created by Congress in 2002, assists industry and other employers with the services and benefits provided by USCIS. CISOMB maintains neutrality and identifies issues where trends or policy could be corrected with USCIS by making formal recommendations and providing an annual report to Congress. According to USCIS officials, strategic review participants from CISOMB and CRCL were able to offer perspectives that reflected the views of those who receive services and benefits provided by USCIS. The presence of a CRCL representative helped to ensure that concerns related to civil rights and civil liberties were given proper consideration when discussing the administration of citizenship and immigration benefits, according to those involved in the review. For example, the CRCL representative shared that while reaching certain output or outcome goals is important, it is also critical to clearly communicate the various means through which USCIS customers can contest, appeal, or seek reconsideration of certain adverse determinations involving DHS employees or programs, or to correct outdated or otherwise incorrect information that could impact determinations. According to USCIS officials, the CRCL representative’s comment led them to evaluate, during the strategic review, whether the agency was clearly communicating the various avenues for customers to seek redress. They subsequently determined that it was. Overall, the USCIS officials involved in the strategic review told us that the presence of CISOMB representatives helped ensure the review accurately portrayed the views and experiences of customers and employers that interacted with and received benefits from USCIS. A representative from CISOMB told us that because of their institutional knowledge regarding the impact of USCIS activities, CISOMB officials involved in the strategic review were able to ask informed questions about the evidence presented during the strategic review. In one instance, CISOMB representatives encouraged USCIS participants to broaden their assessment beyond quantitative output data to identify the impact of the agency’s public engagement efforts. USCIS officials said this was valuable input from the CISOMB representatives, and refocused the review to also look at the quality and end results of USCIS’s services to its customers. Officials in EPA’s Office of Solid Waste and Emergency Response (OSWER) told us that, concurrent with the strategic review of an objective related to the cleanup and reuse of contaminated sites, they launched a working group with the Agency for Toxic Substances and Disease Registry (ATSDR) located within the Center for Disease Control and Prevention at the Department of Health and Human Services. This group was created to collaborate in better understanding methodology to assess human health at Superfund sites. OSWER is responsible for providing policy, guidance, and direction for EPA’s emergency response and waste programs, including the Superfund program. The Superfund program responds to abandoned and active hazardous waste sites and accidental chemical releases. ATSDR is responsible for performing specific functions concerning the effect on public health of hazardous substances in the environment, such as public health assessments of waste sites and health consultations concerning specific hazardous substances. The objectives of the working group were to develop measures to estimate the number of people exposed to or potentially exposed to contaminants at Superfund sites, as well as the number of people who are now protected as a result of actions taken by OSWER and ATSDR. From this collaboration, the working group made recommendations to improve the methodology for determining measures to assess health impacts and OSWER’s clean-up efforts at its clean-up sites. While the collaborative effort was not completed in time to be incorporated into the fiscal year 2014 strategic review findings, OSWER officials told us the project had stronger internal support because the type of evidence the working group was seeking to develop could help with reviewing progress on the strategic objective. Going forward, OSWER officials told us that the results of the EPA/ATSDR working group could help subsequent strategic reviews by producing better evidence of the Superfund program’s effectiveness in achieving the “Promote Sustainable and Livable Communities” objective. Given the long-term and complex nature of many outcomes, the strategic review should be informed by a variety of evidence regarding the implementation of strategies and their effectiveness in achieving the outcome. OMB’s guidance states that the strategic review process should consider multiple perspectives and sources of evidence to understand the progress made on each strategic objective. This should include progress made by the agency towards the performance goals and measures related to the strategic objective as well as program evaluations, research studies, data, and policy analysis relevant to the objective or its related programs.evidence, studies conducted by external entities, such as academics, think tanks, nonprofits, associations, and oversight entities (such as ourselves or Inspectors General), may prove useful to the review. While performance measurement and program evaluations can serve as key evidence for assessing progress, our past work has identified issues with agencies’ capacities to develop and use these types of evidence in decision making. Performance measurement is the ongoing monitoring and reporting of program accomplishments, particularly progress toward preestablished goals. Because of its ongoing nature, performance measurement can serve as an early warning system to management and as a vehicle for improving accountability to the public. Although our work on federal performance measurement during the past 2 decades has found an increase in the reported presence of different types of performance measures across the government, it has not resulted in similar increases in the reported use of performance information in decision making. Moreover, in June 2013, we found that agencies continue to face common, long-standing difficulties in measuring the performance of various types of federal programs and activities—contracts, direct services, grants, regulations, research and development, and tax expenditures. We recommended that the Director of OMB work with the PIC to develop a detailed approach to examine these difficulties across agencies, including identifying and sharing any promising practices from agencies that have overcome difficulties in measuring the performance of these program types. OMB staff agreed with this recommendation. As of April 2015, OMB and the PIC have taken some initial steps to address this recommendation in a few areas, such as acquisition management (contracts). In addition, according to information provided by OMB staff, the PIC formed a working group on performance measurement that, in part, is focusing on how to develop appropriate performance measures. However, OMB has not yet developed a comprehensive and detailed approach to address these issues as envisioned in our report. We will continue to monitor progress on implementation of this recommendation. Program evaluations are individual systematic studies conducted periodically or on an ad hoc basis to assess how well a program is working. A program evaluation’s typically more in-depth examination of program performance and context allows for an overall assessment of whether the program works and identification of adjustments that may improve its results. However, as reported in June 2013 based on results from a governmentwide survey, we found that most federal managers lacked recent evaluations of their programs.reported that an evaluation had been completed within the past 5 years of any program, operation, or project in which they were involved. Another 40 percent of managers reported that they did not know if an evaluation had been completed. However, 80 percent of managers who did have evaluations reported that those evaluations contributed to a moderate or greater extent to improving program management or performance, and to assessing program effectiveness or value. Our past work has found that the capacity to collect and analyze useful evidence is critical to successful reviews. To be useful to various decision makers, evidence must be accessible, accurate, complete, credible, consistent, relevant, timely, and valid. In addition, having the capacity to disaggregate data according to demographic, geographic, or other relevant characteristics can aid in highlighting significant variation, which can help meeting participants to pinpoint problems and identify solutions. Agencies also need to plan for the time and resources required to generate and communicate performance data and other evidence in a timely manner. Easy access to relevant databases and systems- generated analysis, such as providing analysts with the ability to develop performance reports without relying on information technology staff, can streamline the data collection and analysis processes. HUD’s Office of Policy Development and Research (PD&R) is responsible for maintaining current information on housing needs, market conditions, and existing programs, as well as conducting research on priority housing and community development issues. According to HUD performance staff, PD&R supported the review of each strategic objective by providing a template containing the most relevant research and evaluations related to each objective. This included both HUD-funded and external evidence. In addition, HUD’s performance staff asked objective leaders to supplement the evidence provided by PD&R with any additional evidence they thought would inform the review. Figure 6 provides examples of the research and evaluations that informed the department’s review of its objective to end homelessness for veterans, people experiencing chronic homelessness, families, youth, and children. HUD performance staff told us that when a strategy has a clear outcome measure tied to departmental funding and support, identifying or developing relevant research was a lower priority because the existing measures provided an understanding of progress towards a goal or objective. For example, they told us that HUD has outcome information for its rental housing programs, in terms of individuals who are subsequently housed. HUD performance staff told us they were more concerned about developing new performance measures and identifying relevant research to inform policy changes where existing strategies lacked clear measures. For instance, HUD does not have broader outcome information on how all of its rental housing programs help individuals become more self-sufficient in terms of obtaining further education or employment. Prior to kicking off the review for DHS’s goal to strengthen and administer the immigration system, USCIS performance staff compiled relevant evidence—including agency performance data, program evaluations, and relevant reports by us and the DHS Inspector General—into a database to allow strategic review team members to focus on analyzing the evidence and determining progress in achieving the goal. In compiling the database, performance staff summarized key findings from the evidence and provided potential users with the source of the evidence so they could obtain additional context, if necessary. Further, they categorized the evidence to allow for easy sorting by users. For example, the evidence could be sorted by the sub-goal to which it was related; DHS’s four assessment areas it supported; whether it represented an accomplishment, planned activity, challenge/recommendation, a study, or other information; and key contributing organization within USCIS. Figure 7 provides an excerpt from this database, illustrating how agency performance data on processing applications was categorized. For its objective to promote sustainable and livable communities, OSWER officials developed what they called a “ladder of evidence”—a framework and inventory of relevant performance information, scientific studies, academic research, and program evaluations, which they then assessed and categorized by strength. Officials said the different levels (types) of evidence allowed them to better assess and communicate the results of OSWER’s programs. The first level of evidence provides descriptive data, covering information about what OSWER does, whom it serves and why, and performance trends over time. For example, one performance measure at this level is the number of Superfund sites with human exposure to contamination under control. The second level of evidence identifies a relationship between OSWER’s activities and its outcomes. It provides evidence about the effectiveness of program implementation which can help identify promising practices or problematic areas for further study. The third level of evidence establishes a causal link between OSWER’s programs and the impact they are having on human health and environmental outcomes. Figure 8 provides additional information about each level of evidence along with illustrative examples. Using relevant evidence, strategic review participants should assess whether strategies are being implemented as planned and whether they are having the desired effect, as well as whether other factors are influencing results. The review may highlight areas where action is needed to improve or enhance implementation and impact. The following questions, based broadly on practices from OMB’s guidance and our past work on performance management, could help participants focus and facilitate this assessment and determine any needed actions. If progress is lagging, why and what actions (strategy changes, revised management practices, legislative or budgetary proposals, etc.) could lead to better results? Are there any potential gaps in strategy? Conversely, is there any unnecessary overlap and duplication? Addressing such issues could lead to improvements in effectiveness and efficiency. Where progress is sufficient or exceeding expectations, are there strategies or practices that could be replicated and/or scaled to further enhance effectiveness? Have there been recent changes in the agency’s operating environment that need to be addressed? Are there strengths/opportunities on which to capitalize? Are there weaknesses/threats that need to be overcome? If the review identified evidence gaps, what steps will the agency take to develop sufficient evidence? In addition, OMB’s guidance suggests additional actions that agencies should consider, which could lead to enhanced performance. These include benchmarking information from others trying to accomplish the same or similar objectives or using the same or similar key process, and identifying lessons learned from past efforts to continuously improve service delivery and resolve management challenges. Education officials told us that, in addition to the Department’s policy development and spending plan review, they used the strategic review process to assess how recent changes to its School Improvement Grant (SIG) program contributed to progress in one of the department’s strategic objectives. Education’s SIG program is designed to fund significant reforms in low-performing schools in support of the department’s objective to “accelerate achievement by supporting states and districts in turning around low-performing schools and closing achievement gaps, and developing models of next-generation high schools.” According to Education’s Fiscal Year 2014 Annual Performance Report and Fiscal Year 2016 Performance Plan, turning around the lowest-performing schools takes several years to show progress and success. Education reported that since 2009, more than 1,700 schools have received up to $2 million for 3 years through the SIG program to implement intervention models intended to turn around the lowest- performing schools. While nearly two-thirds of the schools have made progress, the remaining schools have either not shown progress or had decreased performance. Through their ongoing SIG program monitoring, Education officials told us they learned about two challenges grantees reported facing that could be hindering progress and developed new strategies intended to address them. First, officials at state and local educational agencies expressed concerns to Education officials about sustaining turnaround efforts, since they are long term in nature and SIG program funds were only available for 3 years.approaches to better support sustainability. Using waiver authority, the department gave grantees flexibility to extend their use of existing funding into a fourth year. In addition, beginning with its fiscal year 2014 appropriations, Education obtained additional authority for state educational authorities to make school improvement grants for up to 5 Education officials told us they took two different years. Education officials told us grantees also expressed concerns about a lack of principals with knowledge about or experience in turning around schools. Recognizing the importance of sustained leadership commitment, the department launched a new grant program in 2014, the Turnaround School Leaders program. This program provides funding for 3 years to local educational agencies to help ensure that leaders at schools eligible for or receiving SIG program funds possess the specialized skills needed to drive successful efforts to turn those schools around. Although CBP, TSA, ICE, and Coast Guard officials determined during their review that sufficient progress was being made on DHS’s Goal 2.2 to Safeguard and Expedite Lawful Trade and Travel, they also identified gaps to address in performance monitoring. Officials told us that they realized that while they tracked a number of performance measures related to aspects of trade, they had none regarding the travel portion of the objective (see table 3 below). Further, while most of the existing measures addressed enforcement and security, they noted that they had few measures that addressed the facilitation aspects of their mission— reducing barriers to the efficient flow of trade and travel. According to one of the CBP officials who coordinated the review for this goal from the Office of Planning, Program Analysis, and Evaluation (PPAE), CBP is responsible for most of the activities that would be covered by the gaps in performance information. He told us that CBP has been working to address these weaknesses since they were identified last year. For example, he shared that PPAE has been working with the Trusted Traveler Division within the Office of Field Operations (OFO) to develop travel-specific performance measures. These measures would address the land border and air travel modes, the principal avenues by which most international travelers enter the country. One or more of the travel measures developed is to address the facilitation aspect of CBP’s mission, as expressed in Goal 2.2. In addition, he told us that PPAE is working with the Cargo and Conveyance Security Directorate within OFO to develop a trade facilitation measure. CBP expects to complete the formulation of these measures during calendar year 2015, and plans to subsequently submit them to DHS as formal performance measures to begin reporting in the second quarter of fiscal year 2016. Much like we found for data-driven reviews, thorough and sustained follow-up on issues identified during strategic reviews is critical to the success of the reviews as a performance improvement tool. To ensure that actions identified as a result of the strategic review are carried out in the period between reviews, the agency should have a process to track these actions and communicate the progress made towards them. Such a process should identify, among other things for each action item, the responsible party, target completion dates, and significant milestones. In addition, agency leadership should hold responsible officials accountable for taking the agreed upon actions and communicating what has been done routinely. For example, agencies could use their existing quarterly performance review processes to monitor progress on strategic review action items, in line with the emphasis in OMB’s guidance for using existing agency management processes for strategic reviews. OMB’s guidance further reinforces this practice by stating that agencies must incorporate actions to maintain or improve progress toward each objective, along with related implementation activities, into their next annual performance plan or other operating plans. For the fiscal year 2016 annual performance plan, this is to include, at a minimum, the agency’s summary of plans to improve or maintain performance, key milestones planned for the next year with completion dates, and efforts to close evidence gaps, as appropriate. HUD’s performance reviews for its agency priority goals, known as HUDStat meetings, occur frequently and regularly (quarterly). To conduct its strategic reviews, HUD broadened the focus of its HUDStat meetings in one quarter to review progress toward its strategic objectives. For both sets of meetings, HUD’s performance staff have developed a process for identifying and tracking action items stemming from the reviews. According to HUD performance staff, action items can be identified in a number of ways, including by the Secretary or PIO during reviews of materials prior to the HUDStat meeting, by meeting participants during the HUDStat session, or in a postmeeting session among the Secretary, PIO, and objective leads. HUD’s performance staff then compile and share a list of action items by objective or goal to all participants via e- mail within a day of the HUDStat meeting to ensure agreement. These are then added to a central tracking database for all action items. For each action item, the tracking database identifies the responsible party, a target completion date, any interim dates (milestones), and a status update. For example, following the 2014 strategic review for HUD’s objective to “end homelessness for veterans, people experiencing chronic homelessness, families, youth, and children,” one action item identified during the review was to establish targets for homeless family admissions to public housing, tenant-based vouchers, and project-based vouchers. It identifies the Office of Public and Indian Housing and the Office of Multifamily Housing as the responsible parties. According to HUD officials, as of April 2015, the Office of Public and Indian Housing is working to understand the capacity of local partners and will subsequently set targets. The Office of Multifamily Housing began collecting homeless admissions data in late 2014 and requiring it in February 2015. However, it is at least a year off from establishing and validating a baseline, and subsequently setting a target. HUD performance staff told us they will use the department’s 2015 strategic reviews to reinforce accountability for setting these targets. HUD’s performance staff told us they work with responsible parties to update the status of each action item and provide a report to the Deputy Secretary regularly. According to HUD performance staff, following the 2014 strategic review, these updates occurred either biweekly or monthly, and for the 2015 strategic review they will occur biweekly. USDA uses quarterly updates to the SOAR quad charts to keep the Secretary and other senior leaders informed of ongoing progress towards the objectives, as well as any related challenges. This includes providing updated information on the status of actions that were identified in prior quarters. For example, the Food Safety and Inspection Service (FSIS), which is responsible for ensuring that the nation’s commercial supply of meat, poultry, and egg products is safe, wholesome, and correctly labeled and packaged, is the lead agency for USDA’s strategic objective to “protect public health to ensure food is safe.” As part of the initial SOAR quad chart, from the second quarter of 2014, one of the next steps FSIS identified for this objective was to ensure continued progress in controlling Salmonella by developing new performance standards targeting chicken parts and ground poultry, and improving the agency’s verification sampling plans. According to USDA, Salmonella is the leading known cause of bacterial foodborne illness and death in the country, causing an estimated 1.3 million illnesses, and between 400 and 500 deaths annually. As part of its SOAR quad chart update for the fourth quarter of 2014, FSIS noted that it had developed a workplan for the Federal Register to announce and seek public comment on draft performance standards for Salmonella in chicken parts and ground chicken as part of the progress update. However, FSIS also noted in the significant challenges section that the draft rule was deemed “significant” by OMB,and FSIS was also responding to internal comments prior to moving forward with publication. We provided a draft of the report to the Director of the Office of Management and Budget, the Secretary of the Department of Agriculture, the Secretary of the Department of Education, the Secretary of the Department of Homeland Security, the Secretary of the Department of Housing and Urban Development, the Administrator of the National Aeronautics and Space Administration, and the Administrator of the Environmental Protection Agency for comment. OMB staff and officials from the six agencies generally agreed with the findings presented in this report. In addition, DHS, Education, EPA, HUD, NASA, and OMB provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees, the Director of the Office of Management and Budget, the Secretary of the Department of Agriculture, the Secretary of the Department of Education, the Secretary of the Department of Homeland Security, the Secretary of the Department of Housing and Urban Development, the Administrator of the National Aeronautics and Space Administration, the Administrator of the Environmental Protection Agency, and other interested parties. This report will also 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) 512-6806 or mihmj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of our report. Key contributors to this report are listed in appendix II. We are required to review implementation of the GPRA Modernization Act of 2010 (GPRAMA) at several critical junctures. This report is part of our response to that mandate. Our specific objective for this report was to identify and illustrate, through case agency examples, practices that facilitate effective strategic reviews by federal agencies. To identify practices, we analyzed and synthesized information gathered from a literature review we conducted, which covered public administration and public policy journals, business administration journals, our body of work on performance management and program evaluation, and other sources on policies and practices that can facilitate or challenge the effectiveness of strategic reviews as a decision-making tool. We also conducted interviews with performance management and evaluation experts representing different levels of government (local, state, federal), sectors (e.g. public, non-profit, foundations), and nations, who had experience with implementing elements of strategic reviews or academic and/or consultative expertise in this area.and interviews experts based on the results of our literature review (i.e., the authors of relevant articles or books included in our review). Based on suggestions from those individuals, we expanded our list of experts and conducted a second round of interviews. Using the information we obtained from our literature review and expert interviews, we developed a broad set of practices for conducting effective strategic reviews. We refined the practices through our audit work at selected agencies (see next paragraphs). We also compared our practices with legal requirements in GPRAMA, guidance from the Office of Management and Budget (OMB), and a guide for conducting strategic reviews developed by the Performance Improvement Council (PIC), and found them to be broadly consistent. To help illustrate and refine our draft practices, we selected a non- generalizeable sample of agencies based on several criteria and analyses. We limited the initial population for selection to the 24 agencies covered by the Chief Financial Officers Act of 1990 (CFO Act), as amended, because GPRAMA directs us to periodically evaluate how implementation of the act is affecting performance management at those agencies. We further refined the list to exclude two agencies, the Departments of Defense (DOD) and Veterans Affairs (VA), from selection. We excluded DOD because the department had not published strategic objectives related to its 2014 strategic goals at the time of our selection process. We excluded VA because of ongoing corrective actions it was taking to address significant shortcomings in the accuracy and reliability of certain performance information. Because agencies conducted their initial strategic reviews in 2014 as we were selecting our sample, we could not use information about agencies’ strategic review processes to inform selection. As a proxy, we used relevant agency-level results on selected items from our 2013 survey of federal managers on performance and management issues to approximate if agencies had robust review processes and selected agencies with varying levels of robustness. These survey items covered the extent to which agency leadership was committed and involved in performance management activities, as well as the use of performance information. We also considered the extent to which agency strategic review processes had a greater chance of addressing areas of fragmentation, overlap, and duplication, and high-risk issues identified in our past work. We have previously reported that effective implementation of strategic reviews could help identify opportunities to reduce, eliminate, or better manage instances of fragmentation, overlap, and duplication because, as part of the reviews, agencies are to identify the various organizations, programs, regulations, tax expenditures, policies, and other activities that contribute to each objective both within and outside the agency.addition, because agencies are to identify goals and strategies to resolve major management challenges they face, strategic reviews could also identify opportunities to better address issues on our High Risk List. We also took into consideration agency size, based on the number full- time equivalent employees, given the potential for variation in review practices due to organizational size and capacity. Based on the criteria and analyses outlined above, we selected the Departments of Agriculture, Education, Homeland Security, and Housing and Urban Development, and the Environmental Protection Agency and National Aeronautics and Space Administration. These selections were also in line with suggestions we independently obtained from staff in OMB’s Office of Performance and Personnel Management who had reviewed each of the agencies’ plans for conducting their strategic reviews as well as the results of those reviews. To identify illustrative examples for each of our practices from the six selected agencies and to further refine our practices, we reviewed documentation about agencies’ strategic review processes and results, including guidance, meeting agendas, relevant evidence used to inform the review, and internal and published summaries of the results. We also conducted interviews with officials involved in conducting strategic reviews at the six selected agencies—which included agency Performance Improvement Officers and their staff, strategic objective leaders, and strategic review participants—and staff from OMB and the PIC. We conducted this performance audit from August 2013 to July 2015 in accordance with generally accepted government auditing standards.Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the above contact, Elizabeth Curda (Acting Director) and Benjamin T. Licht (Assistant Director) supervised this review and the development of the resulting report. Crystal Bernard, Virginia Chanley, Jehan Chase, Carole J. Cimitile, Emily Gruenwald, and Katherine Wulff made significant contributions to this report. Robert Robinson developed the graphics for this report. Sandra Beattie, Ellen Grady, Adam Miles, Jason Vassilicos, and Dan Webb verified the information contained in this report. | The GPRA Modernization Act of 2010 (GPRAMA) provides important tools that can help inform federal decision making. In implementing GPRAMA, the Office of Management and Budget (OMB) established a strategic review process in which agencies, beginning in 2014, were to annually assess their progress in achieving each strategic objective—the outcome the agency is intending to achieve—in their strategic plans. GPRAMA requires GAO to periodically review its implementation. This report identifies and illustrates practices that facilitate effective strategic reviews. To identify such practices, GAO analyzed and synthesized information from a variety of sources, including GPRAMA's requirements; OMB guidance; a review of relevant literature; and interviews with experts in performance management and evaluation and OMB staff. To refine and illustrate the practices, GAO reviewed strategic review documentation and interviewed relevant officials from six selected agencies: USDA, Education, DHS, HUD, EPA, and NASA. GAO selected these agencies based on several factors. This included the extent to which agency strategic review processes had a greater chance of addressing areas identified in GAO's work on fragmentation, overlap, and duplication or high-risk issues, and agency results on selected items in GAO's 2013 survey of federal managers on performance and management issues. In commenting on a draft of this report, OMB and the six selected agencies generally agreed with the findings. GAO identified seven practices federal agencies can employ to facilitate effective strategic reviews and illustrated aspects of those practices through examples from the strategic review processes conducted at the Departments of Agriculture (USDA), Education (Education), Homeland Security (DHS), and Housing and Urban Development (HUD), and the Environmental Protection Agency (EPA), and the National Aeronautics and Space Administration (NASA). 1. Establish a process for conducting strategic reviews. NASA developed a strategic review process that involved senior leaders in individual assessments and a rating of each strategic objective, a crosscutting review to identify themes and provide independent rating recommendations, and a briefing to the Chief Operating Officer to determine final ratings. 2. Clarify and clearly define measurable outcomes for each strategic objective. NASA officials defined what would constitute success in 10 years for each strategic objective and used underlying performance goals, indicators, and milestones to better plan for and understand near-term progress towards their long-term scientific outcomes. 3. Review the strategies and other factors that influence the outcomes and determine which are most important. USDA's Food and Nutrition Service developed a model showing how the output of its programs contribute to relevant near-term and long-term outcomes related to the department's objective to improve access to nutritious foods. The model also identifies external factors that could influence progress, such as food prices. 4. Identify and include key stakeholders in the review. Contributors from various agencies, levels of government, and sectors may be involved in achieving an outcome. While the six agencies involved internal stakeholders in their strategic reviews, GAO did not find instances of external stakeholder involvement. In some cases, agencies took steps to incorporate external perspectives, such as HUD leveraging its existing relationship with officials at the U.S. Interagency Council on Homelessness to better understand how other federal programs are contributing to progress towards its objective to end homelessness for target populations. 5. Identify and assess evidence related to strategic objective achievement. For EPA's objective to promote sustainable and livable communities, officials developed a framework and inventory of relevant performance information, scientific studies, academic research, and program evaluations, which they then assessed and categorized by strength. 6. Assess effectiveness in achieving strategic objectives and identify actions needed to improve implementation and impact. For DHS's goal to safeguard and expedite lawful trade and travel, officials determined that sufficient progress was being made, but identified gaps in monitoring efforts, such as a lack of performance measures related to travel. DHS officials are taking steps to develop measures to address the gaps. 7. Develop a process to monitor progress on needed actions. HUD broadened its existing process for tracking progress on actions items identified at its quarterly performance reviews to also cover those from strategic reviews. HUD staff update the status of each action item regularly—planned to be biweekly following the 2015 strategic reviews. |
Today the Social Security program faces a long-range and fundamental financing problem driven largely by known demographic trends. The lack of an immediate solvency crisis affects the nature of the challenge, but it does not eliminate the need for action. Acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program’s rising costs. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning. Since there is a great deal of confusion about Social Security’s current financing arrangements and the nature of its long-term financing problem, I would like to spend some time describing the nature, timing, and extent of the financing problem. As you all know, Social Security has always been largely a pay-as-you-go system. This means that current workers’ taxes pay current retirees’ benefits. As a result, the relative numbers of workers and beneficiaries has a major impact on the program’s financial condition. This ratio, however, is changing. In 1950, before the Social Security system was mature, the ratio was 16.5:1. In the 1960s, the ratio averaged 4.2:1. Today it is 3.3:1 and it is expected to drop to around 2.2:1 by 2030. The retirement of the baby boom generation is not the only demographic challenge facing the system. People are retiring early and living longer. A falling fertility rate is the other principal factor underlying the growth in the elderly’s share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95 —a rate that is below replacement. Taken together, these trends threaten the financial solvency and sustainability of this important program. (See fig. 1.) The combination of these trends means that labor force growth will begin to slow after 2010 and by 2025 is expected to be less than a third of what it is today. (See fig. 2.) Relatively fewer workers will be available to produce the goods and services that all will consume. Without a major increase in productivity, low labor force growth will lead to slower growth in the economy and to slower growth of federal revenues. This in turn will only accentuate the overall pressure on the federal budget. This slowing labor force growth is not always recognized as part of the Social Security debate. Social Security’s retirement eligibility dates are often the subject of discussion and debate and can have a direct effect on both labor force growth and the condition of the Social Security retirement program. However, it is also appropriate to consider whether and how changes in pension and/or other government policies could encourage longer workforce participation. To the extent that people choose to work longer as they live longer, the increase in the share of life spent in retirement would be slowed. This could improve the finances of Social Security and mitigate the expected slowdown in labor force growth. Today, the Social Security Trust Funds take in more in taxes than they spend. Largely because of the known demographic trends I have described, this situation will change. Although the Trustees’ 2003 intermediate estimates project that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a rapidly growing share of the budget and the economy well before that date. In 2008, the first baby boomers will become eligible for Social Security benefits, and the future costs of serving them are already becoming a factor in the Congressional Budget Office’s (CBO) 10-year projections. Under the Trustees’ 2003 intermediate estimates, Social Security’s cash surplus—the difference between program tax income and the costs of paying scheduled benefits—will begin a permanent decline in 2009. To finance the same level of federal spending as in the previous year, additional revenues and/or increased borrowing will be needed. By 2018, Social Security’s tax income is projected to be insufficient to pay currently scheduled benefits. At that time, Social Security will join Medicare’s Hospital Insurance Trust Fund (whose outlays are projected to begin to exceed revenues in 2013) as a net claimant on the rest of the federal budget. The combined OASDI Trust Funds will begin drawing on the Treasury to cover the cash shortfall, first relying on interest income and eventually drawing down accumulated trust fund assets. The Treasury will need to obtain cash for those redeemed securities either through increased taxes, and/or spending cuts, and/or more borrowing from the public than would have been the case had Social Security’s cash flow remained positive. Neither the decline in the cash surpluses nor the cash deficit will affect the payment of benefits. The shift from positive to negative cash flow, however, will place increased pressure on the federal budget to raise the resources necessary to meet the program’s ongoing costs. Ultimately, the critical question is not how much a trust fund has in assets, but whether the government as a whole can afford the benefits in the future and at what cost to other claims on scarce resources. As I have said before, the future sustainability of programs is the key issue policymakers should address—i.e., the capacity of the economy and budget to afford the commitment. Fund solvency can help, but only if promoting solvency improves the future sustainability of the program. From the perspective of the federal budget and the economy, the challenge posed by the growth in Social Security spending becomes even more significant in combination with the more rapid expected growth in Medicare and Medicaid spending. This growth in spending on federal entitlements for retirees will become increasingly unsustainable over the longer term, compounding an ongoing decline in budgetary flexibility. Over the past few decades, spending on mandatory programs has consumed an ever-increasing share of the federal budget. In 1963, prior to the creation of the Medicare and Medicaid programs, spending for mandatory programs plus net interest accounted for about 32 percent of total federal spending. By 2003, this share had almost doubled to approximately 61 percent of the budget. (See fig. 4.) In much of the last decade, reductions in defense spending helped accommodate the growth in these entitlement programs. Even before the events of September 11, 2001, however, this ceased to be a viable option. Indeed, spending on defense and homeland security will grow as we seek to combat new threats to our nation’s security. GAO prepares long-term budget simulations that seek to illustrate the likely fiscal consequences of the coming demographic tidal wave and rising health care costs. These simulations continue to show that to move into the future with no changes in federal retirement and health programs is to envision a very different role for the federal government. Assuming, for example, that the tax reductions enacted in 2001 do not sunset and discretionary spending keeps pace with the economy, by midcentury federal revenues may only be adequate to pay Social Security and interest on the federal debt. To obtain balance, massive spending cuts, tax increases, or some combination of the two would be necessary. (See fig. 5.) Neither slowing the growth of discretionary spending nor allowing the tax reductions to sunset eliminates the imbalance. Although this figure assumes payment of currently scheduled Social Security benefits, the long-term fiscal imbalance would not be eliminated even if Social Security benefits were to be limited to currently projected trust fund revenues. This is because Medicare (and Medicaid)—spending for which is driven by both demographics and rising health care costs— present an even greater problem. This testimony is not about the complexities of Medicare, but it is important to note that Medicare presents a much greater, more complex, and more urgent fiscal challenge than does Social Security. Medicare growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. Increases in the number and quality of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent. Third-party payers generally insulate consumers from the cost of health care decisions. These factors and others contribute to making Medicare a much greater and more complex fiscal challenge than even Social Security. GAO is developing a health care framework to help focus additional attention on this important area and to help educate key policymakers and the public on the current system and related challenges. Indeed, long-term budget flexibility is about more than Social Security and Medicare. While these programs dominate the long-term outlook, they are not the only federal programs or activities that bind the future. The federal government undertakes a wide range of programs, responsibilities, and activities that obligate it to future spending or create an expectation for spending. A recent GAO report describes the range and measurement of such fiscal exposures—from explicit liabilities such as environmental cleanup requirements to the more implicit obligations presented by life- cycle costs of capital acquisition or disaster assistance. Making government fit the challenges of the future will require not only dealing with the drivers—entitlements for the elderly—but also looking at the range of federal activities. A fundamental review of what the federal government does and how it does it will be needed. At the same time it is important to look beyond the federal budget to the economy as a whole. Figure 6 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2003 Trustees’ intermediate estimates and CBO’s long-term Medicaid estimates, spending for these entitlement programs combined will grow to 14 percent of GDP in 2030 from today’s 8.4 percent. Taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. When Social Security redeems assets to pay benefits, the program will constitute a claim on real resources in the future. As a result, taking action now to increase the future pool of resources is important. To echo Federal Reserve Chairman Greenspan, the crucial issue of saving in our economy relates to our ability to build an adequate capital stock to produce enough goods and services in the future to accommodate both retirees and workers in the future. The most direct way the federal government can raise national saving is by increasing government saving, i.e., as the economy returns to a higher growth path, a much more balanced and disciplined fiscal policy that recognizes our long-term challenges can help provide a strong foundation for future economic growth and can enhance future budgetary flexibility. In the short term, we need to realize that we are already facing a huge fiscal hole (gap). The first thing that we should do is stop digging. Taking action now on Social Security would not only promote increased budgetary flexibility in the future and stronger economic growth but would also make less dramatic action necessary than if we wait. Some of the benefits of early action—and the costs of delay—can be seen in figure 7. This compares what it would take to achieve actuarial balance at different points in time by either raising payroll taxes or reducing benefits. If we did nothing until 2042—the year the Trust Funds are estimated to be exhausted—achieving actuarial balance would require changes in benefits of 31 percent or changes in taxes of 46 percent. As figure 7 shows, earlier action shrinks the size of the adjustment. Thus both sustainability concerns and solvency considerations drive us to act sooner rather than later. Trust Fund exhaustion may be almost 40 years away, but the squeeze on the federal budget will begin as the baby boom generation starts to retire. Actions taken today can ease both these pressures and the pain of future actions. Acting sooner rather than later also provides a more reasonable planning horizon for future retirees. As important as financial stability may be for Social Security, it cannot be the only consideration. As a former public trustee of Social Security and Medicare, I am well aware of the central role these programs play in the lives of millions of Americans. Social Security remains the foundation of the nation’s retirement system. It is also much more than just a retirement program; it pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. Last year, Social Security paid almost $454 billion in benefits to more than 46 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 percent of beneficiaries aged 65 or older were poor, and 48 percent would have been poor without Social Security. It is precisely because the program is so deeply woven into the fabric of our nation that any proposed reform must consider the program in its entirety, rather than one aspect alone. Thus, GAO has developed a broad framework for evaluating reform proposals that considers not only solvency but other aspects of the program as well. The analytic framework GAO has developed to assess proposals comprises three basic criteria: the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and income adequacy; and how readily a proposal could be implemented, administered, and explained to the public. The weight that different policymakers may place on different criteria will vary, depending on how they value different attributes. For example, if offering individual choice and control is less important than maintaining replacement rates for low-income workers, then a reform proposal emphasizing adequacy considerations might be preferred. As they fashion a comprehensive proposal, however, policymakers will ultimately have to balance the relative importance they place on each of these criteria. Our sustainable solvency standard encompasses several different ways of looking at the Social Security program’s financing needs. While 75-year actuarial balance is generally used in evaluating the long-term financial outlook of the Social Security program and reform proposals, it is not sufficient in gauging the program’s solvency after the 75th year. For example, under the Trustees’ intermediate assumptions, each year the 75- year actuarial period changes, and a year with a surplus is replaced by a new 75th year that has a significant deficit. As a result, changes made to restore trust fund solvency only for the 75-year period can result in future actuarial imbalances almost immediately. Reform plans that lead to sustainable solvency would be those that consider the broader issues of fiscal sustainability and affordability over the long term. Specifically, a standard of sustainable solvency also involves looking at (1) the balance between program income and cost beyond the 75th year and (2) the share of the budget and economy consumed by Social Security spending. As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer term. It is also critical if we are to avoid putting unsupportable financial pressures on future workers. Reforming Social Security and federal health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. The current Social Security system’s benefit structure strikes a balance between the goals of retirement income adequacy and individual equity. From the beginning, benefits were set in a way that focused especially on replacing some portion of workers’ preretirement earnings. Over time other changes were made that were intended to enhance the program’s role in helping ensure adequate incomes. Retirement income adequacy, therefore, is addressed in part through the program’s progressive benefit structure, providing proportionately larger benefits to lower earners and certain household types, such as those with dependents. Individual equity refers to the relationship between contributions made and benefits received. This can be thought of as the rate of return on individual contributions. Balancing these seemingly conflicting objectives through the political process has resulted in the design of the current Social Security program and should still be taken into account in any proposed reforms. Policymakers could assess income adequacy, for example, by considering the extent to which proposals ensure benefit levels that are adequate to protect beneficiaries from poverty and ensure higher replacement rates for low-income workers. In addition, policymakers could consider the impact of proposed changes on various subpopulations, such as low-income workers, women, minorities, and people with disabilities. Policymakers could assess equity by considering the extent to which there are reasonable returns on contributions at a reasonable level of risk to the individual, improved intergenerational equity, and increased individual choice and control. Differences in how various proposals balance each of these goals will help determine which proposals will be acceptable to policymakers and the public. Program complexity makes implementation and administration both more difficult and harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed changes to Social Security, even those that make incremental changes in the already existing structure. However, the greatest potential implementation and administrative challenges are associated with proposals that would create individual accounts. These include, for example, issues concerning the management of the information and money flow needed to maintain such a system, the degree of choice and flexibility individuals would have over investment options and access to their accounts, investment education and transitional efforts, and the mechanisms that would be used to pay out benefits upon retirement. Harmonizing a system that includes individual accounts with the regulatory framework that governs our nation’s private pension system would also be a complicated endeavor. However, the complexity of meshing these systems should be weighed against the potential benefits of extending participation in individual accounts to millions of workers who currently lack private pension coverage. Continued public acceptance and confidence in the Social Security program require that any reforms and their implications for benefits be well understood. This means that the American people must understand why change is necessary, what the reforms are, why they are needed, how they are to be implemented and administered, and how they will affect their own retirement income. All reform proposals will require some additional outreach to the public so that future beneficiaries can adjust their retirement planning accordingly. The more transparent the implementation and administration of reform, and the more carefully such reform is phased in, the more likely it will be understood and accepted by the American people. As you requested, we applied our criteria to a scenario of Trust Fund Exhaustion. This scenario dramatically illustrates the need to take action sooner rather than later to address the program’s long-term fiscal imbalance. Under this scenario, currently scheduled benefits would be paid in full until the combined OASDI Trust Funds are exhausted. After exhaustion, monthly benefit checks are reduced in proportion to the annual shortfall. In effect, after trust fund exhaustion, all beneficiaries would experience a sharp drop in benefits. Additional reductions in the following years would result in benefits equal to about two-thirds of currently scheduled levels by the end of the 75-year simulation period. (See fig. 8.) We used our long-term economic model in assessing the Trust Fund Exhaustion scenario against the first criterion, that of financing sustainable solvency. To examine how the Commission reform models balance adequacy and equity concerns, we used the GEMINI model, a dynamic microsimulation model for analyzing the lifetime implications of Social Security policies for a large sample of people born in the same year. Our analysis examined the effects of the reform models for the 1955, 1970, and 1985 birth cohorts. For this analysis, as in our report on the Commission reform models, we used the 2001 Trustees’ intermediate assumptions. Under these assumptions, the combined trust funds are projected to reach exhaustion in 2038. Our analysis of the scenario used the same three benchmarks as in our January report on the Commission reform models: The “benefit reduction benchmark” assumes a gradual reduction in the currently scheduled Social Security defined benefit beginning with those newly eligible for retirement in 2005. Current tax rates are maintained. The “tax increase benchmark” assumes an increase in the OASDI payroll tax beginning in 2002 sufficient to achieve an actuarial balance over the 75-year period. Currently scheduled benefits are maintained. The “baseline extended benchmark” is a fiscal policy path developed in our earlier long-term model work that assumes payment in full of currently scheduled Social Security benefits and no other changes in current spending or tax policies. The use of our criteria in evaluating the Trust Fund Exhaustion scenario underscores the need to take action sooner rather than later to address Social Security’s financing shortfall. In so doing, it illustrates trade-offs that exist between efforts to achieve sustainable solvency for the OASDI Trust Funds and efforts to maintain adequate retirement income for current and future beneficiaries. By definition this scenario would achieve sustainable solvency because after the combined trust funds had run out of assets, benefit payments would be adjusted each year to equal annual tax income. Before 2038, the Trust Fund Exhaustion scenario would result in lower unified surpluses and higher unified deficits compared to the tax increase benchmark by the same amounts as the baseline extended benchmark. Subsequently the Trust Fund Exhaustion scenario would result in unified fiscal results increasingly similar to both the tax increase benchmark and the benefit reduction scenario over the 75-year period. Before 2038, the Trust Fund Exhaustion scenario would require the same amounts of cash as the tax increase or baseline extended benchmarks; subsequently, the Trust Fund Exhaustion scenario would require less cash each year than any of the three benchmarks. Under the Trust Fund Exhaustion scenario, the effect on benefits would differ sharply before and after exhaustion took place. Before exhaustion, benefits would be the same as those currently scheduled, reflected in both the tax increase and baseline extended benchmarks. Once the combined trust funds had run out, benefits for all would be reduced across the board and remain below currently scheduled levels. Accordingly, those receiving benefits at the time of trust fund exhaustion would experience a sharp drop in benefits; under the Trustees’ 2001 intermediate estimates, this drop is estimated at 27 percent (to 73 percent of currently scheduled levels) in 2039. Small further reductions would need to be taken in successive years such that by 2076 benefits would be only two-thirds of currently scheduled levels (i.e., to 67 percent of currently scheduled levels). (See fig. 9.) Due to the timing of the reductions under the Trust Fund Exhaustion scenario, younger generations would bear greater benefit reductions. Those born in 1955 would not experience benefit reductions until they reached age 83, while those born in 1985 would receive lower benefits than under either GAO’s benefit reduction or tax increase benchmarks in all years of retirement. Consequently, lifetime benefits would be reduced more for younger generations. Under the Trust Fund Exhaustion scenario we used, benefits would be adjusted proportionately for all recipients, increasing the likelihood of hardship for lower income retirees and the disabled. Given a lack of historical precedent and legislative clarity on how SSA would proceed in the event of trust fund exhaustion, the nature and scope of SSA’s administrative challenges under the scenario are difficult to describe or assess. At a minimum, a focus on cash management would be needed for SSA to calculate and implement the ongoing benefit adjustments required under the scenario. It is likely that the structural changes required to restore Social Security’s long-term viability generally will require some combination of reductions from currently scheduled benefits, revenue increases, and may include the use of some general revenues. The proposals we have examined, both this year and earlier, generally reflect this. Proposals employ possible benefit modifications within the current program structure, including modifying the benefit formula, reconsidering current eligibility criteria, and reducing cost-of-living adjustments. Revenue increases might take the form of increases in the payroll tax rate, expanding coverage to include the relatively few workers who are still not covered under Social Security, or allowing the trust funds to be invested in potentially higher-yielding securities such as stocks. Similarly, some proposals rely on general revenue transfers to increase the amount of money going towards the Social Security program. Reforms that include individual accounts would also involve Social Security benefit reductions and/or revenue increases, and the use of general revenues. Whatever approach is taken to reform, we must be able to continue to finance ongoing benefits to retirees in the short term. The longer we delay reform, the larger the “transition costs” and the more disruptive the actions will be. In evaluating Social Security reform proposals, the choice among various benefit reductions and revenue increases will affect the balance between income adequacy and individual equity. Benefit reductions could pose the risk of diminishing adequacy, especially for specific subpopulations. Both benefit reductions and tax increases that have been proposed could diminish individual equity by reducing the implicit rates of return the workers earn on their contributions to the system. In contrast, increasing revenues by investing retirement funds in the stock market could improve rates of return but potentially expose individuals to investment risk and losses of expected retirement income. Similarly, the choice among various benefit reductions and revenue increases—for example, raising the retirement age—will ultimately determine not just how much income retirees will have but also how long they will be expected to continue working and how long their retirements will be. Reforms will determine how much consumption workers will give up during their working years to provide for more consumption during retirement. The use of our criteria to evaluate approaches to Social Security reform highlights the trade-offs that exist between efforts to achieve sustainable solvency and to maintain adequate retirement income for current and future beneficiaries. These trade-offs can be described as differences in the extent and nature of the risks for individuals and the nation as a whole. At the same time, the defined benefit under the current Social Security system is also uncertain. The primary risk is that a significant funding gap exists between currently scheduled and funded benefits which, although it will not occur for a number of years, is significant and will grow over time. Other risks stem from uncertainty in, for example, future levels of productivity growth, real wage growth, and demographics. The Congress has revised Social Security many times in the past, and future Congresses could decide to revise benefits in ways that leave those affected little time to adjust. As the Congress deliberates various approaches to Social Security, the national debate also needs to include discussion of the various types of risk implicit in each approach and in the timing of reform. Early action to change these programs would yield the highest fiscal dividends for the federal budget and would provide a longer period for prospective beneficiaries to make adjustments in their own planning. Waiting to build economic resources and reform future claims entails risks. First, we lose an important window where today’s relatively large workforce can increase saving and enhance productivity, two elements critical to growing the future economy. We lose the opportunity to reduce the burden of interest payments, thereby creating a legacy of higher debt as well as elderly entitlement spending for the relatively smaller workforce of the future. Most critically, we risk losing the opportunity to phase in changes gradually so that all can make the adjustments needed in private and public plans to accommodate this historic shift. Unfortunately, the long-range challenge has become more difficult, and the window of opportunity to address the entitlement challenge is narrowing. As the baby boom generation retires and the numbers of those entitled to these retirement benefits grow, the difficulties of reform will be compounded. Accordingly, it remains more important than ever to deal with these issues over the next several years. In their March 2003 report, the Trustees emphasized the need for action sooner rather than later, stating that the sooner Social Security’s financial challenges are addressed, the more varied and less disruptive can be their solutions. Today many retirees and near-retirees fear cuts that will affect them while young people believe they will get little or no Social Security benefits. As I have said before, I believe it is possible to structure a Social Security reform proposal that will exceed the expectations of all generations of Americans. In my view there is a window of opportunity to craft a solution that will protect Social Security benefits for the nation’s current and near- term retirees, while ensuring that the system will be there for future generations. However, this window of opportunity will close as the baby boom generation begins to retire. As a result, we must move forward to address Social Security because we have other major challenges confronting us. The fact is, compared to addressing our long-range health care financing problem; reforming Social Security will be easy lifting. It is my hope that we will think about the unprecedented challenge facing future generations in our aging society. Relieving them of some of the burden of today’s financing commitments would help fulfill this generation’s stewardship responsibility to future generations. It would also preserve some capacity for them to make their own choices by strengthening both the budget and the economy they inherit. We need to act now to address the structural imbalances in Social Security, Medicare, and other entitlement programs before the approaching demographic tidal wave makes the imbalances more difficult, dramatic, and disruptive. We at GAO look forward to continuing to work with this Committee and the Congress in addressing this and other important issues facing our nation. Mr. Chairman, Members of the Committee, that concludes my statement. I’d be happy to answer any questions you may have. 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. | Social Security is an important social insurance program affecting virtually every American family. It is the foundation of the nation's retirement income system and also provides millions of Americans with disability insurance and survivors' benefits. Over the long term, as the baby boom generation retires, Social Security's financing shortfall presents a major program solvency and sustainability challenge. The Chairman of the Senate Special Committee on Aging asked GAO to discuss Social Security's long-term financing challenges and the results of GAO's analysis of an illustrative "Trust Fund Exhaustion" scenario. Under this scenario, benefits are reduced proportionately for all beneficiaries by the shortfall in revenues occurring upon exhaustion of the combined Old-Age and Survivors Insurance and Disability Insurance Trust Funds. This scenario was developed for analytic purposes and is not a legal determination of how benefits would be paid in the event of trust fund exhaustion. GAO's analysis used the framework it has developed to analyze the implications of reform proposals. This framework consists of three criteria: (1) the extent to which the proposal achieves sustainable solvency and how it would affect the U.S. economy and the federal budget, (2) the balance struck between the twin goals of income adequacy and individual equity, and (3) how readily changes could be implemented, administered, and explained to the public. Although the Trustees' 2003 intermediate estimates show that the combined Social Security Trust Funds will be solvent until 2042, program spending will constitute a growing share of the budget and the economy much sooner. Within 5 years, the first baby boomers will become eligible for Social Security. By 2018, Social Security's tax income is projected to be insufficient to pay currently scheduled benefits. This shift from positive to negative cash flow will place increased pressure on the federal budget to raise the resources necessary to meet the program's ongoing costs. In the long term, Social Security, together with rapidly growing federal health programs, will dominate our nation's fiscal outlook. Absent reform, the nation will ultimately have to choose between persistent, escalating federal deficits, significant tax increases, and/or dramatic budget cuts of unprecedented magnitude. The Trust Fund Exhaustion scenario we analyzed dramatically illustrates the need for action sooner rather than later. (See Social Security Reform: Analysis of a Trust Fund Exhaustion Scenario. GAO-03-907 . Washington, D.C.: July 29, 2003.) Under this scenario, after the combined trust funds had been fully depleted, benefit payments would be adjusted each year to equal annual tax income. Under this scenario, after trust fund exhaustion those receiving benefits would experience large and sudden benefit reductions. Additional smaller reductions in the following years would result in benefits equal to about two-thirds of currently scheduled levels by the end of the 75-year simulation period. The Trust Fund Exhaustion scenario raises significant intergenerational equity issues. The timing of the benefit adjustments means the Trust Fund Exhaustion scenario places a much greater burden on younger generations. Lifetime benefits would be reduced much more for younger generations. In addition, under the Trust Fund Exhaustion scenario, benefits would be adjusted proportionately for all recipients, increasing the likelihood of hardship for lower income retirees and the disabled, especially those who rely on Social Security as their primary or sole source of retirement income. Fundamentally, the Trust Fund Exhaustion scenario illustrates trade-offs between achieving sustainable solvency and maintaining benefit adequacy. The longer we wait to take action, the sharper these trade-offs will become. Acting soon would allow changes to be phased in so the individuals who are most likely to be affected, namely younger and future workers, will have time to adjust their retirement planning while helping to avoid related "expectation gaps." Finally, acting soon reduces the likelihood that the Congress will have to choose between imposing severe benefit cuts and unfairly burdening future generations with the program's rising costs. |
MSHA’s Coal Mine Safety and Health Administration is responsible for carrying out enforcement activities related to surface and underground coal mines. As of January 2007, MSHA employed approximately 550 underground coal inspectors in its 11 coal districts. MSHA’s principal enforcement responsibility for underground coal mines is fulfilled by conducting a minimum of four comprehensive inspections of every underground coal mine each year. When MSHA inspectors observe violations of federal health and safety standards, they are required to issue a citation to the coal mine operator. Even if an operator does not agree with the violation or the penalty amount, the operator must resolve the problems within the time frame set by the inspector. In assessing penalties, the Mine Act requires both the Commission and MSHA to consider six statutory factors: 1. the mine operator’s history of previous violations, 2. the appropriateness of the penalty to the size of the mine, 3. whether the mine operator was negligent, 4. the effect on the operator’s ability to continue in business, 5. the gravity of the violation, and 6. the demonstrated good faith of the mine operator charged in quickly remedying the situation after being notified of a violation. Underground coal mine operators face significant challenges preparing for emergencies, including ensuring that miners receive realistic training and organizing mine rescue teams that satisfy new requirements. MSHA issued new requirements in March 2006 that direct mine operators to conduct mine emergency evacuation drills every 90 days, including drills that simulate actual emergency conditions; install directional lifelines to help miners find their way out of a dark mine; and instruct miners in the procedures for evacuating the mine in emergencies, such as those involving fires or explosions. Based on our survey completed in February 2007, almost all mines had conducted evacuation drills and installed lifelines, but we estimate that half of the mines had not conducted drills in environments that simulated actual emergency situations. According to the survey, simulated mine emergency training presents the greatest challenge in preparing miners for and responding to mine emergencies. Specifically, the most common challenges were the availability of training centers that can simulate an emergency situation, the availability of training in a simulated mine emergency situation, and the cost associated with providing simulated mine emergency training (see fig. 1). Although MSHA has materials that mine operators can use to provide hands-on training on specific topics, it does not provide all mine operators with information and tools for training under simulated emergency conditions. MSHA has a catalog of various training tools, including classroom exercises, that mine operators can obtain upon request. For example, to support the new standards issued in March that require miners to train with breathing devices, MSHA distributed a training packet to all underground coal mines and appropriate state grantees. However, MSHA does not provide all mine operators with critical information on how to provide training in simulated emergency environments such as smoke- filled mines or information on resources that are available for providing such training. Some mine operators use a number of techniques to simulate emergency conditions, but other mine operators may be unaware of them. Based on our survey, cost concerns and opportunities for conducting simulated training with all stakeholders are the greatest challenges in preparing rescue teams for mine emergencies (see fig. 2). Mine operators also reported that they anticipated further challenges stemming from new requirements in the MINER Act. We estimate that half of underground coal mines anticipate changing the composition of at least one of their designated mine rescue teams as a result of the MINER Act. Specifically, mine operators pointed to the requirement that teams train at least annually at the mines they are responsible for covering. This change could present a particular challenge for mine rescue teams in several key coal mining states that serve many or all of the states’ mines. According to respective state officials, all mines in Kentucky and many in Virginia and Pennsylvania rely on the state to provide or arrange for mine rescue services. In Kentucky, for example, mines receive rescue services from state teams composed of state mine inspectors whose primary duties are to inspect coal mines. According to a state official, a Kentucky team would be required to conduct 120 training exercises annually under the MINER Act, compared to the 12 exercises it currently conducts. Depending on the final regulations developed by MSHA to implement the requirements of the MINER Act, officials in Kentucky said they might stop offering mine rescue services because of the amount of time that will be needed to meet the training requirements. Some mine operators have already started making changes to their mine rescue teams based on the MINER Act, while others are taking a more cautious approach, given the costs of training and equipping new rescue teams. For example, one company that operates multiple mines reported that it was creating new backup mine rescue teams to satisfy the new requirement that rescue teams be within 1 hour travel time from the mines they serve. In other cases, however, according to mine and industry officials, mines were waiting to see how MSHA implements the new mine rescue requirements before changing their team designations. For example, the extent of the required training at each mine could affect how mine operators designate rescue teams. MSHA has the authority to oversee certain aspects of miner training to help ensure that miners work safely and are prepared for potential emergencies, but its oversight of training is hindered by several factors. To become an approved instructor, MSHA requires that an applicant prove his or her mining and teaching experience in one of three ways: by (1) submitting written qualifications, (2) attending new instructor training, or (3) teaching a class monitored by MSHA under provisional approval from an MSHA district manager. MSHA suggests factors that district managers may use in determining an applicant’s skills, but it does not have firm criteria that new instructors must meet. In addition, the approval procedures are not standardized across MSHA’s 11 coal districts, according to MSHA officials. For example, some districts grant provisional authority to new instructors only if they can be monitored by MSHA staff. Other districts grant provisional approval for individuals to teach specific courses but, according to MSHA officials, may not monitor these instructors’ teaching skills. According to MSHA officials, staff resources limit districts’ ability to monitor applicants’ teaching skills. Lack of up-to-date information on approved instructors MSHA maintains a database of approved instructors that includes contact information for each instructor, the courses they are approved to teach, and whether they have full or provisional authority to teach the courses. But according to MSHA officials, the database contains outdated contact information because some instructors move without notifying MSHA. Without accurate information on its instructors, MSHA cannot ensure that instructors receive training policy updates and cannot determine whether there are enough qualified instructors to meet mine operators’ needs. No continuing education requirements for approved instructors Once instructors are approved, according to an MSHA official, they are not required to demonstrate that they are staying current on emerging mining issues. As a result, MSHA cannot ensure that instructors are keeping their mining knowledge and skills up to date, including their knowledge of emerging safety and health issues and new training tools. Limited monitoring and evaluation of training sessions According to MSHA officials, the agency monitors few miner training sessions relative to the number conducted, and instructor evaluations occur on an ad hoc basis. According to mine operators and trainers, MSHA rarely oversees training, and it monitors sessions primarily for enforcement purposes rather than to enhance instructors’ knowledge and abilities. In addition, many of the training sessions occur on the weekends, when MSHA staff do not normally work, limiting their ability to monitor training. MSHA does not collect or analyze training evaluations obtained from miners to help gauge whether learning objectives are taught effectively, and an estimate of 80 percent of mines do not seek feedback on training sessions from their workers. As a result, MSHA cannot determine how well miners are learning the skills taught by MSHA- approved trainers and recommend corrective measures as necessary. MSHA and NIOSH have complementary roles in improving the safety and health of coal miners, but coordination between the two agencies is largely informal and inconsistent due to a lack of a formal agreement or policies to guide their efforts. MSHA is primarily involved in setting health and safety standards and enforcing them through mine inspections that can result in citations and penalties, whereas NIOSH’s mining program is focused on research into the causes of and ways to prevent the safety and health hazards miners face. MSHA and NIOSH currently lack a formal agreement, such as a memorandum of understanding or other policy to guide their coordination efforts, a practice we have identified as effective in prior work. In 1978, NIOSH’s predecessor and MSHA had a signed memorandum of understanding that specified how they would coordinate to ensure that technology resulting from mine safety research would be used to the fullest extent. The memorandum embodied many of the key practices identified in prior GAO work that can help federal agencies enhance and sustain their collaborative efforts, such as defining roles and responsibilities and developing joint strategies. However, the memorandum is no longer used, and MSHA officials were unaware of any plan to update the document. As a result of not having a formal agreement or policies to guide their activities, coordination between MSHA and NIOSH is primarily driven by informal relationships between staff at both agencies. Officials from both agencies and labor union representatives told us that coordination has been primarily at the initiative of individuals at both agencies and, as such has not always been consistent across the agencies. NIOSH and MSHA face a potentially large workforce turnover in coming years, and informal coordination based on working relationships between staff members may not continue when the individuals leave. As at many federal agencies, MSHA and NIOSH have a large proportion of employees, including many engineers and scientists, who are eligible to retire over the next several years. MSHA data show that more than 50 percent of its 140 engineers and scientists will be eligible for retirement within the next 10 years, with 31 percent eligible within 5 years. Similarly, about half of NIOSH’s employees—most of whom are scientists and engineers—are eligible to retire in 5 years. In addition, MSHA and NIOSH face other challenges that require them to work more closely together, particularly in developing and approving safety technologies under tight time frames. An influx of new and inexperienced miners brought on due to the increased demand for coal and the aging of the workforce, rising dangers as miners go deeper underground to mine coal, and recent mine disasters have heightened interest in promising new safety technology. The MINER Act addresses some of these issues and underscores NIOSH’s and MSHA’s roles in developing and approving safety technologies. For example, the act requires NIOSH to study the use of refuge chambers for miners and requires MSHA to review the results of NIOSH’s work to determine what actions, such as making regulatory changes, are appropriate. Both agencies must take action within a relatively short period of time. While MSHA has taken significant steps to improve its hiring process, the agency’s human capital plan does not include a strategic approach for addressing the large number of retirements expected over the next 5 years. In 2004, MSHA began using the Federal Career Intern Program (FCIP) to hire new mine inspectors, which has resulted in a number of improvements to the hiring and recruitment process, such as hiring new inspectors more quickly. Since it began using the program, MSHA has hired 301 interns, 236 of whom are coal mine inspector trainees. Through the FCIP, MSHA developed a process for assessing applicants’ skills, conducting interviews, and providing applicants with immediate feedback on their aptitude during 1-day job fairs held in locations around the country. As of October 2004, all applicants for inspector positions must attend job fairs and pass a test on basic math and writing skills before interviewing with MSHA. MSHA reported that this screening process has helped the agency maximize its resources, since the exams identify applicants who do not have the basic skills needed to become a successful inspector at an early stage of the hiring process. For example, of the 1,256 applicants tested in 2005 and 2006, 49 percent failed either the math or written exam, or both. MSHA’s previous hiring process considered experience over basic skills, and officials told us that this resulted in some new hires with significant mining experience but weak reading and writing skills. As a result, MSHA spent time during new mine inspector training teaching these basic skills. MSHA officials reported that this new approach has reduced the amount of time it takes to hire a new mine inspector from up to 180 days to 45 days or less. In addition, the Office of Personnel Management approved MSHA’s request to hire mine inspectors through the FCIP under a broader range of pay scale levels, which allows the agency to hire individuals with different experiences. For example, an applicant might have little experience in mining but possess relevant experience in construction and electrical engineering. This applicant would be hired as a mine inspector trainee at the lower end of the pay scale and be given additional training in areas specific to mine health and safety. Further, MSHA officials commented that the job fairs have helped the agency reduce the number of interagency transfers that occurred under its old hiring process, which was a significant problem. Since job fairs are held in the locations where applicants are being sought and applicants must attend the job fairs in person, they tend to live in those communities and are less likely to request a transfer to another location once they are hired. Appointments to the FCIP are generally for 2 years, at which point the intern may be offered a permanent position. During the internship, new hires are required to participate in a formal training program, which consists of training provided by the Mine Academy and structured on-the- job training. However, district managers and Mine Academy officials agreed that, realistically, new inspectors can take up to 5 years to become fully competent and confident in their roles as underground coal mine inspectors. While the improvements MSHA has made to its recruiting process are an important part of addressing impending retirements, the agency has not developed a long-term strategy for replacing mine inspectors. MSHA estimates that over 40 percent of its inspectors will be eligible for retirement by 2012 (see table 1), and agency officials told us that in the last 3 years, between 32 and 47 percent of the coal mine enforcement employees eligible to retire actually did so in the first year of eligibility. District officials expressed concern over loss of highly experienced coal mine inspectors and the impact such retirements can have on achieving the goals of the agency. For example, one district official told us that recent retirements have left the district short-handed and expressed concern over the inspectors’ ability to complete the required annual mine inspections on time. While MSHA human resources officials told us about steps they are taking to mitigate the turnover, the agency has not developed a strategic plan that clearly links measurable outcomes to the mission and goals of the agency. In our review of the plan and discussions with MSHA officials, the agency has not yet demonstrated how it is planning for its future needs, what targets and goals are established to meet those needs, and how the goals will be monitored. For example, given the amount of time needed to train new inspectors, it is not clear how the agency will take into account the potential increases in future hiring and the time necessary to fully train replacements. GAO has reported on effective strategies for workforce planning that require a more strategic approach to meeting the challenges of the future. Among other elements, strategic planning serves as a tool to help agencies address challenges in a manner that is clearly linked to achieving their mission and goals. For example, by using data to make long-term projections, an agency can design a transition program to ensure that experienced employees are available in critical areas of the agency and that the institutional knowledge would not be lost because of turnover. Further, the agency can revisit the projections on a regular basis and use the information to address broader agency goals for improvement. Most of the penalties proposed by MSHA are paid by mine operators without opposition, but a small percentage of more serious and higher- dollar penalties are appealed, and many of those appealed are reduced significantly. In order to determine the amount of a proposed penalty, MSHA uses a standard formula that generally results in larger penalties being proposed for more serious violations. MSHA assigns point values to each of the six broad factors outlined in the Mine Act, and two of these factors—whether the operator was negligent and the gravity of the violation—carry the greatest weight in deciding the amount of the proposed penalty. MSHA inspectors are responsible for making an initial determination regarding the magnitude of these two elements during their inspections. After an inspector issues a citation and makes an initial finding regarding the gravity and negligence of the violation, MSHA determines the magnitude of the remaining four factors and tallies the points to determine the proposed penalty amount. Between 1996 and 2006, MSHA proposed 506,707 penalties for safety and health violations, and the average penalty was $234 per violation. Table 2 details the range of average penalties, by degree of gravity and negligence, proposed by MSHA from 1996 through 2006. MSHA recently changed its regulations governing civil penalty assessments to update them and increase proposed penalty amounts, and to implement the new civil penalty requirement of the MINER Act. The new regulations will increase the points for most of the six statutory factors, and MSHA officials predicted that the new penalty structure will increase total proposed penalties by 234 percent. For example, these changes will increase the maximum points allotted for gravity from 30 to 88 points. MSHA officials asserted that these changes will likely lead to greater rates of compliance and subsequently a safer working environment for the nation’s miners. Between 1996 and 2006, approximately 6 percent (31,589) of the penalties proposed by MSHA for violations of underground coal mine safety and health standards were contested by mine operators, and about half of the contested penalties were reduced. The average amount of a contested penalty was $1,107, compared to an average of $176 for a noncontested penalty, and more than half of all contested penalties were for the most serious violations. Almost half of all penalties contested by underground coal mine operators are reduced through the appeals process, even those involving the highest levels of gravity and negligence. From 1996 to 2006, 47 percent of all contested penalties (14,723 penalties) were decreased from the amount originally proposed by MSHA. On average, these penalties were reduced by about half of the amount initially proposed by MSHA using its standard formula. While all of the entities involved in the appeals process—the Labor’s Solicitor’s Office, MSHA’s conference litigation representatives (CLR), and the Commission’s administrative law judges (ALJ)—are required by law to apply the six statutory factors specified in the Mine Act, they are not legally obligated to use any particular method to determine a final penalty amount when they determine that a reduction from MSHA’s proposed penalty is appropriate. As a result, they have considerable discretion in deciding on the final penalty amount. Officials from all three of the entities involved in the appeals process told us that in determining the size of a final penalty, they apply the six statutory factors on a case-by- case basis and use their professional judgment. For example, officials from the Solicitor’s Office and CLRs told us that, when appropriate, the Department of Labor generally views penalty settlements as being in the best interest of both the agency and the mine operators because settlements allow them to avoid costly litigation. Attorneys from the Solicitor’s Office also told us that they analyze the evidence presented by MSHA inspectors and mine operators and assess their chances of winning the case in deciding whether to settle a case or go to trial. Prior decisions by the Commission require ALJ decisions to be sufficiently explained. However, in some cases we reviewed, while the reasons supporting a reduction from MSHA’s proposed penalty are clearly explained, the rationale for the final penalty amount is not always well documented. For example, in one case decided in October 2005, the ALJ reduced MSHA’s proposed penalty from $50,000 to $10,000. Although the judge concluded that the gravity of the violation was less than MSHA had originally found, thereby supporting a penalty reduction, he appeared to agree with MSHA’s assessment regarding the other five statutory factors, including MSHA’s finding that the operator’s degree of negligence was high. In conclusion, the events of the last year heightened interest in protecting miners and preparing them for the perils in their workplace. While Congress, federal and state officials, mine operators, miners and their representatives have taken important steps to improve safety in mines, more can be done in several areas. First, without assistance for mine operators in providing training under simulated emergency conditions and adequate monitoring of instructors and the training miners receive, miners may not be able to safely and confidently escape a mine. Further, the high rates of retirement eligibility among MSHA and NIOSH scientists and engineers as well as the need to work together under tight time frames may render current informal coordination ineffective, thus hampering the agencies’ efforts to speed the implementation of new safety technology in mines. Similarly, the expected high attrition among MSHA’s inspector corps, coupled with the amount of time needed to train new inspectors to become proficient at their duties, calls for a more strategic approach. Absent a clear plan to address expected turnover, MSHA could jeopardize its success to date in reforming the inspector recruitment and hiring process. Finally, given the trends over the past 10 years, the higher proposed penalties under MSHA’s new penalty structure will likely lead more operators to appeal. As a result, it is important that decisions on contested penalties are transparent and contain the necessary information to understand how final penalty amounts are determined. Without such information, it will be difficult to monitor their decisions over time to ensure that all of the entities involved in the appeals process are appropriately and consistently applying the six statutory factors in altering penalty amounts and that the impact of penalties in protecting miners’ safety through greater compliance by mine operators is not diminished. In the reports, we made recommendations to the Secretaries of Labor and Health and Human Services, and the Chairman of the Federal Mine Safety and Health Review Commission. These recommendations are designed to strengthen the efforts of Labor, MSHA, NIOSH, and the Commission by improving mine operators’ access to information and tools for training their workers, strengthening MSHA’s oversight of training, improving the effectiveness of information sharing between MSHA and NIOSH, strengthening MSHA’ s human capital strategic planning efforts, and ensuring that there is transparency in final penalty amounts for appealed cases. Each agency generally agreed with the recommendations after reviewing a draft of the reports. Mr. Chairman, this concludes my statement. I will be pleased to respond to any questions you or other members of the committee may have. For further information, please contact Daniel Bertoni at (202) 512-7215. Individuals making key contributions to this testimony include Revae Moran, Sara L. Schibanoff, and Rachael C. Valliere. 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 Mine Safety and Health Administration (MSHA), the National Institute for Occupational Safety and Health (NIOSH), the Federal Mine Safety and Health Review Commission, the Department of Labor's Office of the Solicitor, the states, and the mining industry share responsibility for ensuring mine safety. In two reports released today, GAO examined the challenges underground coal mines face in preparing for emergencies, how well MSHA oversees mine operators' training efforts, how well MSHA and NIOSH coordinate to enhance the development and approval of mine safety technology, MSHA's coal mine inspector recruiting efforts, and how civil penalties are assessed. Underground coal mine operators reported facing significant challenges in preparing for emergencies, including ensuring that miners receive realistic training and organizing mine rescue teams that satisfy new requirements. While mine operators recognize the importance of providing training in an environment that simulates an emergency, many of them reported challenges such as limited access to special training facilities and the cost of providing such training. In addition, mine operators reported that they anticipate challenges in implementing new mine rescue team requirements, such as conducting training annually at each mine the rescue team services. MSHA approves mine operators' training plans and inspects their training records, but its oversight of miner training is hampered by several factors. For example, MSHA does not have current information on its instructors and does not ensure that they keep their knowledge and skills up to date. In addition, MSHA does not adequately monitor instructors or evaluate training sessions, and does not assess how well miners are learning the skills being taught. MSHA and NIOSH have a common mission to improve the safety and health of coal miners, but they do not have a current memorandum of understanding to guide their coordination efforts. As a result, most of the coordination that occurs is initiated by individual staff members or by outside parties. Such informal coordination may not be sufficient given the pending retirements of many MSHA and NIOSH engineers and scientists and other challenges both agencies face. In 2004, MSHA began a new process for hiring mine inspectors, which has led to a number of improvements, such as being able to identify applicants who possess the basic skills needed to be successful inspectors and decreasing the time it takes to hire new inspectors. However, MSHA's human capital plan does not include a strategic approach for addressing the large number of retirements expected in the next 5 years. While most of the penalties proposed by MSHA are paid by mine operators without opposition, a small percentage of the cases involving more serious and higher dollar penalties are appealed, and those appealed are often reduced significantly. MSHA uses a standard formula to propose penalties, but the other entities involved in the appeals process use considerable discretion in deciding on the final penalty amount. Approximately 6 percent of the 506,707 penalties proposed by MSHA between 1996 and 2006 were appealed by mine operators. About half of the penalties for the appealed violations were reduced by an average of 49 percent, regardless of the level of gravity of the violation initially cited by MSHA or the degree of the mine operator's negligence initially cited. |
LCS is designed to move fast and transport manned and unmanned mine countermeasures, surface warfare, and anti-submarine warfare systems into theater. For the LCS, the seaframe consists of the hull; command and control systems; automated launch, handling, and recovery systems; and certain core combat systems like an air defense radar and 57- millimeter gun. The Navy is embedding LCS’s mine countermeasures, surface warfare, and anti-submarine warfare capabilities within mission packages. These packages—acquired separately from the seaframes— are comprised of unmanned underwater vehicles, unmanned surface vehicles, towed systems, and hull- and helicopter-mounted weapons. The Navy acquired the first two seaframes, LCS 1 and LCS 2, in two different designs from shipbuilding teams led by Lockheed Martin and General Dynamics. Lockheed Martin constructed LCS 1 at Marinette Marine, which is located in Marinette, Wisconsin, while General Dynamics constructed LCS 2 at Austal USA in Mobile, Alabama. In addition to LCS 1 and LCS 2, the Navy has also contracted for construction of an additional 22 ships, of which 2 (LCS 3 and LCS 4) have been delivered to date.set of performance requirements. The most notable difference is that the The two designs reflect different contractor solutions to the same Lockheed Martin version—referred to as the Freedom variant—is a monohull design with a steel hull and aluminum superstructure, while the General Dynamics/Austal USA version—known as the Independence variant—is an aluminum trimaran. LCS was intended to be an affordable ship at $220 million per seaframe. The Navy executed cost-reimbursement contracts with the shipbuilding teams for design of LCS 1 and LCS 2 in July 2003. Subsequently, the Navy exercised options under these contracts for the detail design and construction of LCS 1 and LCS 2—in December 2004 and October 2005—for $188.2 million and $223.2 million, respectively. Cost- reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, and establish an estimate of the total cost of the contract—referred to as the total estimated cost or ceiling cost. This contract type places most of the risk on the government, which may pay more than budgeted should incurred costs be more than expected when the contract is signed, and can be appropriate for use on complex research and development projects when performance uncertainties or the likelihood of changes makes it difficult to estimate performance costs in advance. Under this contracting arrangement, the contractor agrees to use its best efforts to perform the work specified under the contract within the estimated cost. However, the government must reimburse the contractor for its allowable costs regardless of whether the contractor completes work on the particular item. The Navy contracted for the remaining seaframes currently under contract using fixed-price incentive contracts. Fixed-price incentive contracts place increased risk on the contractor, which generally bears some responsibility for increased costs of performance, including full responsibility once the contract’s price ceiling is exceeded. The Navy’s acquisition strategy for LCS seaframes has changed several times over the past decade. The original plan was to fund one or two initial ships—in what the Navy called a Flight 0 configuration—based on the designs it selected through a conceptual design competition, and then spend time experimenting with the seaframes and overall LCS concept. Further, the significant differences between the two seaframe designs lent even more importance to the experimentation concept to inform a decision about which seaframe design was better suited to meet the Navy’s needs. After a down-select decision, the winning design was to be procured in larger numbers, with any design changes incorporated into a new Flight 1 configuration. The Navy abandoned this strategy, however, after concluding it would be unrealistic to expect the two competing shipyards to build only one or two ships and then wait for the Navy to complete the period of experimentation before awarding additional contracts. Instead, the Navy opted to continue funding additional seaframes. Several federal and DOD regulations and Navy policies govern Navy ship acceptance processes. For LCS 1 and LCS 2, these regulations and policies include the following: FAR part 46: Prescribes policies and procedures to ensure that supplies (such as ships) and services acquired under a government contract conform to the contract’s quality and quantity requirements, including provisions on inspection and acceptance. Under the terms of inspection clauses in government contracts, the government generally has the right to inspect and test supplies tendered under the contract before accepting the supplies. FAR section 46.101 defines acceptance as the act of an authorized representative of the government by which the government assumes ownership of supplies tendered as partial or complete performance of the contract. FAR subpart 46.5 prescribes specific regulations on acceptance. Section 46.501 states, among other things, that acceptance constitutes acknowledgement that the supplies or services conform with applicable contract quality and quantity requirements except as provided in the subpart and subject to other terms and conditions of the contract. Other subpart 46.5 sections identify regulations related to responsibility for and place of acceptance, certificates of conformance, and transfer of title and risk of loss. DFARS subpart 246.5: Identifies DOD regulations related to certificates of conformance, including use of a certificate of conformance for ship critical safety items. Office of the Chief of Naval Operations Instruction (OPNAVINST) 4700.8H, Trials, Acceptance, Commissioning, Fitting Out, Shakedown, and Post Shakedown Availability of U.S. Naval Ships Undergoing Construction or Conversion (Dec. 5, 1990). This instruction outlines Navy policy, procedures, and responsibilities related to ship acceptances. As is typical for all Navy ships, including LCS seaframes, after the shipbuilder is satisfied that the ship is complete, the ship embarks on a series of dockside and at-sea tests—known as sea trials—to evaluate overall quality and performance against the contractually required technical specifications and performance requirements. Navy shipbuilding programs, including LCS, generally conduct two sets of sea trials— builder’s trials and acceptance trials. During builder’s trials, inspectors from the Navy’s Supervisor of Shipbuilding, Conversion, and Repair (SUPSHIP) are generally responsible for observing and identifying deficiencies. SUPSHIP is the organization charged with administering and managing DOD contracts with commercial entities in the shipbuilding and ship repair industry. During acceptance trials, the responsibility for identifying deficiencies falls upon the Navy’s Board of Inspection and Survey (INSURV), an independent organization whose inspectors evaluate the newly constructed ship and report on its material condition to Congress and Navy leadership. Ideally, following the successful completion of sea trials and once the government is satisfied that the ship meets requirements, the shipbuilder delivers the ship. Delivery is also referred to as preliminary acceptance of the ship. The Navy accepted delivery of LCS 1 and LCS 2 on September 18, 2008, and December 18, 2009, respectively. In Navy shipbuilding, the official transfer of custody occurs at preliminary acceptance when the Navy signs a Material Inspection and Receiving Report (Form DD 250). Following preliminary acceptance, Navy ships undergo several additional activities to prepare them for service within the fleet. These activities, which can generally take up to a year to complete, include the following: Guaranty period: The guaranty period is a time specified in the contract during which the shipbuilder retains responsibility for correcting any defects that arise on the ship (other than normal wear and tear). The guaranty period is initiated once the Navy accepts delivery of the ship (i.e., once the Form DD 250 is signed). The LCS 1 and LCS 2 contracts each provided for 8-month guaranty periods. Industrial post-delivery availability and/or post-delivery availability: The Navy completes one or both of these availabilities following ship delivery to accomplish remaining work, including critical engineering changes identified late in the construction schedule that were not completed during ship construction. These changes are to address safety or mission critical issues or are essential to support post-delivery test and trials. Final outfitting and post-delivery tests: Following delivery and until sailaway from the shipbuilder’s yard—usually anywhere from 10 to 90 days after the Navy accepts delivery—the crew boards the ship and begins training. Additional training and operational tests of mission systems occur at the ship’s home port. Final contract trials: INSURV inspectors conduct a second round of sea trials to assess whether the ship and all mission equipment are operating as intended. Typically, these trials are held prior to expiration of the ship’s guaranty period. Final acceptance: Upon expiration of any contractually specified guaranty period, final acceptance occurs. The Navy does not complete any documentation related to final acceptance of ships. For LCS 1 and LCS 2, final acceptances occurred in May 2009 and August 2010, respectively. Post shakedown availability: A period of planned maintenance follows final contract trials. During this time, class-wide upgrades and correction of new or previously identified deficiencies that are the government’s responsibility also occur. Obligation and work limiting date: The official date on which full responsibility for funding the ship’s operation and maintenance is transferred from the acquisition command to the operational fleet. The Navy is required to set an obligation and work limiting date for any ship it constructs using Shipbuilding and Conversion, Navy (SCN) appropriations. LCS 1 and LCS 2, however, are unique among Navy ships in that they were constructed using Research, Development, Test and Evaluation (RDT&E) appropriations, and pursuant to Navy guidance, there is no requirement for an obligation and work limiting date for ships constructed with RDT&E funds. Figure 1 highlights how these different events are typically sequenced for Navy ships. Quality deficiencies on Navy ships can be identified at all points throughout the shipbuilding process, during construction to sea trials and even after delivery. SUPSHIP oversees the construction process by inspecting and testing the shipbuilder’s completed work and issuing requests for the shipbuilder to correct any identified deficiencies. During acceptance trials, INSURV inspectors label the most serious issues as “starred” deficiencies. These issues can significantly degrade a ship’s ability to perform an assigned primary or secondary operational capability or the crew’s ability to safely operate and maintain ship systems. Because of their importance, starred deficiencies must be corrected by the builder or waived by the Chief of Naval Operations prior to accepting delivery of the ship. We have previously reported extensively on risks and challenges confronting the Navy’s acquisition of LCS seaframes. In particular, our reports have highlighted multiple issues surrounding the deliveries of LCS 1 and LCS 2: In August 2010, we found that the Navy accepted delivery of LCS 1 and LCS 2 in incomplete, deficient states. Most notably, shipbuilders had not demonstrated the launch, handling, and recovery systems— critical for deploying and retrieving mission package watercraft—on LCS 1 or LCS 2 ahead of those ships’ deliveries and subsequent final acceptances. In November 2013, we reported on quality shortfalls across Navy shipbuilding programs, including LCS. We found that LCS 1 and LCS 2 were delivered with a large number of open deficiencies, the majority of which were determined to be attributable to the contractors. Our analysis found that over half of these deficiencies were closed after the ships were delivered to the Navy and were being outfitted, but other deficiencies continued to be unresolved one year after delivery—a point at which the Navy had taken final acceptance of LCS 1 and LCS 2. We subsequently made several recommendations aimed at improving the construction quality of ships delivered to the Navy. In July 2014, we reported on testing and weight management challenges facing LCS seaframes. We found that initial seaframes face capability limitations resulting from weight growth during construction, including LCS 1 and LCS 2 not meeting performance requirements for sprint speed and endurance, respectively. The Navy addressed some, but not all, of our recommendations in these different reports. The Navy complied with the relevant FAR provision in accepting LCS 1 and LCS 2 in incomplete, deficient conditions, largely due to the cost- reimbursement type contracts in place to construct these ships. The Navy also met FAR requirements related to responsibility for and place of acceptance and transfer of title, among other provisions. Under the cost- reimbursement contracts, the LCS 1 and LCS 2 prime contractors were only required to give their best efforts to complete quality-related activities—along with the other work specified in the contracts—up to each contract’s estimated cost. These efforts resulted in LCS 1 and LCS 2 not completing final contract trials, and LCS 2 not finishing its acceptance trials—resulting in increased knowledge gaps related to ship performance and deficiencies. In addition, the Navy did not achieve the quality standards on LCS 1 and LCS 2 that are outlined in its own ship acceptance policy, although the policy also contains several notable flexibilities to these standards. In particular, the policy recognizes situations where the Navy may defer work until after delivery and final acceptances and affords the Chief of Naval Operations the power to waive certain quality standards outlined in the policy. The Navy relied extensively on these waivers to facilitate its trials and acceptance processes for LCS 1 and LCS 2. Although LCS 1 and LCS 2 contained numerous deficiencies—including areas of the ships that remained incomplete when the Navy took final acceptance—the Navy’s actions complied with section 46.501 of the FAR because these actions were consistent with the cost-reimbursement Under cost-reimbursement type terms of the respective contracts.contracts, the government generally reimburses the contractor for the costs it incurs in performing the contract. Specifically, cost-reimbursement contracts such as the LCS 1 and LCS 2 contracts include a “limitation of cost” or “limitation of funds” clause, which provides an estimated cost (also known as the ceiling cost) for performance of the contract. These clauses state that the government is not obligated to reimburse the contractor for costs incurred in excess of the estimated cost, and the contractor is not obligated to continue performance or otherwise incur costs in excess of the estimated cost. For ships, including LCS 1 and LCS 2, the limitation of cost or funds clause applies through the end of the guaranty period, which culminates in final acceptance. According to the Navy’s assistant general counsel for research, development and acquisition, at the point when the Navy was to take final acceptance of LCS 1 and LCS 2, each ship’s contractor had incurred costs that were close to the respective total estimated cost (ceiling cost) of the contract. Pursuant to the limitation of cost clause in each of the contracts, the LCS contractors were not obligated to repair or replace non-conforming work or otherwise incur costs in excess of the total estimated contact cost, regardless of whether the ships failed to meet quality standards or were otherwise incomplete at the point when the Navy accepted the ships. Once the contractors had incurred costs equal to the respective total estimated costs, the Navy faced the choice of either increasing total estimated costs to permit the respective contractors to continue work or proceeding with final acceptances of the ships in their deficient conditions. For LCS 1 and LCS 2, the Navy took the second approach. The Navy also complied with the other requirements of FAR subpart 46.5 and DFARS subpart 246.5 regarding the government’s acceptance of supplies or services. In particular, each ship was accepted by an authorized SUPSHIP representative at the respective contractor’s facility as specified in the contracts, and the Navy did not need to employ any certificates of conformance for either LCS 1 or LCS 2. In addition, FAR subpart 46.5 contains a provision on transfer of title and risk of loss. The Navy’s ship acceptance process—including the transfer of custody by signing the Material Inspection and Receiving Report—and the passage of title to a ship are separate processes, and no specific document transfers title of a ship to the Navy. There was no specific point in time when titles to LCS 1 and LCS 2 as a whole were transferred to the Navy. Passage of titles to these ships complied with the applicable federal regulation and was governed by a specific contract clause on government property, providing for title to property to pass to the Navy as the ships were constructed. The cost-reimbursement contracts for LCS 1 and LCS 2 contain several quality-related terms intended to facilitate delivery of seaframes that were complete, tested, and free of deficiencies. However, under these contracts, the LCS 1 and LCS 2 prime contractors were only required to give their best efforts to complete the specified work up to each contract’s estimated cost. These efforts limited the extent to which quality-related terms of the ships’ contracts were exercised. Table 1 provides an overview of these quality-related contract terms and identifies whether they were fully executed for LCS 1 and LCS 2. Most notably, the Navy did not conduct final contract trials for LCS 1 or LCS 2. Normally, sea trials—including final contract trials—require 4 to 5 days to complete and are graded evaluations by INSURV, which identify whether the ship’s material condition is satisfactory, degraded, or unsatisfactory. Alternatively, for LCS 1, the Navy completed an abbreviated 2-day special trial in May 2012, which was ungraded by INSURV and showed both residual and new deficiencies. Final contract trials are intended to provide important information on ship performance toward the end of the guaranty period. Special trials are not intended to substitute for the more rigorous final contract trials. LCS 2, on the other hand, has never even completed its acceptance trials. Prior to delivery in 2009, the Navy decided to split the acceptance trials for LCS 2 into two parts because the ship was incomplete and unfinished when initial acceptance trials got underway. The second, remaining portion of the acceptance trials—intended to demonstrate several of the ship’s untested combat systems—was scheduled for completion in summer 2010. However, the Navy subsequently never held these trials and, in August 2014, completed a 1-day ungraded special trial for LCS 2—approximately 4 years after it took final acceptance of the ship. The Navy’s decision to not complete key LCS 1 and LCS 2 trials is inconsistent with the program office’s earlier plans and agreements with INSURV—the Navy organization responsible for conducting trials. The LCS program office initially planned to hold two separate sets of acceptance trials for both LCS 1 and LCS 2. However, aside from splitting each ship’s acceptance trials, INSURV officials stated that LCS 1 and LCS 2 were otherwise expected to follow the normal trials and acceptance process. Yet, in light of the program office’s later decision to not make LCS 2 available for its second set of planned acceptance trials, INSURV officials told us they were unlikely to agree to conduct trials on future ships in a similar manner. INSURV officials did note, however, that they recognize that Freedom variant ships built at Marinette Marine face environmental and treaty limitations that compel the need for two sets of acceptance trials, although the scope of testing that has to be deferred from the Great Lakes is—and should continue to be—minimal. Navy policy requires robust standards to be met prior to a ship’s delivery and continuing through the end of the guaranty period—standards that LCS 1 and LCS 2 did not meet.policy include the following: Key quality standards contained in this Ships and submarines will be fully mission capable, in the sense that all contractual and governmental responsibilities shall be resolved prior to the Navy accepting delivery (preliminary acceptance), except for crew certification, outfitting, or special Navy range requirements which cannot be met until after delivery. Delivery of the ship is based on acceptance trials and satisfactory correction or resolution of deficiencies, and acceptance trials shall be conducted when all work, including the correction of significant known deficiencies, has been completed. Final contract trials are to be conducted at sea and should have operations at full power and be of sufficient thoroughness to determine whether defects have developed since acceptance trials. However, the policy also provides certain flexibilities that allow the Navy to conduct sea trials for and accept delivery of a ship with deficiencies. These flexibilities enabled the Navy to defer certain work on LCS 1 and LCS 2 until after preliminary and final acceptances. Most notably, the policy allows for the following: Deferring work until the post-delivery period before the vessel is transferred to the fleet, if determined to be prudent—for example, because of financial or workload reasons. In cases of new construction efforts, leaving significant ship systems/capabilities incomplete until the end of post shakedown availability. Finally, the policy also provides for waiver requests, to be used in extraordinary circumstances, to the Chief of Naval Operations to provide for deviation from the policy. To facilitate the LCS 1 and LCS 2 acceptance processes, the program office obtained waivers for several provisions of the policy, which permitted the Navy to undertake the following activities on LCS 1 and LCS 2: Conduct acceptance trials with significant construction deficiencies. Accept delivery of the ships with uncorrected starred deficiencies. Navy decisions to accept delivery of LCS 1 and LCS 2 in incomplete, deficient conditions were driven by a focus on near-term cost performance by shipbuilders, a desire to introduce the long-delayed ships to the fleet, and—in the case of LCS 1—environmental and treaty considerations associated with the location of that ship’s construction. In prioritizing these factors, the Navy shortchanged its quality assurance processes for both ships, which has caused it to devote considerably more time and money to resolving deficiencies post-delivery than anticipated. However, because the Navy did not establish clear deadlines for resolving ship deficiencies, corrections were allowed to lag, to the point that fleet operators inherited unresolved starred deficiencies on each seaframe. Further, these deficiencies have constrained recent shipboard operations. Key factors that motivated the Navy to accept delivery LCS 1 and LCS 2 in incomplete, deficient conditions include (1) a desire to improve the contractors’ cost performance and (2) prioritization of fleet introduction, so as to begin experimenting with the ships and demonstrating operational and sustainment concepts. In addition, environmental limitations related to testing and transport compelled the Navy’s acceptance schedule for LCS 1. However, in most cases the outcomes of the Navy’s decisions were not as initially intended. In the final months leading up to the eventual deliveries of LCS 1 and LCS 2, the prime contractors consistently increased their cost estimates for completing the ships. For LCS 1 and LCS 2, contractor cost estimates increased 3.6 percent and 9.8 percent, respectively, in the 5 months preceding those ships’ deliveries. These increases were in addition to cost growth totaling over 150 percent that the Navy had previously incurred on each contract. According to LCS seaframe program officials, the LCS shipbuilders did not have strong incentives to complete the ships and deliver them to the Navy, in part because of the cost-reimbursement contracts that were in place. Consequently, the Navy pushed the delivery process forward for the ships—despite incomplete work and deficiencies—once the ships met minimal safe-to-sail conditions. According to LCS seaframe program officials, the program was confident that lower pricing for remaining work could be obtained after delivery by using different shipyards than Marinette Marine and Austal USA, where LCS construction took place. However, the Navy may not have achieved these anticipated cost benefits. Most notably, the Navy did not assess whether the eventual post-delivery shipyards—including Colonna’s Shipyard (Norfolk, Virginia), BAE Systems Ship Repair (San Diego, California and Norfolk, Virginia), and General Dynamics NASSCO (San Diego, California)—would provide better pricing than the original construction yards. Instead, SUPSHIP officials reported that the Navy only completed assessments as to whether the eventual post delivery shipyards’ pricing was fair and reasonable as compared to other shipyards in their own respective geographic areas. These geographic areas did not include Wisconsin or Alabama, where Marinette Marine and Austal USA—the original LCS construction yards—are located, respectively. The cost-reimbursement type contracts used to construct LCS 1 and LCS 2 included both incentive and award fees to incentivize contractor performance. The incentive fee was designed to reward the contractor for controlling contract costs by increasing the fee when the costs incurred during contract performance were less than the contract’s target cost. Work performed after delivery during the guaranty period, such as correction of deficiencies, was reimbursable without fee to the For completion of the work remaining on both ships after the contractor.end of the guaranty period, including deficiency corrections and emergent work, the Navy instead created new arrangements, called basic ordering agreements, with the two LCS prime contractors. These agreements anticipated placement of orders on a cost-plus-fixed-fee, cost-plus-award- fee, or fixed price basis. Most of the orders we reviewed were placed on a cost-plus-fixed-fee basis, where the contractor is reimbursed for its allowable incurred costs to the extent prescribed in the contract, and receives a fee that is fixed at the outset. These new agreements allowed Navy program officials to reprioritize work based on available funding and the ships’ testing schedules. However, in contrast to the incentive fees used under the original construction contracts, cost-plus-fixed-fee contracts provide the contractor only a minimum incentive to control costs, and expose the government to increased cost risk.did not conduct a robust analysis of pricing for post delivery work among alternative shipyards—including the original LCS construction yards—and the contract structure used for post delivery work did not provide the contractors with incentives to control costs, it is unclear whether LCS 1 and LCS 2 cost performance improved or deteriorated as compared to previous performance within the original construction shipyards and under the original contract structure. As we previously found in 2010, LCS 1 and LCS 2 experienced significant delivery delays—20 months and 26 months, respectively—as compared to their initial planned delivery dates. These delays occurred in an environment where senior Navy leaders placed a high priority on introducing the ships to the fleet with haste in order to begin experimenting with and demonstrating LCS operational and sustainment concepts, which would help inform design changes to later ships in the class. Most notably, the program’s 2004 acquisition strategy included a directive from the Chief of Naval Operations to “get the hulls into the water with the speed of heat.” The Navy’s decision to accept delivery of LCS 1 without fully correcting starred deficiencies contributed to that ship’s availability to complete a limited deployment in 2010 nearly 2 years ahead of plan, albeit with significant mission constraints. This deployment positioned the Navy to begin developing a life-cycle maintenance strategy for critical equipment on the Freedom variant. In July 2014, we identified operational lessons learned as part of the ship’s 2013 deployment to Singapore, including equipment reliability and crew maintenance practices. With LCS 2, although the Navy also accepted delivery before correcting starred deficiencies, opportunities to capitalize on this ship’s availability for fleet use have been more constrained. As we previously found in 2013, the combat management system software on that ship was incomplete at delivery, and as of December 2012—3 years after ship delivery— questions remained among the LCS 2 crew about both the combat management system and radar. Most significantly, the crew had obtained minimal operational experience with both systems, and integration of weapon and sensor capabilities into the combat system remained incomplete. Even as of August 2014, the combat management system continued to face significant limitations, which has restricted its use during fleet operations. Navy officials reported that for LCS 1, environmental and treaty constraints also contributed to its delivery acceptance decision for that ship. These officials stated that the treaty constraints prevented the testing of certain ship systems, including weapon systems, during acceptance trials in the Great Lakes. Further, the ship’s September 2008 delivery was timed, in part, to facilitate transiting the ship out of the Great Lakes and into the Atlantic Ocean before the St. Lawrence Seaway closed for the winter due to ice. These environmental and treaty limitations caused the Navy to split acceptance trials for LCS 1 into two parts—one within the Great Lakes, and a second trial in the Atlantic Ocean. However, the scope of testing deferred into LCS 1’s second acceptance trial included items that the Navy could have tested while in the Great Lakes, but was prevented from doing so because of incomplete and deficient work. These items include the 11-meter rigid-hull inflatable boat and recovery winch, electrical load shedding and distribution systems, and splitter gears, among others. When the Navy accepted delivery of LCS 1 and LCS 2, it anticipated significantly less time and money would be required to address quality problems than has actually been required. Instead, the aftermath of delivery for each of these ships has been characterized by significant cost growth, schedule delays, and the transfer of deficient ships to operational communities. In 2013, we found that the Navy accepted delivery of LCS 1 and LCS 2 with unresolved starred deficiencies affecting both ships. The Navy also deferred testing and certifications of numerous other ship systems and pieces of equipment as part of initial acceptance trials for these ships. Therefore, the Navy chose to accept delivery of both LCS 1 and LCS 2 without the benefit of a complete INSURV inspection to identify all deficiencies. Subsequent trials held after the delivery of LCS 1 identified additional deficiencies. LCS 2 has not yet been made available for a complete inspection by INSURV. Further, the Navy executed the first part of LCS 2’s acceptance trials despite a considerable amount of incomplete work remaining throughout ship compartments. Comparatively fewer compartments were incomplete on LCS 1 for that ship’s initial acceptance trials, but these incomplete areas included engine machinery spaces critical for demonstrating ship capabilities. Table 2 details LCS 1 and LCS 2 trial events and the key quality metrics identified at each event. On both LCS 1 and LCS 2, the Navy deferred testing of systems, including key weapons systems such as the 57-millimeter gun, until after the ships’ first set of acceptance trials. Further, mission package equipment—critical to LCS mission execution—was not tested as a part of either ship’s acceptance trials. Consequently, key interfaces between the seaframes and mission package equipment—particularly, seaframe launch, handling, and recovery systems—remained undemonstrated at initial acceptance trials. Further, neither ship had acquired required third- party certifications for certain navigation, aviation, and tactical data link systems. Consequently, the Navy was not able to fully demonstrate the uncertified systems prior to delivery. As LCS 1 trials events progressed, INSURV was able to inspect and demonstrate systems and equipment that were not available during that ship’s first set of acceptance trials. These inspections and demonstrations resulted in additional starred deficiencies for the ship, in some cases, but also increased the Navy’s knowledge related to the ship’s capabilities. To date, however, INSURV has not completed similar follow-on inspections and demonstrations for LCS 2 systems and equipment. August 2014 special trials tested only four of the systems that the Navy excluded from inspection—or that failed inspection—during that ship’s initial acceptance trials. The Navy has relied on RDT&E funds budgeted for post-delivery and outfitting activities to remedy LCS 1 and LCS 2 deficiencies and complete construction of these ships. As the Navy has identified additional LCS 1 and LCS 2 deficiencies following delivery of those ships, post-delivery and outfitting funding obligations to address the deficiencies have grown. Tables 3 and 4 below highlight the significant cost growth that the LCS 1 and LCS 2 post-delivery and outfitting accounts have incurred in the years since those ships delivered. Although the Navy identifies LCS 1 and LCS 2 outfitting and post-delivery funds within its RDT&E construction budget, it does not include these funds when calculating the total construction costs. Instead, Navy budget documents separate out funding for post-delivery and outfitting activities as “non-end cost” items for LCS 1 and LCS 2—a practice that obscures the true construction costs of these ships. The Navy has obligated some portion of LCS 1 and LCS 2 post-delivery and outfitting funds to activities other than completion of ship construction and correction of deficiencies. For instance, the Navy has funded activities such as emergent work and addition of crew amenities. However, seaframe program officials stated that these outfitting activities for the two hulls were minimal, and they were unable to further clarify these totals for us. Obligation and work limiting dates establish deadlines that drive the acquisition community to do its part to bring a ship up to required specifications ahead of turning it over to the fleet. For an SCN funded ship, the obligation and work limiting date is set for 11 months following completion of outfitting for the ship. However, because the Navy constructed LCS 1 and LCS 2 using RDT&E appropriations, it was not required to set obligation and work limiting dates for these ships, and identification and correction of deficiencies was allowed to lag beyond normal timelines for Navy ships. In addition, post-delivery work periods— aimed at correcting LCS 1 and LCS 2 deficiencies—consumed more time than the Navy anticipated when it accepted delivery. Because deficiencies were not corrected in a timely manner, the ships were delayed in becoming fleet ready, or capable of executing required mission sets. These delays totaled approximately 1.5 years for LCS 1 and 6 months for LCS 2—although incomplete trials for LCS 2 call into question the Navy’s basis for declaring that ship as fleet ready. Figures 2 and 3 highlight the effect of unanticipated extensions to LCS 1 and LCS 2 post-delivery work periods and delays achieving fleet readiness following delivery of those ships to the Navy. Although significant increases in funding and time devoted to post- delivery work have occurred, the program office did not fully resolve LCS 1 and LCS 2 starred deficiencies before it judged the ships as fleet ready. Once a ship is judged fleet ready—and subsequently transferred to the fleet for operations—responsibility for funding and scheduling correction of any remaining deficiencies shifts from the acquisition program office to the operational community. Figure 4 illustrates the number of starred deficiencies transferred from the program office to the fleet for both LCS 1 and LCS 2. When a ship is transferred to the fleet with uncorrected deficiencies, the fleet determines whether to fund repair of the deficiencies—using Operations and Maintenance, Navy appropriations—or to simply document the deficiencies as part of the ship’s material history. For LCS 1 and LCS 2, program officials reported that the fleet has elected to correct some deficiencies while leaving others uncorrected. However, these uncorrected deficiencies have constrained recent shipboard operations. For example, during LCS 1 acceptance trials in 2008 and 2009, the Navy deferred testing of the ship’s launch, handling, and recovery system. Following these deferrals, fleet operators reported problems with system components—including, in 2013, the hoist motor and brake—indicating that the system was not performing adequately, and subsequently constraining mission readiness. On LCS 2, persisting deficiencies with the ship’s combat systems software have imposed operational limitations that constrain the ship’s ability to employ its 57- millimeter gun. Further, INSURV documented that the Fire Scout vertical take-off and landing tactical unmanned aerial vehicle remains untested by INSURV on both seaframes. According to seaframe program officials, the Navy’s inventory of these vehicles is overloaded with real world tasking, and none have been made available to the LCS program for testing or demonstration. The Navy complied with FAR requirements in accepting LCS 1 and LCS 2, largely due to its use of cost-reimbursement contracts for these ships. At the same time, however, this contract type allowed some quality requirements to go unexecuted. Further, program officials did not establish obligation and work limiting dates for LCS 1 and LCS 2— unrequired because research and development appropriations funded these ships’ constructions—which allowed the Navy to deviate from disciplined and timely trials processes that it relies upon to expose deficiencies and prove out corrective fixes. The Navy’s priority was to accelerate the ships’ entry into the fleet. This accelerated schedule, however, spurred a need for extensive and costly post-delivery maintenance periods to correct deficiencies. Ultimately, the ships’ contributions to fleet activities were delayed and constrained. Because our review was focused exclusively on LCS 1 and LCS 2, which the Navy accepted delivery of several years ago and has since transferred to the fleet, the opportunity to implement changes to the acquisition of these two ships has passed. In addition, the Navy is acquiring the remaining LCS seaframes under fixed-price incentive type contracts. Consequently, we are not making recommendations in this report. We provided a draft of this report to DOD for comment. In its written comments, which are reprinted in appendix II, DOD acknowledged receipt of the draft report. DOD also provided technical comments that we incorporated into the report, as appropriate. We are sending copies of this report to interested congressional committees, the Secretary of Defense, and the Secretary of the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or mackinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. This report evaluates the Navy’s acquisition of the first two Littoral Combat Ships (LCS). Specifically, we (1) assessed the extent to which the Navy complied with applicable federal regulations, contracts, and policies in accepting LCS 1 and LCS 2 and (2) evaluated the basis for and outcomes from the Navy’s decision to accept delivery of these ships. To assess the extent to which the Navy complied with applicable federal regulations, contracts, and policies in accepting LCS 1 and LCS 2, we identified ship acceptance requirements outlined in the Federal Acquisition Regulation (FAR), including part 46; Department of Defense’s (DOD) FAR Supplement (DFARS), including subpart 246.5; Navy policies, including Office of the Chief of Naval Operations Instruction (OPNAVINST) 4700.8H, Trials, Acceptance, Commissioning, Fitting Out, Shakedown, and Post Shakedown Availability of U.S. Naval Ships Undergoing Construction or Conversion (Dec. 5, 1990); and the LCS 1 and LCS 2 contracts. We identified the Navy’s acceptance process for LCS 1 and LCS 2 by reviewing program acquisition strategies, trial schedules and reports, material inspection and receiving reports, deficiency waivers from the Chief of Naval Operations, and monthly Navy Supervisor of Shipbuilding, Conversion, and Repair (SUPSHIP) briefings. We compared the Navy’s LCS 1 and LCS 2 acceptance process against the stated requirements. In addition, we corresponded in writing with the Navy’s assistant general counsel for research, development and acquisition to better understand how the LCS 1 and LCS 2 acceptance process complied with the acceptance requirements of subpart 46.5 of the FAR. We also relied on our prior work evaluating the LCS program and shipbuilding quality best practices to supplement the above analyses. To evaluate the basis for and outcomes from the Navy’s decisions to accept LCS 1 and LCS 2, we reviewed Navy and contractor documents detailing construction plans, costs, and schedules, including weekly SUPSHIP briefings, contracts, and earned value management reports. We also evaluated LCS 1 and LCS 2 trial plans and results and deficiency correction plans, as outlined in program acquisition strategies, SUPSHIP and program office briefings, Navy Board of Inspection and Survey (INSURV) reports, and budget documentation. These steps enabled us to identify the key factors responsible for the Navy’s decision to accept these ships. We also reviewed post-delivery basic ordering agreements, progress briefings, and Navy budget submissions to assess whether the Navy achieved the post-delivery cost efficiencies it anticipated when accepting delivery of LCS 1 and LCS 2. We reviewed 2013 fleet reports on equipment casualties to assess the extent to which deficiencies identified at LCS 1 and LCS 2 acceptances persisted when those ships were turned over to the fleet, and what effect those deficiencies have had on recent fleet operations. To determine the number and type of deficiencies for each vessel, we obtained and used data from the Navy’s Technical Support Management (TSM) system. TSM is the primary database SUPSHIP uses to track the status of new ship construction deficiencies. We analyzed these data to determine the total number of open, starred deficiencies at key intervals including (1) when the Navy accepted delivery of each ship (preliminary acceptance); (2) at the end of each ship’s guaranty period, approximately 8 months following preliminary acceptance; and (3) when the ships were transferred to the fleet, which the Navy indicated occurred in February 2013 for LCS 1 and February 2014 for LCS 2. Total starred deficiencies are those identified during acceptance trials. The data we collected represents the deficiencies at a particular moment in time. Further, deficiencies may be subdivided into multiple deficiencies or consolidated into a smaller number when the Navy and its shipbuilding contractors determine whether the government or the shipbuilder is responsible for correcting the respective deficiencies. We reviewed existing information about the data and the system that produced them, including previous data reliability testing performed on the same data collected for previous engagements on Navy shipbuilding, and interviews with agency officials knowledgeable about the data. We determined that the TSM data were sufficiently reliable for the purposes of this report for the ships we reviewed. To further corroborate documentary evidence and gather additional information in support of our review for both objectives, we conducted interviews with relevant Navy and contractor officials responsible for managing LCS 1 and LCS 2 contracts, construction, acceptances, and post-delivery activities, including the Program Executive Office, LCS; LCS seaframe program office; LCS fleet introduction program office; SUPSHIP; INSURV; Office of the Chief of Naval Operations—Surface Warfare directorate; Naval Sea Systems Command (NAVSEA)— Contracts directorate; Lockheed Martin and Marinette Marine (LCS 1 prime contractor and shipbuilder); General Dynamics and Austal USA (LCS 2 prime contractor and shipbuilder); and the American Bureau of Shipping. We also held discussions with attorneys from NAVSEA and the Office of the Assistant Secretary of the Navy for Research, Development and Acquisition. We conducted this performance audit from November 2013 to September 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributors to this report were Diana Moldafsky, Assistant Director; Christopher R. Durbin, Analyst in Charge; George Bustamante; Laura Greifner; Kristine Hassinger; Heather B. Miller; Roxanna T. Sun; and Ozzy Trevino. Littoral Combat Ship: Additional Testing and Improved Weight Management Needed Prior to Further Investments. GAO-14-749. Washington, D.C.: July 30, 2014. Littoral Combat Ship: Deployment of USS Freedom Revealed Risks in Implementing Operational Concepts and Uncertain Costs. GAO-14-447. Washington, D.C.: July 8, 2014. Navy Shipbuilding: Opportunities Exist to Improve Practices Affecting Quality. GAO-14-122. Washington, D.C.: November 19, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-738T. Washington, D.C.: July 25, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-530. Washington, D.C.: July 22, 2013. Defense Acquisitions: Realizing Savings under Different Littoral Combat Ship Acquisition Strategies Depends on Successful Management of Risks. GAO-11-277T. Washington, D.C.: December 14, 2010. National Defense: Navy’s Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program. GAO-11-249R. Washington, D.C.: December 8, 2010. Defense Acquisitions: Navy’s Ability to Overcome Challenges Facing the Littoral Combat Ship Will Determine Eventual Capabilities. GAO-10-523. Washington, D.C.: August 31, 2010. Littoral Combat Ship: Actions Needed to Improve Operating Cost Estimates and Mitigate Risks in Implementing New Concepts. GAO-10-257. Washington, D.C.: February 2, 2010. Best Practices: High Levels of Knowledge at Key Points Differentiate Commercial Shipbuilding from Navy Shipbuilding. GAO-09-322. Washington, D.C.: May 13, 2009. Defense Acquisitions: Overcoming Challenges Key to Capitalizing on Mine Countermeasures Capabilities. GAO-08-13. Washington, D.C.: October 12, 2007. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255. Washington, D.C.: March 1, 2005. | GAO has reported extensively on LCS—an innovative Navy program, consisting of a ship and its mission packages. The Navy bought the first two ships using research and development funds, initially planning to experiment with them to test concepts and determine the best design. As GAO reported in July 2013, the Navy later opted to fund additional ships without having completed this planned period of discovery and learning. Further, LCS 1 and LCS 2 have experienced major cost growth and schedule delays. In August 2010, GAO reported that the ships were incomplete at delivery and in November 2013, GAO reported on significant quality problems with Navy ships, including LCS 1 and LCS 2, noting that the Navy regularly accepts ships with numerous open deficiencies. Congress mandated that GAO review the Navy's compliance with federal regulations in accepting LCS 1 and LCS 2. This report (1) assesses the extent to which the Navy complied with applicable federal regulations, policies, and contracts and (2) evaluates the basis for and outcomes from decisions to accept these ships. To conduct this work, GAO analyzed applicable federal regulations, policies, contracts, and program documentation, and spoke with relevant Department of Defense (DOD) and contractor officials. Navy decisions to accept the first two littoral combat ships (LCS)—LCS 1 and LCS 2—in incomplete, deficient conditions complied with the Federal Acquisition Regulation's (FAR) acceptance provisions, largely due to the cost-reimbursement type contracts in place to construct these ships. The Navy also met FAR requirements related to responsibility for and place of acceptance, among other provisions, by using an authorized Navy representative to accept each ship at its respective contractor's facility. Under the cost-reimbursement contracts, the LCS 1 and LCS 2 prime contractors were only required to give their best efforts to complete quality-related activities—along with the other work specified in the contracts—up to each contract's estimated cost. These efforts resulted in both ships not completing all required sea trials—tests that evaluate ships' overall quality and performance against contractual requirements—including acceptance and final contract trials, as shown in the table below. Not completing these trials increased knowledge gaps related to ship performance and deficiencies. In addition, LCS 1 and LCS 2 did not meet the quality standards outlined in the Navy's ship acceptance policy, although the policy also contains several notable flexibilities to these standards. In particular, the policy recognizes situations where the Navy may defer work until after delivery and final acceptances and affords the Chief of Naval Operations the authority to waive certain quality standards outlined in the policy. The Navy relied extensively on these waivers to facilitate its trials and acceptance processes for LCS 1 and LCS 2. Navy decisions to accept delivery of LCS 1 and LCS 2 in incomplete, deficient conditions were driven by a focus on near-term cost performance by shipbuilders, a desire to introduce the long-delayed ships to the fleet, and—in the case of LCS 1—environmental and treaty considerations associated with constructing that ship adjacent to the Great Lakes. The Navy prioritized these factors over its quality assurance processes for both ships, which has caused it to devote considerably more time and money to resolving deficiencies after delivery than anticipated. However, because the Navy did not establish clear deadlines for resolving ship deficiencies, corrections were allowed to lag, to the point that fleet operators inherited unresolved deficiencies on each ship. These deficiencies have constrained recent shipboard operations. Because the opportunity to implement acquisition changes to these two ships has passed, GAO is not making any new recommendations in this report, but has made prior recommendations to improve LCS acquisition. DOD has acted on some, but not all, of these. |
The North Atlantic Treaty was signed on April 4, 1949, by 12 European and North American countries to provide collective defense against the emerging threat that the Soviet Union posed to the democracies of Western Europe. Since its inception, NATO’s key objective has been to achieve a lasting peace in the North Atlantic area that is based on the common values of democracy, rule of law, and individual liberty. Currently, 28 countries are members of NATO. Article 10 of the treaty permits accession of additional European states if they are in a position to further the treaty’s principles and contribute to North Atlantic security. Under Article 5 of the North Atlantic Treaty, members of NATO agree that an armed attack against any member is considered to be an attack against them all. The NATO PfP program was launched at the January 1994 NATO summit in Brussels as a way for the alliance to engage the former members of the Warsaw Pact and other former communist states in Central and Eastern Europe. Currently, 22 countries from Europe, Eurasia, and Central Asia are in the PfP program. The objectives of the partnership are to (1) facilitate transparency in national defense planning and budgeting processes; (2) ensure democratic control of defense forces; (3) maintain the capability and readiness to contribute to crisis response operations under the United Nations (UN) and other international organizations; (4) develop cooperative military relations with NATO for the purposes of joint planning, training, and exercises for peacekeeping; search and rescue; and humanitarian operations; and (5) develop forces that are better able to operate with NATO members. NATO also uses the PfP to support countries interested in NATO membership, although it does not promise eventual membership. NATO does not extend Article 5 protection to PfP countries or any country other than NATO members. In addition to the PfP program, NATO has established partnerships with other groups of countries located beyond Europe, Eurasia, and Central Asia to build security relationships and maintain dialogue with countries in other regions of the world. NATO established the MD partnership in 1994—the same year as the PfP. As of September 2010, it includes seven African and Middle Eastern countries. At the June 2004 NATO Summit in Istanbul, NATO established the ICI, and invited six countries of the Gulf Cooperation Council to participate. NATO has also established formalized partnership relationships with additional countries, referring to them as “Partners across the Globe.” Since the mid-1990s, NATO has initiated several military operations, most notably the International Security Assistance Force (ISAF) in Afghanistan. Initially, ISAF was a coalition of volunteering countries deployed under the authority of the UN Security Council. In August 2003, the Alliance assumed strategic command, control, and coordination of the mission and established a permanent ISAF headquarters in Kabul. Since then, the operation has grown to about 120,000 troops from 47 countries, including all NATO members, as of August 2010. NATO also intervened militarily in the aftermath of the disintegration of the former Yugoslavia to halt conflict in Bosnia-Herzegovina in 1995, Kosovo in 1999, and Macedonia in 2001. Since December 2004, the NATO-led Kosovo Force (KFOR) has been the only remaining large-scale Allied force deployment in the Balkans, although NATO maintains headquarters in Sarajevo, Bosnia-Herzegovina; and Skopje, Macedonia; to assist the host governments in defense reform and NATO integration. In addition, NATO’s naval forces lead Operation Active Endeavour, a maritime surveillance operation, launched after the September 11, 2001, terrorist attacks, to detect, deter, and protect against terrorist activity in the Mediterranean. NATO vessels started patrolling the Eastern Mediterranean in October 2001 and eventually expanded to the entire Mediterranean in March 2004. NATO also has a noncombat training mission in Iraq, begun in 2004; and a counterpiracy mission off the Horn of Africa, known as Operation Ocean Shield, begun in 2009. DOD launched the WIF program in July 1994 to support countries that are members of the PfP program. DOD uses defense-wide Operation and Maintenance, and Research and Development funds for the WIF program according to the laws and policies governing these types of funds. The WIF program’s goals include: assisting PfP partners in building defense institutions that are transparent, accountable, and professional; improving U.S./NATO-PfP partner interoperability to enhance partner contributions to coalition operations; supporting PfP partner integration with NATO; and ensuring democratic control of the armed forces. WIF funding supports the participation of PfP countries in bilateral and multilateral military exercises and military contact programs, including seminars, workshops, conferences, exchanges, and visits. Within DOD, different components are responsible for the implementation of the WIF program. Appendix II provides descriptions of these components and the level of WIF funding allocated to them in the fiscal year 2010 budget. WIF funding may also be used in conjunction with other security cooperation programs that support the goals of the WIF and PfP programs. Appendix III provides descriptions of these related programs and the level of funding they provided to PfP countries in fiscal year 2009. DOD relies on other funding, such as the Coalition Support Fund, to cover the cost of partner countries’ participation in NATO operations. The PfP program has evolved in four key ways since July 2001, when we last reported on the program. First, several PfP countries from Central and Eastern Europe have become members of NATO, resulting in a decline in the total number of PfP countries and the number of PfP countries aspiring to NATO membership. Second, NATO has developed additional mechanisms for engaging with PfP countries, allowing partners additional opportunities to tailor their participation in the PfP based upon their individual objectives and capacities. Third, the growing size and significance of the NATO operation in Afghanistan has increased NATO’s emphasis on developing PfP countries’ capabilities for participating in NATO military operations and the strategic importance of the Caucasus and Central Asian PfP countries to NATO, given their proximity to Afghanistan. Fourth, as NATO has taken steps to wind down its peacekeeping efforts in the Balkans, it has increasingly used the PfP to build cooperative relationships with countries in the region, marking a shift in its role in stabilizing that part of Europe. Since 2001, several PfP countries from Central and Eastern Europe have become members of NATO, resulting in a decline in the total number of PfP countries and the number of PfP countries aspiring to NATO membership. While NATO has utilized the PfP for a variety of purposes, historically, NATO’s primary focus for the program has been to assist interested countries in preparing to become NATO members. However, the PfP’s function as a pathway to membership has diminished as the composition of countries in the program has changed. As figure 1 shows, 12 former PfP countries have joined NATO since the PfP’s establishment in 1994, including 9 countries since our previous report on the PfP in 2001. While 9 countries have left the PfP since 2001, 5 new countries have also joined—Bosnia-Herzegovina, Malta, Montenegro, Serbia, and Tajikistan—bringing the total number of current PfP members to 22 (see fig. 2). While the PfP has always included some countries that did not aspire to join NATO, NATO and U.S. officials with whom we spoke noted that the number of PfP countries seeking NATO membership has declined as the majority of those countries interested in joining have already done so. Of the 22 countries currently in the PfP, only 4 are actively pursuing NATO membership: Bosnia-Herzegovina, Georgia, Macedonia, and Montenegro. Ukraine had previously pursued NATO membership, but is no longer doing so, given the outcome of the country’s February 2010 presidential elections. Three of the countries aspiring to membership—Bosnia-Herzegovina, Montenegro, and Macedonia—have been offered a MAP, the final step that countries complete before NATO offers membership. Nine of 26 PfP countries had MAPs at the time of our previous report in 2001. During the MAP process, countries are required to undertake an intensive set of reforms that extend beyond their defense institutions, in order to bring the countries in line with NATO standards. Macedonia has had a MAP since 1999, and NATO has committed to offering it membership as soon as it resolves its dispute with Greece over its constitutional name. NATO has offered the other two countries a MAP only within the last year. NATO’s Foreign Ministers offered Montenegro a MAP in December 2009. In April 2010, the NATO Foreign Ministers voted to offer Bosnia- Herzegovina a MAP; however, the Foreign Ministers decided that Bosnia- Herzegovina can only fully participate in MAP once it takes the necessary steps to transfer ownership of various immovable military assets (such as bases) from its two entity governments to the central government. Most current PfP countries have not indicated an interest in joining NATO, or, in the case of the five Central Asian PfP countries, are not eligible for NATO membership because of their geographic location outside of Europe. According to NATO, U.S., and PfP country officials, these countries participate in the PfP for a variety of reasons including the opportunity for dialogue with NATO on security issues, the ability to access NATO training and technical assistance to support reform efforts and build interoperability with NATO, the opportunity to contribute to NATO operations, and the desire to counter external pressures from other countries. Since our report in 2001, NATO has created a variety of new partnership mechanisms and modified existing mechanisms to allow PfP countries to tailor their participation in the program based upon their unique capacities and objectives. With nine PfP countries having joined NATO since 2001, leaving fewer countries aspiring to membership, these mechanisms enable current PfP countries to structure their cooperation with NATO in ways other than the MAP process. The 22 countries currently in the PfP differ significantly in terms of geographic location, military capabilities, political systems, and economic development, ranging from developed Western European democracies, such as Switzerland, to developing, authoritarian states in Central Asia, such as Turkmenistan. These mechanisms allow this diverse group of PfP countries the flexibility to shape their participation in the PfP based upon their unique needs (see table 1). Three of the mechanisms in table 1, the Individual Partnership Programme, the Planning and Review Process, and the Operational Capabilities Concept focus primarily on PfP countries’ defense and military goals. The three other mechanisms in figure 3, the Individual Partnership Action Plan, the Annual National Programme, and the MAP, also allow PfP countries to establish defense and military goals. However, these mechanisms are broader in scope with countries also identifying political, legal, economic, security, and other goals they would like to work with NATO to achieve. Individual Partnership Programme. Since NATO established the PfP program in 1994, all participating countries prepare, at a minimum, Individual Partnership Programme documents. Individual Partnership Programmes identify each country’s national policy for participating in the PfP, the forces and assets they are willing to make available for PfP activities, and the areas in which they would like to pursue cooperation with NATO. In developing Individual Partnership Programmes, countries select partnership activities and events in which they would like to participate. To improve this process, NATO developed the Euro-Atlantic Partnership Work Plan (EAPWP) in 2004. The EAPWP, which is developed for a 2-year period, lists activities and events offered by NATO, as well as by individual NATO members and other PfP countries. In the 2010-2011 EAPWP, there are over 1,200 activities sorted into 34 areas of cooperation (for more details about these areas of cooperation, see app. IV). Planning and Review Process. NATO established the Planning and Review Process in 1994, and modeled it on NATO’s own force planning system. The Planning and Review Process allows PfP countries to work more closely with NATO to enhance their interoperability with NATO forces and strengthen their defense institutions. The 18 countries participating in the Planning and Review Process work with NATO to assess their defense capabilities, identify potential contributions to NATO exercises and operations, and select specific goals for developing their defense capabilities and building interoperability (see app. V for further information on partnership goals participating countries have selected through the Planning and Review Process). NATO has made modifications to the Planning and Review Process over time. For instance, in 2004, NATO modified the Planning and Review Process’ goals to further support defense reform, defense institution building, and the fight against terrorism. Operational Capabilities Concept. In 2004, NATO introduced the current version of the Operational Capabilities Concept to assist PfP countries in improving their ability to work effectively with NATO forces during military operations. Thirteen countries participate in the Operational Capabilities Concept. Through this process, countries identify specific military units that they want to develop to NATO standards. NATO then evaluates and certifies these units as ready to participate in NATO operations. Individual Partnership Action Plan. NATO created the Individual Partnership Action Plan mechanism in 2002 to allow PfP countries to develop deeper and more individualized cooperation with NATO than the Individual Partnership Programme, without having to commit to pursuing NATO membership. The Individual Partnership Action Plan process is a 2- year cycle in which participating partners identify specific goals for cooperation with NATO related to political, economic, and other reforms in addition to their defense and military goals. As part of the Individual Partnership Action Plan process, NATO also conducts assessments of the progress participating partners are making toward meeting these goals. Of the five countries currently with Individual Partnership Action Plans, only Bosnia-Herzegovina aspires to become a NATO member. Annual National Programme and MAP. Annual National Programmes are associated with countries aspiring to become NATO members. The Annual National Programme process is similar to that for the Individual Partnership Action Plan and they address similar types of issues; however, Annual National Programmes are updated every year and NATO expects participating countries to establish more ambitious reform objectives that will bring their institutions in line with NATO standards. Additionally, NATO assesses participating countries’ progress in achieving reform objectives annually instead of biennially and places greater scrutiny on the extent and pace of progress. In the past, only countries in the MAP process completed Annual National Programmes. However, in 2008, NATO offered Georgia and Ukraine Annual National Programmes, but not MAPs, to acknowledge their membership aspirations, reward them for the progress they had already demonstrated in undertaking reforms, and encourage them to set goals and undertake additional reforms consistent with NATO standards. When NATO’s Foreign Ministers voted to offer Bosnia-Herzegovina a MAP in April 2010, they decided that NATO would not accept Bosnia-Herzegovina’s first Annual National Programme until it had taken the necessary steps to transfer ownership of its immovable military assets from its two entity governments to the central government. The growing size and significance of the NATO operation in Afghanistan has increased both NATO’s emphasis on developing PfP countries’ capabilities for participating in NATO military operations and the strategic importance of the Caucasus and Central Asian PfP countries to NATO, given their proximity to Afghanistan. In recent years, NATO has made the operation in Afghanistan its top priority and ISAF has grown from 5,000 to approximately 120,000 troops since NATO assumed command of the force in August 2003. Consequently, NATO has placed an increased emphasis on obtaining support from PfP countries for this operation. This focus has been highlighted in NATO summit statements. For instance, at their 2004 Istanbul Summit, NATO Heads of State declared their intention to provide partners with increased opportunities to enhance their contributions to NATO-led operations, and to help transform their defenses in keeping with NATO’s own evolving operational roles and capabilities. At their 2008 Bucharest Summit, NATO Heads of State affirmed the high value they place on partners’ contributions to NATO operations and stated they would continue to strive to increase interoperability between NATO and partner forces. The importance of PfP countries to NATO’s efforts in Afghanistan has also been emphasized by various NATO and NATO member country officials. For instance, during a 2010 speech on NATO’s partnerships, the U.S. Ambassador to NATO stated that partner assistance to NATO’s operation in Afghanistan is the best example of what partnerships can accomplish. As shown in figure 3, a range of PfP countries have contributed troops for ISAF. NATO reports that 11 PfP countries had almost 2,000 troops deployed in Afghanistan, as of August 2010. None of the Central Asian countries, or Russia, Belarus, Moldova, and Malta contribute troops to ISAF. Eight additional NATO partner countries that are not in the PfP program also contribute troops to ISAF, including Australia, which contributes approximately 1,450 troops. Some PfP countries that do not provide troop contributions to NATO operations offer other types of support, such as overflight access, land access, or basing rights. Four of the five Central Asian PfP countries provide logistic and/or host nation support to ISAF. For instance, in May 2009, Uzbekistan signed an agreement with NATO that allowed for the rail transit of nonmilitary goods through its territory to Afghanistan to support NATO operations. Turkmenistan is the only Central Asian country that has not provided such support. In addition to contributing troops to ISAF, two Caucasus countries, Georgia and Azerbaijan, also provide logistic support, including allowing overflight rights and the rail transit of nonmilitary goods. NATO and U.S. officials with whom we met stated that this type of assistance from the Caucasus and Central Asian PfP countries is critical to NATO’s execution of the war in Afghanistan. Additionally, NATO has noted that the relationships developed through the PfP have laid the basis for many of these agreements. In addition to ISAF, NATO has looked to partners to provide troop contributions to KFOR. As figure 4 shows, six PfP countries contributed troops to NATO’s operation in Kosovo, as of February 2010. These six countries include five Western European partners and Ukraine. Morocco, an MD partner, also contributed 213 troops to KFOR, as of February 2010. 82.2% NATO has noted that partners’ contributions to ISAF and KFOR have helped ease the burden on its members from conducting multiple operations. A fourth key way the PfP has evolved since our previous report on the PfP centers on NATO’s efforts in the Balkans. As figure 5 shows, NATO has established several peacekeeping missions in the Balkans since the mid-1990s. However, as NATO has taken steps to wind down its peacekeeping efforts in the Balkans, it has increasingly used the PfP to build cooperative relationships with countries in the region, marking a shift in its role in stabilizing that part of Europe. NATO has relied on the promise of these cooperative relationships and eventual NATO membership to encourage reforms in the Balkan countries designed to reduce the risk of future violence. Since our report in 2001, NATO has continued to invite additional countries in the Balkans to participate in the PfP. As of 2010, NATO has invited all the Balkan countries to participate in the PfP, with the exception of the newly independent Kosovo. Before inviting Bosnia- Herzegovina, Montenegro, and Serbia to join the PfP in 2006, NATO placed various requirements on the three countries. For instance, NATO required the countries to cooperate fully with the International Criminal Tribunal for the former Yugoslavia. Additionally, NATO required that Bosnia-Herzegovina eliminate its two entities’ parallel defense structures and develop a unified command and control structure. Montenegro and Bosnia-Herzegovina have progressed in their membership aspirations since joining the PfP in 2006. Montenegro joined the MAP process in December 2009 and NATO invited Bosnia- Herzegovina to do so in April 2010; however, it must resolve the issue of transferring its immovable defense property, such as military bases, to state control before it can fully participate. The two countries have also cooperated with NATO on various reforms. For instance, a representative from Montenegro’s delegation to NATO noted that his country has worked closely with NATO to complete a Strategic Defense Review and has made significant progress in tailoring the size and composition of its military to its actual needs. A representative from Bosnia-Herzegovina’s delegation to NATO stated that his country has made strides in ensuring civilian control over the military through Bosnia-Herzegovina’s participation in the PfP. A NATO official based in Sarajevo also noted that Bosnia-Herzegovina has almost completed the process of unifying its military under state control. While Serbia has not engaged with NATO to the same extent as Bosnia-Herzegovina or Montenegro, it has also taken steps to further its participation in the PfP. For instance, it joined the Planning and Review Process in 2007. Additionally, NATO and Serbia created a Serbia-NATO Defense Reform Group in 2006 to support Serbia’s efforts to reform and modernize its military. Two Balkan countries—Albania and Croatia—became NATO members in April 2009. A year earlier at NATO’s Bucharest summit, the heads of state from NATO countries noted that the two countries had demonstrated their commitment to the promotion of collective security among the NATO countries and had embraced NATO’s shared values. The President’s Report to Congress on the Future of NATO Enlargement in 2009 highlighted the role the PfP had played in preparing the two countries to assume the responsibilities of membership. For instance, the report noted that the PfP had assisted the two countries in making significant progress in reforming their militaries and developing forces that were interoperable with NATO. In addition, NATO has determined that Macedonia has also successfully met the requirements for membership and will be admitted into NATO once it has resolved its dispute with Greece over its name. NATO’s new Strategic Concept is expected to highlight the importance of the PfP and other NATO partnerships and discuss ways to strengthen these partnerships further. Specifically, NATO is debating how to (1) strengthen its partnerships with countries outside of the PfP, (2) enhance routine and crisis consultations with PfP countries on security issues, (3) more effectively engage with PfP countries, such as those in Central Asia, that are not seeking membership, and (4) balance PfP countries’ aspirations for membership with Russian concerns about NATO expansion. NATO’s new Strategic Concept is expected to highlight the importance of the PfP and NATO’s other partnerships, given the widespread acknowledgment among NATO members that partnerships are critical to NATO’s ability to address many of the security challenges it faces, including terrorism and the proliferation of weapons of mass destruction. The Group of Experts’ May 2010 report to NATO’s Secretary General highlighted the importance of partnerships, citing the strengthening of partnerships as one of NATO’s four core tasks for the next 10 years. As figure 6 shows, NATO’s partnerships extend beyond the PfP and include countries from around the world that fall into various partnership groupings including the MD, the ICI, and Partners across the Globe. Some NATO members, including the United States, have advocated for NATO to pursue a more global partnership agenda. According to a U.S. mission to NATO official, the United States had previously proposed eliminating the distinctions between NATO’s various partnership programs and creating one consolidated, global partnership program. Some NATO stakeholders have argued that NATO is an organization facing global security threats and that by strengthening partnerships with key countries around the world, it will allow NATO to better draw upon these partnerships as such threats arise. However, some NATO members, such as France and Germany, have been reluctant to make these partnerships a key focus for NATO, believing that it pushes NATO away from its traditional focus on Europe. These NATO members believe that NATO should continue to place the PfP above its other partnership efforts, given the PfP countries’ geographic proximity to NATO territory. Various NATO stakeholders have also raised concerns that if NATO increases its engagement with partners outside of the PfP it will result in declining NATO resources for PfP countries, given NATO’s expected budget shortfalls in upcoming years. As the scope of NATO’s partnerships is debated, NATO is also considering steps to work more effectively with its partners in the MD and the ICI. The Group of Experts noted in its report that the accomplishments of the MD and ICI programs have been relatively modest to date. Accordingly, various NATO stakeholders have recommended that NATO focus its efforts on areas of mutual concern such as nonproliferation, terrorism, missile defense, and Iran. To this end, the Group of Experts recommends that NATO develop a statement of shared interests with the two partnerships to further cooperation in such areas. Additionally, NATO’s Allied Command Transformation recommends that NATO should seek to review and reenergize its relationships with partners in the two programs in order to increase the scope and frequency of both its formal and informal engagements with these partners. One option NATO is considering is to increase MD and ICI countries’ access to partnership mechanisms that are currently only available to PfP countries. For example, these countries do not have access to all of the activities in the EAPWP. They are also not entitled to participate in the Planning and Review Process or develop Individual Partnership Action Plans. Unlike the MD and ICI, NATO has not developed a formal partnership structure for cooperation and dialogue with its Partners across the Globe; however, it is assessing ways to deepen its partnership with these countries. Several of these partners are key contributors to NATO’s operation in Afghanistan. For example, Australia has contributed more troops than many NATO members. Japan, while not contributing troops, has funded billions of dollars in reconstruction projects. Both NATO’s Allied Command Transformation and the Group of Experts have recommended that NATO provide mechanisms to enable global partners to have a meaningful role in shaping strategy and decisions on missions to which they contribute. U.S. officials with whom we spoke noted that these countries are not seeking formalized partnerships with NATO, but are seeking such mechanisms to allow for better coordination with NATO on joint efforts. NATO stakeholders have cited the need for NATO to strengthen its existing commitments to PfP countries to hold consultations with those countries facing security threats. The PfP Framework Document states that, “NATO will consult with any active participant in the Partnership if that Partner perceives a direct threat to its territorial integrity, political independence, or security.” Some NATO stakeholders view NATO’s failure to hold such consultations with Georgia during the August 2008 Russia-Georgia war as evidence that NATO’s current commitments to hold consultations with PfP countries in such situations are insufficient. In recognition of such concerns, the Group of Experts recommended that NATO strengthen crisis consultations, as provided for in the PfP Framework Document. However, a U.S. official with whom we spoke noted that some NATO members are reluctant to strengthen such commitments due to concerns that it may involve NATO in conflicts that are not in NATO’s best interests or create unrealistic expectations among PfP countries regarding potential NATO assistance. Revitalizing existing NATO-PfP councils may also be needed to improve ongoing dialogue between NATO and the PfP countries. The Euro- Atlantic Partnership Council (EAPC) is the forum in which all NATO members and PfP countries come together to discuss relevant political and security issues. NATO and the PfP countries are currently considering various proposals to make the EAPC more dynamic and relevant, including linking the agenda more closely with that of the North Atlantic Council and focusing more on practical issues, such as energy security, where there is opportunity for mutual cooperation. Some NATO stakeholders with whom we met noted that the diversity of countries in the PfP has made substantive and frank discussion at the EAPC challenging, because some PfP countries are reluctant to discuss their security concerns, given other countries that attend. Additionally, stakeholders noted that because the EAPC is not a decision-making body, its meetings seldom result in specific outcomes. Some NATO stakeholders have also cited the need for NATO to revitalize its commitment to conduct routine and crisis consultations with the priority countries of Russia, Ukraine, and Georgia through existing bilateral councils or commissions. For instance, NATO leaders noted at their 2009 summit that the NATO-Russia Council has not always been adequately utilized and recommended that NATO use the Council to focus on areas where there are opportunities for cooperation, such as nonproliferation, arms control, and counterterrorism. The Group of Experts recommended that NATO regularly make use of the NATO- Ukraine and NATO-Georgia Commissions to discuss mutual security concerns and foster practical cooperation in areas such as defense reform. Other NATO stakeholders have called for NATO to ensure that it honors its commitments to Ukraine and Georgia to, through the two commissions, provide the countries with additional assistance in implementing political and defense reforms. NATO is also considering how it might increase the effectiveness of its efforts to encourage reforms in PfP countries that are not aspiring to NATO membership. In particular, NATO has cited Central Asia, which has no PfP countries aspiring to membership, as a key area of focus for the PfP since 2004; however, it has struggled to effectively engage with the five countries in the region. For instance, only one of the five countries in the region, Kazakhstan, has elected to develop an Individual Partnership Action Plan. NATO has identified various challenges in engaging these partners, including their reluctance to have their defense ministries scrutinized, their limited financial resources and personnel available for participation in NATO activities, their close relationship with Russia, and their distance from Europe. To enhance engagement with Central Asian countries, NATO is seeking better coordination among members’ bilateral assistance programs. One initiative centers on NATO’s clearinghouse mechanisms. These clearinghouses are designed to bring together PfP country representatives and security cooperation officials from NATO countries. Through the clearinghouses, partners can discuss their needs and then NATO members are able to volunteer to provide assistance to meet those needs. NATO has already established such clearinghouses for some PfP countries, such as those in the Caucasus, and is considering establishing one for Central Asia. A NATO official noted that NATO should do a better job of leveraging the types of assistance that individual members can provide that NATO itself cannot, such as the provision of equipment. As an example, the official noted that a Central Asian country has requested radar equipment to support border security requirements. The official noted that if a NATO member would commit to providing this equipment, NATO could use this as an opportunity to encourage the country to take certain actions, including providing additional support for its operation in Afghanistan. As part of its strategy, NATO intends to place a liaison officer in Central Asia to assist in the coordination of NATO members’ bilateral assistance and to increase communication between NATO and Central Asian government officials. Various NATO stakeholders have stated that NATO needs to maintain a credible “Open Door Policy” that supports the aspirations of those PfP countries that are seeking NATO membership. Some NATO members and PfP countries have expressed concern that NATO has allowed Russia undue influence in enlargement decisions, particularly for Georgia. In February 2010, U.S. Secretary of State Hillary Clinton stated that NATO membership should be a process between the country and NATO, with no outside party being able to adversely influence the outcome. In addition, the Group of Experts report emphasized the need for a strong Open Door policy stating that NATO should ensure consistency with Article 10 of the North Atlantic Treaty and its principles for enlargement by allowing states interested in joining NATO to move forward as they fulfill their requirements for membership. Certain NATO members have advocated for a slower approach to the prospective membership of some PfP countries to avoid antagonizing Russia. At NATO’s January 2010 Strategic Concept seminar, some participants stated that Russian concerns about enlargement should be taken into account. Additionally, some stakeholders have noted that, while NATO should reaffirm its commitment to maintain an open door policy, a slow path to membership for Georgia, would help ease tensions with Russia and provide greater possibilities for NATO-Russia cooperation. As a result of the changing composition of countries in the PfP program, total WIF funding dropped significantly in 2006, and the majority of funds are no longer distributed to countries aspiring to join NATO. DOD also established the DIB program in 2006 as a key focus of the WIF program; however, this relatively new program has faced challenges with its implementation. DOD last formally evaluated the WIF program in 2001 before key changes to both the WIF and PfP programs were implemented. Since 1999, 12 PfP countries have become NATO members. As a result, fewer PfP countries remain eligible for WIF funding. In 2001, when we last reported on the WIF program, 21 countries were eligible for WIF funding; in 2010, 16 are eligible. According to DOD officials, the decline in the number of WIF-eligible countries contributed to the decreases in WIF budgets. From fiscal years 1996 through 2005, total annual WIF funding averaged about $43 million. From fiscal years 2006 through 2010, annual WIF funding has averaged about $29 million. The distribution of WIF funding among eligible PfP countries also has changed since the initial years of the program. In our 2001 report on the WIF program, we found that WIF funding was primarily targeted to countries aspiring to become members of NATO. From 1994 through 2000, about 70 percent of WIF funding was distributed to 12 aspiring countries, according to the 2001 report. With the exception of Macedonia, these countries became NATO members and lost WIF funding. As of September 2010, only four countries aspire to join NATO. As a result, as table 2 shows, the fiscal year 2010 WIF budget only distributes about 20 percent of its funding to aspiring countries. In addition, a significant share of the fiscal year 2010 WIF budget—about 35 percent—was devoted to supporting the participation of eligible PfP countries in bilateral or multilateral military exercises. WIF funding was budgeted to support the participation of PfP countries in a number of exercises in fiscal year 2010 ranging from 10 for Georgia to 2 for Turkmenistan and Uzbekistan. DOD views these exercises, which are sponsored by the United States, NATO, or other countries, as a key means of building participating countries’ military capability and interoperability with U.S. and NATO forces. According to DOD officials, WIF provides a key source of funding to enable PfP developing countries to participate in these exercises. According to DOD officials, exercises are occasionally cancelled due to political factors in host countries. In fiscal year 2009, four exercises were cancelled, according to DOD. For example, a U.S.-sponsored multilateral exercise, known as Sea Breeze, hosted by Ukraine was cancelled in 2009 when the Ukrainian Parliament failed to authorize foreign troops to enter the country to participate. Consequently, the actual number of exercises WIF supports and amount of WIF funding devoted to exercises are likely to be lower than the budget reflects. DOD established the DIB program in 2006 as a key focus of the WIF program. The DIB program, which received about 20 percent of the fiscal year 2010 WIF budget, is designed to help eligible PfP countries develop accountable, professional, and transparent defense establishments. The DIB program is also intended to complement NATO’s Partnership Action Plan on Defense Institution Building, which NATO established with similar objectives in 2004. Approved activities in the fiscal year 2010 budget for the DIB program included assisting with strategic defense reviews; developing defense planning, budgeting, and resource management systems; developing professional military education programs; improving human resource management systems; and preparing countries to contribute to peacekeeping operations. In its initial years, the DIB program conducted surveys of PfP countries’ defense institutions and developed “roadmaps” to outline key steps the countries needed to take to achieve required reforms. According to DOD, the program has surveyed 11 PfP countries. The DIB program has faced a variety of challenges in its first few years, which have contributed to frequent cancellations of DIB-sponsored activities. In fiscal year 2009, the DIB program executed only about $650,000 in originally approved activities in its $6.4 million budget. We also found that the DIB program did not execute any of its five originally approved activities in the fiscal year 2010 budget for Georgia and only one of seven for Bosnia-Herzegovina. DOD officials attributed the lack of execution to the existence of similar assistance provided through FMF- funded contracts in some countries and limited interest in DIB program activities in others. First, DOD officials told us that Bosnia-Herzegovina and Georgia were already receiving similar assistance funded through the FMF program. For example, the DIB program included activities in its fiscal year 2010 budget to help Bosnia-Herzegovina implement its strategic defense review and create a human resource management system. However, FMF- funded advisors were already embedded in Bosnia-Herzegovina’s Ministry of Defense and Joint Staff assisting with these efforts. In Georgia, both FMF and DIB funding were directed to help Georgia with its “defense transformation,” according to DOD documents. FMF funding provided $3.8 million in fiscal year 2009 and $2.5 million in fiscal year 2010 for a contract that provides advice and assistance to Georgia’s Ministry of Defense and Air Force for defense sector transformation, according to DOD. This included the building of institutions and systems, the development of doctrine and curricula, the conduct of a National Security Review, and the training of Ministry of Defense and Air Force personnel to improve professionalism and NATO interoperability. At the same time, the DIB program included $750,000 for defense transformation in its fiscal year 2010 budget for Georgia. According to a DOD official, the DIB program did not implement this assistance, primarily because of Georgia’s preference to work through the FMF-funded advisors, who were available to provide full-time assistance, rather than intermittent guidance visits offered through the DIB program. Second, DOD officials noted that some PfP countries have been unwilling to participate in the DIB program’s surveys of their defense institutions or have lost interest in participating in follow-up activities after the surveys were completed. For example, according to a DOD official at the U.S. post in Sarajevo, Bosnia-Herzegovina’s Ministry of Defense and Joint Staff were not receptive to findings from a DIB assessment, which contributed to their decision to pursue reforms through FMF-funded advisors instead. DOD officials also noted that the PfP countries from Central Asia resist outside assessments of their defense institutions or undertaking reforms to increase transparency and accountability of these institutions. As shown in figure 7, the fiscal year 2010 WIF budget indicates that the DIB program planned limited assistance for Central Asian countries compared to countries in other regions. DOD officials noted that the DIB program is still relatively new, although it was first developed in 2006. The Office of the Secretary of Defense only recently transferred management responsibility for the DIB program to the Center for Civil-Military Relations at the Naval Postgraduate School in Monterey, California. The Center established a management team in January 2010 and intends to develop a plan for evaluating the DIB program, according to an official there. Two DOD-commissioned assessments of the WIF program were completed in 2000 and 2001. These assessments sought to analyze the objectives, activities, and accomplishments of Warsaw Initiative programs and identify the lessons learned from program implementation and results. The assessments found that the majority of WIF activities were successful in enhancing the ability of recipient countries’ militaries to contribute to NATO operations and to operate with NATO forces. The assessments also found that the WIF program should do a better job of taking into account the recipient countries’ capacities to absorb or apply the assistance provided. According to DOD officials, no formal evaluations specifically of the WIF program have taken place since these two assessments were conducted in 2000 and 2001. Federal standards for internal controls indicate that U.S. agencies should monitor and assess the quality of performance over time. Moreover, GAO’s Internal Control Tool states that separate evaluations are often prompted by events such as major changes in management plans or strategies. In commenting on our draft of this report, DOD noted that the Department has conducted periodic reviews of the WIF program and as a result, the program has evolved over time to keep pace with changes in NATO. WIF program managers conduct midyear budget reviews and program management reviews each year. The budget review is designed primarily to assess the execution of WIF funds for the first half of the year and determine if any funds should be reallocated; however, the Defense Security Cooperation Agency (DSCA) did not have data readily available on how funds were reprogrammed when events were cancelled. According to DOD officials, the program management review is a forum for program managers and stakeholders to discuss ways the program can be improved and any lessons learned. Program implementers also prepare after action reports on individual events supported by WIF funding that include evaluations of results, according to DSCA officials. In addition, DOD officials also noted that while the department does not assess results of the WIF program specifically, it monitors progress countries make in achieving broader U.S security cooperation goals, which are supported by a variety of programs and funding streams, including WIF. The WIF program provides a key source of DOD funding to support eligible countries’ participation in NATO’s PfP program. NATO’s new Strategic Concept, due at the end of 2010, will likely lead to further changes to the PfP program and other partnerships that could have implications for the WIF program. For example, DOD may need to reconsider how it defines eligibility for WIF funding to complement efforts by NATO to increase the level of cooperation activities with partner countries outside of the PfP program. DOD’s current policy is that WIF funding is only available to NATO partner countries in the PfP program. While DOD officials noted that they have undertaken efforts to periodically review and adapt the WIF program to changes in the PfP program, the last formal evaluation of the WIF program took place in 2001. This was before the focus of the PfP and WIF programs changed in response to the changing composition of participating countries and the critical need for partner contributions to the NATO-led war in Afghanistan. In addition, the challenges DOD has faced in implementing the WIF-funded DIB program, including potential duplication of other U.S.-funded assistance, heighten the need to assess whether the WIF program is effectively supporting PfP countries’ goals for cooperation with NATO and NATO’s efforts to deepen its relationships with partner countries. We recommend that, following the establishment of NATO’s new Strategic Concept, which could result in changes to NATO’s PfP program, the Secretary of Defense conduct an evaluation of the U.S. WIF program to ensure that it effectively supports the goals of NATO’s PfP program. We provided a draft of this report to the Secretaries of Defense and State for their review and comment. DOD provided oral comments stating that the Department concurs with our recommendation. In commenting on our draft, DOD noted that the Department has conducted periodic reviews of the WIF program and, as a result, the program has evolved over time to keep pace with changes in NATO. DOD and State also provided technical comments, which we incorporated in the report as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretaries of Defense and State and other interested congressional committees. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. Our objectives were to (1) describe how the Partnership for Peace (PfP) program has evolved since GAO last reported on it; (2) describe options the North Atlantic Treaty Organization (NATO) is considering for the future of the PfP and other partnership programs under the new Strategic Concept; and (3) analyze support to PfP countries through the U.S. Warsaw Initiative Fund (WIF) program. To address these objectives, we analyzed NATO, Department of Defense (DOD), and Department of State (State) documents; academic literature related to PfP and WIF programs; and WIF funding data for fiscal years 2006 through 2010. We met with DOD and State officials in Washington, D.C., and the U.S. Mission to NATO in Brussels, Belgium. We also met with NATO officials at both NATO Headquarters in Brussels and at Supreme Headquarters Allied Powers Europe in Mons, Belgium, as well as with representatives from five PfP countries and one NATO member country. In addition, we conducted phone interviews with geographic U.S. combatant command officials who have PfP countries in their areas of responsibility—European Command (EUCOM) in Stuttgart, Germany, and Central Command (CENTCOM) in Tampa, Florida. We also reviewed relevant GAO and Congressional Research Service reports to obtain additional background information on NATO, the PfP, and NATO and the United States’ security cooperation relationships with PfP countries. In addition, we selected three countries—Bosnia-Herzegovina, Georgia, and Kazakhstan—to examine NATO’s bilateral relationship with PfP partners and U.S. support through the WIF program in greater depth. We sought to pick countries that differed, among other things, in terms of their geographic location, level of participation in the PfP, interest in NATO membership, and contributions to NATO operations. We met with State and DOD officials at the U.S. Embassy in Tbilisi, Georgia; Government of Georgia officials; and NATO officials based in Tbilisi. We also conducted telephone interviews with U.S. officials in Sarajevo, Bosnia-Herzegovina; and Astana, Kazakhstan; and with an official from NATO Headquarters, Sarajevo. This sample of three countries is not intended to be representative of all countries participating in the PfP program or receiving WIF funding. To describe how the PfP program has evolved since 2001 when GAO last reported on it, we reviewed a variety of relevant NATO documents that provided information on the PfP and analyzed how it has evolved over time. These documents included background materials that NATO has produced on the PfP generally and on specific PfP mechanisms. We also reviewed materials NATO has produced describing NATO enlargement since the PfP was created in 1994 and materials describing the organization’s cooperative efforts with specific PfP countries. Additionally, we assessed the results of NATO reviews of the PfP conducted in 2002 and 2004 and reviewed NATO summit statements from 1999 through 2009 to identify decisions NATO leaders have made about the PfP. We also reviewed NATO guidance on the PfP, such as NATO’s Handbook, the 2009 Euro-Atlantic Partnership Work Plan (EAPWP) Overarching Guidance, and the 2009 Planning and Review Process (PARP) Ministerial Guidance. In order to assess PfP countries’ level of engagement with NATO and their use of key mechanisms, we also reviewed examples of Individual Partnership Action Plans, Annual National Programmes, and PARP documents. We also reviewed corresponding assessments for these documents that describe NATO’s findings about partners’ progress in achieving these goals. To identify troop contributions to NATO’s operations in Afghanistan and Kosovo, we analyzed publicly available NATO data that provided approximate figures of troop contributions by participating countries. We found these data to be sufficiently reliable for presenting the extent to which countries are contributing troops to these operations. To gather further information on how the PfP has changed since 2001, we also assessed findings in State’s annual reports to Congress on PfP developments for years 2007 through 2009. We also used information gathered in our interviews with U.S., NATO, and PfP country officials to further identify ways that the PfP program has changed since 2001. To describe options NATO is considering for the future of the PfP and other partnership programs under the new Strategic Concept, we reviewed and synthesized findings from several NATO analyses, conducted in 2009 and 2010, including the Group of Experts’ final report, NATO’s Multiple Futures Project Final Report, NATO Allied Command Transformation’s report, “Building the Alliance’s New Strategic Concept,” and the NATO Parliamentary Assembly’s recommendations regarding the new Strategic Concept. We also reviewed summary reports from two NATO conferences held in 2010 discussing the future of NATO’s partnership efforts. Additionally, we reviewed proposals by some PfP countries regarding how the Strategic Concept should address the issue of partnerships. To gain further information on considerations about NATO’s Strategic Concept and options for NATO’s partnerships, we reviewed academic articles, Congressional testimonies by NATO experts, speeches by key U.S. and NATO officials, and interviewed U.S., NATO, and PfP country officials during our visit to NATO Headquarters. To analyze support to PfP countries through the U.S. WIF program, we discussed WIF-funded activities and program monitoring with DOD officials at the Office of the Secretary of Defense, Defense Security Cooperation Agency (DSCA), EUCOM, and CENTCOM. We also discussed the WIF program with security assistance officers at U.S. embassies in Bosnia-Herzegovina, Georgia, and Kazakhstan. In addition, we discussed the WIF program with an official from the Center for Civil-Military Relations at the Naval Postgraduate School in Monterey, California, which is responsible for managing the WIF-funded Defense Institution Building (DIB) program. We also reviewed DSCA guidance on the WIF program, and annual budget submissions and memos. In addition, to assess the extent of DOD’s past evaluations of the WIF program, we reviewed the findings of two independent assessments of the WIF program completed in 2000 and 2001, a July 2005 audit of the WIF program by the DOD Inspector General, and our July 2001 report on the NATO PfP and WIF programs. To present information on WIF funding priorities and the distribution of funding among eligible countries, we analyzed WIF summary budget data for fiscal years 2006 through 2010 from DSCA. According to DOD, no reliable data showing the distribution of WIF budgets among eligible countries were available before fiscal year 2006. We also analyzed all approved activities in the fiscal year 2010 WIF budget to determine how WIF funding was distributed among eligible PfP countries and by type of activity. We focused on fiscal year 2010 budget data because, for fiscal years 2006 through 2009, DOD grouped a significant share of the WIF budget into a multiple country category. For example, in fiscal year 2009, the WIF budget allocated about $11 million out of a total of about $30 million in WIF funding to the multiple country category. The fiscal year 2010 WIF budget attributed more of the funding to specific countries and allocated only about $2 million to the multiple country category. Consequently, country breakouts in the fiscal year 2010 budget are more meaningful than in previous years. We also analyzed data on canceled activities approved in the WIF budgets for fiscal years 2009 and 2010 from DSCA and corroborated this information through interviews or emails with officials from DSCA; combatant commands; and the U.S. posts in Bosnia, Georgia, and Kazakhstan. To assess the reliability of DOD’s WIF budget data, we interviewed DSCA officials about the data and reviewed all the approved activities in the WIF budgets for fiscal years 2009 and 2010. We also discussed WIF funding with security assistance officers at U.S. posts in Bosnia-Herzegovina, Georgia, and Kazakhstan to help verify the accuracy of DSCA budget data in these countries. We found the WIF budget data used in this report to be sufficiently reliable to present the distribution of the fiscal year 2010 WIF budget among eligible countries and specific types of activities, such as support for PfP countries’ participation in military exercises and the DIB program. We conducted this performance audit from November 2009 to September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Within DOD, multiple components implement the WIF program. The Office of the Secretary of Defense is responsible for the development, coordination, and oversight of policy and other activities related to the WIF program. DSCA manages the program and provides the funding to different implementing components that are responsible for executing the program. Table 3 describes these implementing components. The portion of WIF funding that supports PfP countries’ participation in military exercises comes from WIF budget allocations to the relevant combatant commands. The combatant commands also use some of their WIF funding for military contact programs. Table 4 describes U.S. security cooperation programs that provide assistance related to the goals of the WIF program and NATO’s PfP program. The relevant geographic combatant commands (COCOM) and security assistance officers based at U.S. posts in recipient countries play a key role in ensuring that the WIF program complements the other available sources of funding in support of U.S. security cooperation goals. Figure 8 shows the level of funding of these programs and the WIF program to eligible PfP countries in fiscal year 2009. PfP countries are able to select partnership activities and events in which they would like to participate from the EAPWP. The EAPWP lists activities and events offered by NATO, as well as by individual NATO members and other PfP countries. It is revised every 2 years. In the 2010-2011 EAPWP, there are over 1,200 activities sorted into 34 areas of cooperation. PfP countries determine the areas of cooperation on which they wish to focus and select relevant activities in each area. Table 5 lists these areas of cooperation. Eighteen PfP countries participate in PARP. Russia, Tajikistan, Turkmenistan, and Malta are the only four PfP countries that do not currently participate in the PARP process. PARP is modeled on NATO’s own force planning system and allows interested PfP countries to work more closely with NATO to develop the interoperability of their forces and strengthen their defense institutions. Countries participating in PARP work with NATO to assess their defense capabilities, identify potential contributions to NATO exercises and operations, and select specific partnership goals for developing their defense capabilities and building interoperability. There are over 150 partnership goals that partners can choose from. There are general goals related to defense-wide issues, such as defense planning and budgeting, as well as goals specific to countries’ land, maritime, and air forces. Table 6 shows the 14 partnership goals most commonly selected by partners in 2008. The 18 countries selected an average of 37 partnership goals in 2008. Ukraine selected the most goals with 96, while Kyrgyz Republic selected the least with 15. The types of goals selected by countries varied. For instance, Western European partners’ goals for participation in the PfP program focused primarily on improving military capabilities and interoperability with NATO. The European Union (EU) and NATO have committed to adhere to common standards in the development of their armed forces, so PfP countries that are also EU members are fulfilling EU requirements by developing interoperability with NATO. The Western European PfP countries already have developed civilian-run defense institutions and, therefore, do not generally pursue goals related to those issues. Countries from the Balkans and the former Soviet Union selected goals related to improving their military capabilities and interoperability with NATO as well. However, many of these countries also identified additional objectives related to defense institution building, including goals focusing on civilian control of the military, defense budgeting and planning, and effective personnel and resource management. Key contributors to this report include Judith McCloskey, Assistant Director; Ashley Alley; Debbie Chung; Howard Cott; David Dayton; David Dornisch; Etana Finkler; and Ryan Vaughan. | The North Atlantic Treaty Organization (NATO) established the Partnership for Peace (PfP) to increase cooperation with former Warsaw Pact members and provide many of these countries with a path to NATO membership. As NATO confronts new security challenges, including the war in Afghanistan, its relationships with partner countries have grown in scope and importance. Additionally, NATO is developing a new Strategic Concept to clarify its mission and activities, including its relationship with PfP countries and other partners. The Department of Defense (DOD)-funded Warsaw Initiative Fund (WIF) supports the goals of the PfP program. GAO was asked to review (1) how the PfP program has evolved since GAO last reported on it in 2001; (2) options NATO is considering for the future of the PfP and other partnership programs; and (3) support to PfP countries through the U.S. WIF program. GAO analyzed NATO, DOD, and State Department (State) documents; and WIF funding data. GAO also interviewed DOD, State, NATO, and selected country officials. The PfP program has evolved in four key ways since July 2001, when GAO last reported on it. First, several former PfP countries from Central and Eastern Europe have become NATO members, resulting in both a decline in the number of countries participating in the PfP and in the number of PfP countries seeking NATO membership. Second, NATO has developed additional mechanisms for engaging with PfP countries, allowing partners additional opportunities to tailor their participation in the PfP based upon their individual objectives and capacities. Third, the growing size and significance of the NATO operation in Afghanistan has increased NATO's emphasis on developing PfP countries' capabilities for participating in NATO military operations and the strategic importance of the Caucasus and Central Asian PfP countries. Fourth, as NATO has taken steps to wind down its peacekeeping efforts in the Balkans, it has increasingly used the PfP to build cooperative relationships with countries in the region, marking a shift in its role in stabilizing that part of Europe. NATO's new Strategic Concept is expected to highlight the importance of the PfP and other NATO partnerships, and discuss ways to strengthen them further. First, NATO is debating how to strengthen its partnerships with a growing number of countries outside of the PfP. Some NATO members disagree about the extent to which NATO should pursue a more global partnership agenda. Second, NATO is considering options to enhance its routine and crisis consultations with PfP countries on security issues. Third, NATO is evaluating how to more effectively engage with PfP countries, such as those in Central Asia, that are not seeking NATO membership. Fourth, NATO is debating how to best balance PfP countries' aspirations for membership with Russian concerns about NATO expansion. The changing composition of countries participating in the PfP program has affected the budget and focus of the WIF program, which supports the participation of PfP countries in military exercises and military contact programs. The decline in the number of countries in the PfP program contributed to a drop in average annual WIF funding from about $43 million in fiscal years 1996 through 2005 to about $29 million in fiscal years 2006 through 2010, according to a DOD official. Moreover, WIF funding is no longer concentrated on PfP countries aspiring to join NATO, as it was in the initial years of the program. In 2006, DOD established the Defense Institution Building program as a key focus of the WIF program to help PfP countries develop more professional and transparent defense establishments. Planned activities included assisting with strategic defense reviews; and developing defense planning, budgeting, and resource management systems, among others. DOD has encountered challenges implementing this program, including potential duplication with other U.S. assistance in some countries and limited interest from other countries, which have contributed to frequent cancellations of planned activities. DOD has not formally evaluated the WIF program since 2001, although there have been changes since then in the composition of participating countries and the focus of the WIF program. GAO recommends that, following the establishment of NATO's new Strategic Concept, which could result in changes to NATO's PfP program, the Secretary of Defense conduct an evaluation of the U.S. WIF program to ensure that it effectively supports the goals of NATO's PfP program. DOD concurred with the recommendation. |
The WTO administers rules for international trade, provides a mechanism for settling disputes, and offers a forum for conducting trade negotiations. Such negotiations periodically involve comprehensive “rounds,” with defined beginnings and ends, in which a large package of trade concessions among members is developed and ultimately agreed on as a single package. A total of eight rounds have been completed in the trading system’s 56-year history. Each of the last 3 rounds cut industrial nations’ tariffs by about one-third overall. WTO membership has increased since the organization’s creation in 1995 to 146 members, up from 90 contracting parties of the General Agreement on Tariffs and Trade (the WTO’s predecessor) when the Uruguay Round of negotiations was launched in 1986. WTO membership is also diverse in terms of economic development, consisting of most developed countries and numerous developing countries. The WTO has no formal definition of a “developing country.” However, the World Bank classifies 105 current WTO members, or approximately 72 percent, as developing countries. In addition, 30 members, or 21 percent of the total, are officially designated by the United Nations as “least developed countries.” The ministerial conference is the highest decision-making authority in the WTO and consists of trade ministers from all WTO members. The outcome of ministerial conferences is reflected in a fully agreed-upon ministerial declaration. The substance of these declarations is important because it guides future work by outlining an agenda and deadlines for the WTO until the next ministerial conference. The WTO General Council, made up of representatives from all WTO members, implements decisions that members adopt in between ministerial conferences. Decisions in the WTO are made by consensus—or absence of dissent—among all members rather than on a majority of member votes, as it is in many other international organizations. At the fourth ministerial conference in Doha, Qatar, in November 2001, WTO members were able to reach consensus on a new, comprehensive negotiating round, officially called the Doha Development Agenda. The Doha Round is the first round of global trade negotiations since the conclusion of the Uruguay Round in 1994. The Doha Declaration sets forth a work program for the negotiations on agriculture, services, nonagricultural market access, and other issues. In addition, the work program emphasizes the development benefits of trade and the need to provide assistance to developing countries to help them take advantage of these benefits. The Doha Declaration also sets forth a structure and series of interim deadlines for the negotiations. Specifically, it established a Trade Negotiations Committee (TNC) open to representatives from all WTO members to oversee the negotiations, as well as several subsidiary bodies. In addition, it laid out several deadlines and other milestones through the next ministerial conference by which time negotiators were to make decisions on issues under negotiation. In the months following Doha, WTO members agreed that the next ministerial conference would occur in Cancun, Mexico, in September 2003. Figure 1 presents key milestones through the Cancun Ministerial Conference. The Doha Declaration also set several general goals for the next (Cancun) ministerial conference, namely, to take stock of progress at midpoint of the Doha negotiations, to provide necessary political guidance, and to make decisions as necessary. However, at their fifth ministerial conference held in Cancun, Mexico, from September 10 to 14, 2003, WTO ministers were neither able to achieve these goals nor bridge wide differences on individual negotiating issues. They concluded the conference with only an agreement to continue consultations and convene a meeting of the General Council by mid-December 2003 to take actions necessary to move toward concluding the negotiations. The Cancun Ministerial Conference provided an opportunity for both symbolic and practical progress in the Doha Round of negotiations. These opportunities were of heightened importance because negotiators had by their own admission failed to make sufficient progress to meet interim deadlines set out in the Doha Declaration, at least in part because members were awaiting the results of the agricultural reform efforts in the EU. Consequently, real give-and-take did not truly begin until the final weeks before the ministerial, leaving little time to bridge the substantial differences that existed on key issues. The September 2003 WTO Ministerial Conference held in Cancun, Mexico, had symbolic and practical importance for the Doha Round of negotiations. On the symbolic level, several WTO officials we met prior to the meeting noted that the Cancun Ministerial Conference might be a means to regain the momentum needed to bring the Doha Round to a successful conclusion. The Doha Round promised to be the most comprehensive round of global trade negotiations yet, involving a commitment to further liberalize trade, update trade rules, and further integrate developing countries into the world economy. The Cancun Ministerial Conference occurred at roughly the midpoint in the 3-year negotiations. However, based on our meetings with country delegations and WTO officials in Geneva and public statements by WTO officials, on the eve of the ministerial there was a sense true negotiations had not really begun. In particular, although WTO member governments had succeeded in actively submitting and discussing many proposals to achieve the general goals laid out at Doha, they had been less successful in narrowing their differences on these proposals or coming up with workable plans for developing specific national commitments (or schedules) to lower trade barriers. WTO members held differing views on the symbolic importance of the Cancun Ministerial Conference. For instance, U.S. and some other member country officials, as well as WTO officials, expressed hope that the Cancun Ministerial Conference would create the political will to achieve a meaningful and ambitious agreement by the deadline that would benefit all participants. WTO officials we spoke with, for example, stressed that Cancun needed to provide a “boost” of fresh momentum to the flagging talks. Other members planned to use the meeting to focus on the centrality of agriculture reform. However, some members downplayed the symbolic importance of the ministerial and viewed it merely as an opportunity to take a mid-point assessment of the negotiations. At a practical level, Cancun was viewed as critical to provide negotiators with direction in key areas that had thus far eluded consensus, according to WTO and member country officials. With just 16 months before the agreed-upon deadline of January 1, 2005, for concluding the negotiations, working-level progress in resolving outstanding issues was effectively stalled. Breaking the logjam hinged upon receiving clear ministerial direction in several key areas. For example, guidance was needed on the specific goals and methods that would be used to liberalize trade in agriculture. Progress on narrowing substantive differences in advance of the Cancun ministerial proved slow. As late as July 2003, observers and participants in the negotiations noted that WTO members were simply restating long-held positions on key issues and had yet to engage in real negotiations. For instance, in July 2003, the WTO Director General said that negotiators had been waiting to see what others are willing to offer without showing flexibility themselves. The chairmen of some of the negotiating groups repeated this sentiment in their statements to the July meeting of the Trade Negotiations Committee. (See app. II for a discussion of significant events in the WTO negotiations before and during the Cancun Ministerial Conference.) A key factor hindering the progress of Doha Round talks had been the pace and extent of reform of the EU’s Common Agricultural Policy (CAP). Agriculture was considered by many WTO members to be a linchpin to achieving progress in all other areas of the Doha negotiating agenda. After considerable internal debate, on June 26, 2003, the EU agreed to CAP reform. Among other things, the reform would ensure that for many agricultural products, the amount of subsidy payments made to farmers would be independent from the amount they produce. Yet even after the EU CAP reform was announced, other members stated that they were still waiting to see the EU’s internal reform translated into a significantly more ambitious WTO negotiating proposal. The EU resisted making a new WTO proposal, arguing that in effect it was being forced to pay for reform twice by reforming its internal policy once and then being asked by WTO negotiators to reform again to be able to conclude an agreement. Another factor hindering overall progress was perceived linkages between various negotiating topics.The Doha Round’s outcome is to be a “single undertaking,” meaning a package deal involving results on the full range of issues under negotiation such as agriculture, services, and nonagricultural market access. As a result, trade-offs are expected to occur among issues to accomplish an overall balance satisfactory to all members. Thus, it is difficult to make progress on one issue without achieving progress on other issues. For example, many developing nations consider agriculture their number one priority and have been unwilling to make offers to open up their services markets until they see more progress on agricultural reform. On the other hand, the EU and Japan, who expect to make concessions on agriculture, wanted a commitment at Cancun to begin negotiations on several issues that were new to the trading system--investment, competition (antitrust), government procurement, and trade facilitation— which are collectively known as Singapore issues. By our mid-July meetings in Geneva it was clear that expectations for Cancun were being scaled back because of the overall lack of progress. Instead of issuing “modalities,” (numerical targets, timetables, formulas, and guidelines for countries’ commitments), for example, WTO officials and country representatives we met with suggested that “frameworks,” or more general guidance on what types of concessions each participant would make, might be a more appropriate goal for Cancun. In other words, instead of ministers agreeing on some specific target, such as “all nations will cut tariffs by one-third,” they would agree to something more general, such as all nations are expected to cut tariffs by a certain method and with the following kinds of results (e.g., substantially liberalizing trade and reducing particularly high tariffs). The negotiations began to make some progress at the end of July, when trade ministers from a diverse group of approximately 30 WTO members met in Montreal, Canada, to discuss the status of the negotiations. During this meeting, ministers encouraged the United States and the European Union to provide leadership in the negotiations by narrowing their differences on the key issue of agriculture. The United States and the European Union agreed to do so, and in August they presented a joint framework on agriculture. In addition, in late August, the General Council removed a potential obstacle to progress at the Cancun ministerial by approving an agreement involving implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and public health declaration adopted in Doha. The Doha TRIPS and public health declaration directed WTO members to find a way for members with insufficient pharmaceutical manufacturing capacity to effectively use the flexibilities in TRIPS to acquire pharmaceuticals to combat public health crises. U.S. and WTO officials and representatives from other WTO members we met with had identified this as an important symbolic issue for the WTO as an institution, especially for WTO members from Africa. They had urged its prompt resolution to create a more favorable climate for the Cancun ministerial meeting. Despite resolving the TRIPS issue and attaining some movement on agriculture in the final weeks before the Cancun ministerial, differences persisted on other key issues in the negotiations on the eve of the meeting. The Cancun Ministerial Conference failed to resolve substantive differences on key issues: agriculture (including cotton), the “Singapore issues,” market access for nonagricultural goods, services, and development issues that included special and differential treatment for developing countries. Key countries’ principal positions were far apart, and certain aspects of each issue were particularly contentious. Although many looked to the Cancun ministerial to provide direction that would enable future progress, it ultimately ended without resolving any of the members’ wide differences on these issues. Agriculture is central to the Doha Round of trade negotiations, both in its own right and because many WTO members say that progress on other negotiating fronts is not possible without significant results in agriculture. The Doha Declaration calls for negotiations to achieve fundamental agricultural reform through three “pillars” or types of disciplines (rules): (1) substantially improving market access; (2) reducing, with a view to phasing out, all forms of export subsidies (export competition); and (3) substantially reducing trade-distorting domestic support (subsidies). Additionally, the declaration imposed two interim deadlines on WTO agriculture negotiators: a March 31, 2003, deadline for establishing modalities (rules and guidelines for subsequent negotiations), and a deadline to submit draft tariff and subsidy reduction commitments at the Cancun meeting. Negotiators missed both deadlines. As a result, the goal for the Cancun ministerial was to adopt a framework and set new deadlines for subsequent work on the three main pillars of the agriculture negotiations. The delay in EU CAP reform, as well as the 2002 U.S. Farm Bill, which was projected to increase U.S. agricultural support spending complicated resolution of these issues. Many WTO members felt this bill undermined the relatively bold negotiating stance the United States assumed in the WTO, which called for making substantial reductions in trade-distorting domestic support and tariffs. Various countries or groups of countries differ in their objectives for the agriculture negotiations. The Cairns Group of net agriculture exporting countries and the United States envisioned an ambitious agricultural liberalization agenda. The United States proposed a two-phase process to reform agriculture trade in the WTO. The first phase of the proposal would eliminate export subsidies and reduce and harmonize tariff and trade- distorting domestic support levels over a five-year period. The second phase of the proposal is the eventual elimination of all tariffs and trade- distorting domestic support. Other developed country members such as the EU, Japan, Korea, and Norway favored a more limited agenda. This group and several other small developed countries argued for flexibility to maintain higher tariffs in order to protect their domestic agriculture production. Finally, many developing countries wanted a reduction in developed country agriculture subsidies and market access barriers while, at the same time, wanting less ambitious obligations to liberalize their own market access barriers. Domestic support. Arguing that such programs resulted in lower world prices and displacement of their producers from global markets, many developing countries forcefully pressed the developed countries to make significant cuts to their trade-distorting domestic support programs, particularly the United States and the European Union, which in 1999 totaled $16.9 billion and 47.9 billion euros ($45 billion at 1999 exchange rates), respectively. Although they agreed in principle on the desirability of reducing trade-distorting subsidies, both the United States and the European Union resisted further disciplines on their abilities to support domestic agriculture in ways that present WTO rules consider to be non- trade distorting. For example, they opposed calls to cap and reduce subsidies that are not currently subject to spending limits under the WTO. The EU argued that its CAP reform already addressed developing country demands by making domestic support payments independent of production, in principle making the payments less trade distorting, even though total expenditures will not be lowered. However, several WTO members indicated that the reforms were not ambitious enough. In addition, the United States said that it would not reduce its domestic support for agriculture unless other members, namely the EU, made cuts that substantially reduced the wide disparities in allowed trade-distorting domestic support. The United States also demanded that developing countries provide something in return for cutting subsidies, such as lowering their tariffs on U.S. exports. Market access. The United States viewed attaining additional market access as an important objective in the negotiations. U.S. and Cairns Group negotiators proposed a harmonizing formula for tariff reduction known as the Swiss formula that would subject the higher tariffs to larger cuts. Other members, including the EU, Japan, and Korea, favored an across-the-board average cut and a minimum cut per product (tariff line). As illustrated in figure 2, this approach would generally result in less liberalization than if the harmonizing formula were used. Many developing countries, and the Cairns Group, proposed substantially less liberalizing developing country tariff reductions, in part to counter continued use of subsidies in developed countries. Finally, according to their official statements, numerous smaller developing countries emphasized the importance of trade preferences to, and the negative effects that erosion of trade preferences would have on, smaller, more vulnerable economies. Export competition. The United States, the Cairns Group, and many developing countries wanted to eliminate export subsidies for agricultural products. The EU, the primary employer of export subsidies, envisioned a substantial reduction and elimination of export subsidies for certain products but not a total elimination. It also tied any cuts in export subsidies to the adoption of stricter disciplines on U.S. food aid and export credits. Like the United States, the EU also sought stricter disciplines on export state-trading enterprises. As previously noted, the United States and the European Union had responded to calls to provide leadership by narrowing their differences on the three pillars of agricultural reform before the Cancun meeting. In a mid- August framework, the U.S. and the EU proposed reductions in trade- distorting domestic agricultural support, with those members with higher subsidies making deeper cuts and a three-pronged strategy to reduce agricultural tariffs. With respect to export subsidies, the framework eliminated export subsidies for some agricultural products and committed members to reduce budgetary and quantity allowances for others. Reaction to the framework was negative and swift, in part because it implied less ambitious reductions in domestic support and market access barriers than the original U.S. proposal, which U.S. officials emphasize is still on the table, and did not completely eliminate export subsidies. For example, within a week a newly formed group of developing countries, commonly referred to as the Group of 20 (G-20) for its 20 members, presented a counter framework that implied deeper cuts in domestic agricultural subsidies by developed countries, a tariff reduction formula that allowed developing countries to make less substantial cuts, and the total elimination of export subsidies. The draft ministerial declaration presented to ministers in late August contained elements of both proposals. Although extensive discussions on agriculture did occur at Cancun, they ultimately failed to bridge the substantial gaps that remained. Sharp divisions remained on the extent to which the developing countries should be required to open their markets and whether it was possible to eliminate all export subsidies. On domestic support, divisions remained concerning the extent of cuts in trade-distorting domestic support and the question of whether additional disciplines on non trade-distorting support were desirable. Furthermore, the prominence of the G-20 of developing countries relative to the more diverse Cairns Group at the meeting imposed a North-South dynamic on the agriculture negotiations. Specifically, several developed countries criticized the G-20’s negotiating tactics, including their failure to offer market access concessions such as tariff cuts in exchange for substantial cuts in developed country subsidies and their demands for a long list of changes to the Conference Chairman’s draft text, even though very little time remained to negotiate. Meanwhile, representatives from the G-20 argued that the developed country proposals and framework offered very modest gains and maybe even some steps backward in efforts to liberalize world agricultural trade. In addition to the three main agricultural pillars that were the agreed focus of the Doha agriculture negotiations, the Sectoral Initiative in Favour of Cotton put forward by four West and Central African countries figured prominently in the Cancun ministerial discussions. The initiative was added to the ministerial agenda in the weeks leading up to Cancun and does not appear in the Doha Declaration. The proposal by these cotton exporting countries singled out three WTO members--the United States, the European Union, and China--as the primary cotton subsidizers. They claimed that these subsidies were driving down world prices and that many of their farmers no longer found it profitable to produce cotton, a concern given their contention that cotton plays an essential role in their development and poverty reduction efforts. The cotton initiative’s guidelines called for immediately establishing a mechanism at Cancun to eliminate all subsidies on cotton and a transitional mechanism to compensate farmers in cotton-producing least developed countries (LDC) that suffered losses in export revenue as a result of cotton subsidies. Specifically, the proposal called for reducing all cotton support measures by one third annually for 3 years, thereby eliminating all support for cotton by year-end 2006. In addition, the proposal stipulated that any cotton-subsidizing WTO member would be a potential contributor to a proposed transitional compensation mechanism. The transitional compensation mechanism would last up to 3 years. The sectoral initiative did not specify the total amount of compensation to be paid but cited a recent study that the direct and indirect losses for the 3 years—1999 to 2002—were $250 million and $1 billion, respectively, for the countries of West and Central Africa. The cotton initiative was discussed at length in Cancun; however, there was no resolution. The reason for the failure was that certain members had difficulty supporting a transitional compensation mechanism within the context of the WTO and saw the issue of cotton as hard to separate from the larger agricultural agenda. U.S. efforts to respond to the region’s immediate concerns on cotton by broadening the original initiative made little headway, despite some evidence that falling world cotton prices were also attributable to other factors such as competition from manmade fibers. The failure to resolve the cotton initiative to the satisfaction of the developing countries had a negative impact on the overall tone of the Cancun meeting, because certain developing countries viewed the issue as a litmus test for the WTO and thought the proposed response fell far short of addressing their pressing needs. The issue also took on symbolic importance, becoming a political rallying point for a number of countries’ frustrations. The Doha Declaration established a deadline for deciding how to handle negotiations aimed at adding four new issues, called the Singapore issues, to the global trading system. The four Singapore issues are investment, competition (antitrust), transparency (openness) in government procurement, and trade facilitation (easing cross-border movement of goods). According to the draft ministerial text presented to ministers before Cancun, ministers were to decide by explicit consensus the basis for starting actual negotiations on these issues, or to continue exploratory discussions on them. However, the wording of the Doha Declaration left unclear what was to specifically occur in Cancun. Certain members thought the declaration implied that formal negotiations were to begin in Cancun and that the only issue for Cancun was the type of negotiation. Others thought the declaration implied that formal negotiations could only begin if there were explicit consensus among the members at Cancun to do so. Key players’ positions were divided into three main camps. A group of developed and developing country members led by the European Union, Japan, and South Korea strongly advocated starting negotiations on all four issues, including investment and competition, which were particularly controversial. These nations had succeeded at Doha in getting the four issues included as part of the round’s overall package but only on the condition that explicit agreement be reached at Cancun on the parameters to negotiate these issues. Many developing countries, on the other hand, had consistently expressed their strong opposition to the inclusion of the Singapore issues in the WTO negotiating agenda and several viewed Cancun as their opportunity to block negotiations on these issues. For example, India argued that for many of these countries, undertaking new obligations in these areas would have presented too great a burden, since they were still having difficulty implementing their Uruguay Round obligations. They also were not convinced of the development benefits that would result. A third group of countries, including the United States and some developing nations, were willing to negotiate but wanted each issue considered on its own merit. However, some of the developing countries linked their willingness to negotiate with progress in other areas such as agriculture. The United States had been pushing the issues of transparency in government procurement and trade facilitation. The United States was also willing to negotiate on competition policy and investment, but had some concerns that included whether negotiations could call into question its enforcement of strong antitrust laws and match the high standards that are a feature of its bilateral investment agreements. The discussions at Cancun on the Singapore issues were contentious and contributed to the breakdown of the ministerial. Early in the week, a group of 16 developing countries argued that because there was no clear consensus on the modalities for the negotiations as required by the Doha Declaration, the matter of whether to add these four new issues to the negotiations should be dropped from the Cancun agenda and moved back to Geneva for further discussion. The draft text issued later that week called for beginning negotiations on two issues and setting deadlines for trying to reach agreement on possible bases for addressing the other two issues. This text was discussed on the last day of the conference, but in the end, compromise on this divisive subject proved impossible. Lowering barriers to market access of nonagricultural goods was also an important point of contention leading into the Cancun ministerial. The Doha Declaration stated that negotiations on nonagricultural market access should be aimed at reducing or, as appropriate, eliminating tariffs for nonagricultural products, including reducing or eliminating tariff peaks and tariff escalation, as well as nontariff barriers. The Doha Declaration also said that the liberalization of nonagricultural goods should take fully into account the principle of special and differential treatment for developing countries, including allowing for “less than full reciprocity” in meeting tariff reduction commitments. Because WTO members missed a May 31, 2003, deadline for reaching agreement on modalities for nonagricultural market access that would govern preparation of national schedules of barrier-cutting commitments, the goal for Cancun was to establish a “framework” or basic approach to tariff and nontariff barrier liberalization that would then be supplemented by more detailed modalities later. Even though there are important differences in the situations and individual positions of various developing countries—a fact the United States likes to emphasize--WTO members were largely divided along North- South lines in nonagricultural market access talks going into the Cancun meeting. The United States and other developed countries were pushing for substantial cuts in tariffs and wanted the high overall tariffs of key developing countries like India and Brazil to come down. For example, India has an average bound tariff of 34 percent on nonagricultural products, while China and Côte d’Ivoire have average bound tariffs of 10 percent or less. The United States also aimed to seek a high level of ambition in opening markets and expanding trade for all countries through a harmonizing formula that cuts tariffs in all countries. In addition, it wanted to reduce wide disparities among members’ tariffs as well as reduce low tariffs. Publicly, the developing countries were fairly united in saying that any liberalization needed to leave them sufficient flexibility to address their special needs and should involve greater cuts by richer countries than poor ones. In May 2003, the chairman of the negotiating group on market access issued a “chair’s proposal,” attempting to reconcile WTO members’ various positions, including on tariff cutting formulas, sectoral liberalization, and special and differential treatment. Coming into Cancun, two major proposals for cutting tariffs--one from the market access chairman and another from the United States, EU, and Canada--were under active discussion, though all of the numerous original proposals submitted by WTO members remained “on the table.” These two proposals differed in the type of mathematical formula that would be used to determine how much each member would be expected to reduce its tariffs. The proposed tariff formula developed by the chairman as a compromise would largely differentiate among countries according to their current overall average bound tariff rate. Specifically, a country with higher average bound tariffs would have to reduce its bound tariffs at a lesser rate than a country with lower average bound tariffs. To use an illustrative example, Brazil, with higher overall bound rates to begin with, would have to cut a 10 percent bound tariff on a particular product to approximately 7.5 percent, or by 25 percent. Malaysia, with lower overall bound tariffs, would have to slash a 10 percent bound tariff to 6 percent, or by 40 percent (see fig. 3). Proponents argue that this formula would recognize each country’s differing starting points for liberalization while still accomplishing significant cuts in bound tariff rates. Some officials counter that average bound tariffs are not a direct or good indicator of development status or needs. Moreover, they expressed concern that this formula would require more reduction from nations that have lower overall bound tariffs. The United States was concerned that this would effectively punish countries that have previously liberalized, while rewarding countries that had not liberalized. In addition, the United States was concerned that this proposal was based on average bound tariff rates, which would not necessarily lead to lower applied rates. Many developing countries’ bound tariff rates are higher than the tariffs they currently apply. For example, Brazil has an average bound tariff of 31 percent and a 15 percent average applied rate. Real liberalization will only occur if countries reduce bound tariffs to below currently applied rates. On the other hand, the United States, the European Union, and Canada developed an alternative framework for negotiations. This framework calls for all countries to use a single harmonizing formula, such as a Swiss formula, where the coefficient of reduction does not depend on a country’s average bound tariff rate. For example, if a Swiss formula using a coefficient of 8 were used, all countries would have to cut a 10 percent tariff on a particular product to 4 percent. Nevertheless, the U.S., EU, Canada framework does foresee some differentiation among countries. For example, it suggested that countries could be rewarded for “good behavior” by giving credits to countries that commit to do things that are considered sound trade policy, such as putting a ceiling on, or binding, a high percentage of their tariffs. According to U.S. Trade Representative (USTR) officials, the credits would allow them to lower tariffs by a lesser amount than that implied by the formula. Developing countries, however, say this approach is inconsistent with the Doha mandate, which states developing countries as a whole will be allowed to make lesser commitments. In addition, they fear that they would have to cut tariffs much more than developed countries in absolute terms. As a result, just prior to the Cancun meeting, a few nations such as India reasserted their interest in an across-the board or linear approach to cutting tariffs on nonagricultural goods, similar to that depicted in figure 2. Under a linear approach, all tariffs would be cut at the same rate and therefore the results would not be harmonizing. The discussions at Cancun never got into the detailed proposals that had been debated before Cancun and failed to bridge these gaps on tariff formulas. At Cancun, WTO members were also considering the complete elimination of tariffs in to-be-agreed-upon sectors, including ones that are particularly important to developing countries. However, the issues of choice of sectors and participation in the elimination remained controversial. Many developing countries wanted sectoral elimination to be voluntary. Also under debate was whether sectoral elimination should result in zero tariffs, harmonization, or a differentiated outcome for developed versus developing countries. The United States and many other countries thought that sectoral initiatives were an important way to supplement the general tariff cutting formula and to achieve their ambitious liberalization objectives. The United States wanted to make sure all countries competitive in a given sector would participate in sectoral elimination regardless of their level of development. Consistent with the Doha mandate, WTO members were also considering special treatment for developing countries and new entrants such as recently acceded members in implementing their tariff commitments. This included longer periods to implement the tariff reductions, differentiation in how sectoral initiatives would be applied, and not making reduction commitments mandatory. The developed countries recognized that many nations, particularly least developed and other vulnerable economies, need flexibility to deal with sensitive sectors and other adjustment needs. However, they opposed across-the-board flexibility for all developing countries, including the more advanced ones. At Cancun, some steps were taken to address the inherent trade-off between committing to ambitious tariff liberalization and retaining flexibility. The World Bank and the International Monetary Fund, for example, provided assurances that they were prepared to work with developing nations to help offset lost tariff revenue and address concerns related to erosion of preferences. Nevertheless, ministers did not resolve the debates over tariff-cutting formulas, the mandatory nature of sectoral elimination, and the degree of flexibility to accord to developing countries. Progress was not made on these issues because progress was not made or expected in agriculture nor on the Singapore issues. The Doha Declaration set a deadline for WTO members to complete the work they had initiated in January 2000 to further open services markets under the General Agreement on Trade in Services. In contrast with agriculture and industrial market access, the services group had already agreed on how to conduct these talks, which are under way. The goal for Cancun—particularly for the United States—was to energize the ongoing services negotiations and to set a deadline for submission of improved offers to lower barriers to services. According to a WTO official, only 38 (counting the EU as one member) of the WTO’s 146 members had submitted offers before the Cancun ministerial. Although 18 of these offers were from developing countries, as defined by the World Bank, many large developing countries such as India, South Africa, Egypt, and Brazil had not submitted offers. Some of these nations, as well as others such as Argentina, China, and Mexico had their own market access ambitions, including further easing of the temporary movement of their services suppliers across national borders. Services negotiations regained some momentum before Cancun due to two important events. First, the language contained in the draft Cancun Ministerial Declaration incorporated several of the demands from developing countries such as the need to conclude negotiations in rule- making in areas such as emergency safeguard measures for services. Second, the adoption of modalities on September 3, 2003, for the special and differential treatment of LDCs was expected to boost the participation of LDCs in the services negotiations. However, little progress was made in the services negotiations at Cancun because advances on other issues under negotiation, especially in agriculture, were needed in order to enable further movement. Many developing countries were greatly concerned about receiving special treatment in the form of making lesser commitments in ongoing global trade talks and receiving assistance in implementing existing WTO agreements. Global trade rules have long included the principle that developing countries would be accorded special and differential treatment consistent with their individual levels of development, including the notion that they would not be expected to fully reciprocate tariff and other concessions made by developed countries. In the Doha Declaration, WTO members agreed that all special and differential treatment provisions in existing WTO agreements should be reviewed with a view to strengthening them in order to make them more precise, effective, and operational. The declaration requires the WTO’s Committee on Trade and Development to identify those special and differential treatment provisions that are mandatory and those that are nonbinding and to consider the legal and practical implications of turning the nonbinding ones into mandatory obligations. According to USTR officials, part of the continuing difficulty of this work has been the problems of separating work on special and differential treatment from the work underway in actual individual negotiating groups (e.g., agriculture) and the lack of progress on related issues such as graduation/differentiation, which is also part of the Committee on Trade and Development’s work programme. Also, as part of the Doha Declaration, WTO members committed themselves to address outstanding implementation issues and set a December 2002 deadline for recommending appropriate action on them, but they missed that deadline. Although there was agreement on a number of implementation issues at Doha, outstanding issues remain in areas like trade related investment measures, anti-dumping rules, and textiles. These issues have proved divisive, even among developing countries. At Cancun, ministers were asked to endorse and immediately implement a subset of the numerous proposals for special and differential treatment as well as to set a new deadline for resolving outstanding special and differential treatment and implementation issues. For some developing countries, progress on these issues at Cancun was key to their willingness to negotiate further market liberalization in other areas. In addition, the African Group in particular wanted to better ensure that the needs of the WTO’s poorest member countries would be satisfactorily addressed in the overall package of Doha Round results. However, developed and developing countries fundamentally disagreed in their interpretation and use of special and differential treatment. For example, government officials from several developed countries echoed their desire to better target special and differential treatment by adopting a needs-based approach. According to these officials, special and differential treatment provisions should be tailored to match the various levels of development and the particular economic needs of developing countries. Many developing countries, on the other hand, wanted an expansion of special and differential treatment. Their expansionist ambition was reflected in 88 proposals for additional special treatment obligations, mostly from the African Group and the group of least developed countries. Among other things, the proposals sought additional technical support and called for an exemption for developing countries and LDC members from requirements to comply with existing WTO obligations that they believed would be prejudicial to their individual development, financial, or trade needs or beyond their administrative and institutional capacity. Developed countries and more advanced developing countries considered many of these demands to be problematic because some changes proposed would alter the balance of the Uruguay Round agreements. In the end, however, developed countries and some developing countries appeared ready to move forward on some of these proposals at Cancun, had the ministerial proved successful. The General Council Chairman worked carefully with a diverse group of key countries to put this package together. A total of 24 special and differential treatment proposals, including some related to implementation issues, were included in the draft Cancun Ministerial Declaration sent to Cancun from Geneva. An additional three proposals were added during the course of the Cancun meeting. While some developing nations argued that these proposals were of little economic value and felt agreeing to these proposals at Cancun would create a false sense of progress, other developing countries were willing to accept the package in return for assurances of future advances. As for implementation issues, discussions on developing country proposals in this area were overshadowed at Cancun by another issue--a push by the EU and other European countries to secure greater recognition and protection of geographical indications (place names) for specialty agricultural products. Many countries, including the United States, Australia, New Zealand, and some Latin American nations, strongly resisted, because they produce and market products under widely used terms such as “Champagne” and “Roquefort cheese” that the European nations were seeking to protect and monopolize. In the end, no agreement was reached at Cancun on special and differential treatment or on implementation issues. Despite a full ministerial agenda of issues requiring resolution, the only actual decision taken relating to the negotiations at Cancun was that the WTO’s General Council should meet by December 15, 2003. The closing session on Sunday, September 14, adopted a short ministerial statement expressing appreciation to Mexico for hosting the talks, welcoming Cambodia and Nepal to the WTO, and stating that participants had worked hard to make progress in the Doha mandate but that “more work needs to be done in some key areas to enable us to proceed toward the conclusion of the negotiations.” To achieve this, the concluding ministerial statement directed officials to continue working on outstanding issues with a renewed sense of urgency and purpose. The failure to make progress in resolving the major substantive issues at Cancun left the Doha Round in limbo and resulted in a major setback that will make attaining an overall world trade agreement by January 1, 2005, more difficult, according to WTO Director General Supachai and key WTO member country representatives. Specifically, no further negotiating sessions have been scheduled, although informal efforts to get the talks back on track have continued. The Cancun ministerial declaration directed the Chairman of the General Council to coordinate this work and to convene a meeting of the General Council at the senior officials level no later than December 15, 2003 “to take the action necessary to move toward a successful and timely conclusion of the negotiations.” However, on December 9, WTO General Council Chairman Perez del Castillo notified the heads of delegation that there was a lack of “real negotiation” or “bridging of positions” in the informal talks. Because he believed insufficient convergence had occurred to take “necessary action to conclude the round,” he presented a Chair’s report outlining key issues and possible ways ahead. He also recommended that all negotiating bodies be reactivated in early 2004, after new chairs are chosen. The December 15, 2003, General Council meeting generally accepted this recommendation, according to the chairman’s closing remarks. According to government officials, trade negotiations observers, authoritative reports, and GAO observations and analysis, several other factors contributed to the Cancun meeting’s collapse. The ministerial agenda was complex, and unwillingness by some nations to work with the text presented by the General Council Chairman hampered progress. In addition, the large number of participants and emerging coalitions influenced the meeting’s dynamic. Competing visions and goals for the Doha Round, particularly between developed and developing countries, and a high-profile initiative on cotton, fueled North-South tensions. Meanwhile, the WTO’s cumbersome decision-making process did not lend itself to building consensus. The agenda for Cancun was not only complex, it was also overloaded. This situation was due to the stalemate that had characterized the Doha Round up to Cancun, in which the negotiators had missed virtually all self- imposed deadlines. The Doha Declaration already had specified that certain items were to be on the agenda for the next (Cancun) ministerial, such as deciding how to handle negotiations on the Singapore issues (see fig. 4). But as interim deadlines came and went without agreement, other issues were added to the Cancun agenda. Although the goal of reaching agreement on these issues for achieving trade liberalization had eluded negotiators during the previous 22 months of work in Geneva, they proposed to reach agreement on all of them in Cancun, even though they had just 5 days to do so. Adding to the complexity of the task, the Cancun ministerial began without an agreed-upon text as a starting point for discussion. In late August, the General Council Chairman issued a revised draft ministerial declaration. This version included draft frameworks for modalities for agriculture, nonagricultural market access, and the Singapore issues. These draft frameworks still included multiple bracketed items (items to be agreed upon) and lacked specific details in several areas. However, not all WTO members agreed to use this draft as the basis for ministers’ discussion in Cancun. Efforts to produce a new text of a ministerial declaration from which to work took considerable time at Cancun. The first 3 days of the 5-day conference were devoted to formal and informal meetings. The Conference Chairman, the Mexican Foreign Minister finally presented a draft text at a meeting on the fourth day of the 5-day conference (September 13). Just 30 hours remained until the scheduled close of the conference, yet ministers needed 6 hours to study the new text. The meeting to obtain reactions to the text took another 6 hours. More than 115 nations spoke, one after the other, with most ministers criticizing various points of the draft and repeating well-established positions. A WTO spokesman later reported that the only consensus evident that night was that the text was unacceptable to many WTO members. The U.S. Trade Representative advocated moving forward when he took the floor about halfway through the meeting. He expressed willingness to work with the draft, urged a collective sense of responsibility, and warned fellow trade ministers that they should not let the perfect become the enemy of the good. Certain other members such as Sri Lanka, Uruguay, Chile, and China were among the few other countries that made positive statements. After another several hours of critical interventions, however, the Conference Chairman closed the meeting, expressing concern that with less than 15 hours remaining, members did not appear to be willing to reach a consensus. A WTO spokesperson later reported that they could see a clear problem emerging because differences in positions were hardening. Achieving consensus at Cancun was a very complex undertaking due to the large number of participants and the emerging coalitions that affected the meeting’s dynamics. Participants in the WTO talks at Cancun included 146 members with vastly different economic interests, levels of development, and institutional capacities. Moreover, the number of delegates at Cancun was substantially larger than the number of delegates at the Doha ministerial, which occurred shortly after September 11, 2001. Nongovernmental organizations (NGO) were also participating. The 1,578 registered NGO participants included business as well as a range of public interest (labor, environment, consumer, development, and human rights) groups, and both were active in seeking to influence the negotiations. For example, NGOs, such as the development advocacy group Oxfam, underwrote the literature being distributed on the cotton initiative, and poverty relief organization Action Aid’s press release immediately called the Conference Chairman’s draft text “a stab in the back of poor countries.” The emergence of two developing country coalitions also affected the dynamics of the Cancun meeting. Brazil was widely seen as the leader of the G-20 group of developing countries pressing for bigger cuts in developed country agricultural subsidies. The United States and the European Union, traditionally at odds over agriculture, complained that the group was engaged in confrontational tactics that were more directed at making a point than at making a deal. However, the group claimed that it took a businesslike and professional approach to the negotiations and had succeeded in highlighting the centrality of agricultural reform to the Doha Round’s success. Another strong coalition that emerged in Cancun was a group of 92 countries made up of the African, Caribbean, Pacific (ACP) African Union /LDC countries. This group’s main objective was to ensure that the WTO’s poorest countries’ interests were taken into account. In the end, their views were decisive, as their refusal to accept negotiations on the Singapore issues and other members’ insistence to negotiate these issues triggered the Conference Chairman’s decision to end the ministerial. In addition to a complex agenda and volatile meeting dynamics, the participants appeared to have competing visions of what the round had promised. Noting that the negotiations were titled the “Doha Development Agenda,” developing countries still expected that the talks would focus primarily on their needs. For many, this meant progress on agriculture, while others stressed meaningful accommodation of their special needs. U.S. officials, on the other hand, told us that they would like to see further differentiation of the as-yet-undefined term “developing countries.” Some U.S. officials told us that developing countries’ reluctance to open their markets is contrary to sound development policies, because lowering trade barriers is pro-, not anti-development. Moreover, various studies had shown that a significant share of the estimated economic benefits of the Doha Round would be due to an expansion of trade between developing countries as they reduced their trade barriers to each other’s goods. As the days of the ministerial wore on without consensus, frustrations increased. The developed nations accused the developing countries of grandstanding and of not making an effort to reach agreement. Officials from some developed countries complained, for example, that developing countries had not approached the negotiations in the spirit of reciprocity but instead were focused on making demands without expecting to make concessions. In essence, developing countries were not seen as negotiating in good faith. Developing countries also felt frustrated and believed that the lack of progress in the negotiations was due to an absence of political will by the developed countries to fulfill the promises at Doha. For example, developing countries believed that the developed countries had not offered enough on agriculture, the issue that many developing countries cared about the most. The differences in expectations are illustrated in reactions to the cotton initiative, which served as a focal point for concerns about developed country agriculture subsidies. The WTO Director General personally urged ministers to give the matter full consideration and held consultations with the interested parties in an attempt to forge a compromise. While the African proponents believed that agreement on this issue would have been a sign of good faith, the United States viewed the request for monetary compensation as inappropriate and better suited to a development assistance venue. When the Conference Chairman issued his draft text, many countries reacted negatively to the proposed compromise on cotton. Brazil, speaking on behalf of the G-20, referred to the proposal as totally insufficient. The Chairman’s text did not mention the elimination of subsidies but instead suggested that West African countries diversify out of cotton. The fact that the cotton initiative is one of the four key issues that the General Council Chairman has focused on after the ministerial, along with agriculture, industrial market access, and the Singapore issues, demonstrates its continued importance. Finally, certain participants have also cited the WTO’s cumbersome process for achieving consensus as contributing to the collapse of the talks. The WTO operates by consensus, meaning that any one participant opposing an item can block agreement. In the EU Trade Commissioner’s closing press conference in Cancun, he expressed frustration that there was no reliable way within the WTO to get all 146 member nations to work toward consensus. Relatively few formal meetings involving all members actually occurred in Cancun, although plenary sessions and working groups took place. Moreover, formal negotiating sessions involving all members were not conducive to practical discussion or to achieving consensus. Instead, they often involved formal speeches. As a result, small group meetings were used to obtain frank input and conduct actual negotiations. Although efforts were made to keep the whole membership involved through daily heads of delegations meetings, certain members expressed a sense of frustration and confusion as epitomized by indignation by some members at the subjects being discussed during the green room meeting on the last day. The Conference Chairman’s decision to make the controversial Singapore issues, and not agriculture, the first and last item for discussion on the last day of the ministerial conference caused a backlash by a group of developing countries that ultimately precipitated the meeting’s collapse. As opposed to the day-to-day negotiations, which are overseen in Geneva by the Director General acting as the head of the TNC and by the General Council Chairman, WTO ministerial conferences are unusual in that the Conference Chairman is the only person with the power to call and adjourn meetings, to invite participants, and to choose the topics for discussion. At Cancun, after the heads of delegations meeting the night before, the Chairman decided, after consulting with certain ministers, that he needed to see if there was any way to reach consensus on the Singapore issues, which seemed to him to be intractable. As a result, he convened a closed- door meeting of about 30 ministers broadly representative of the whole WTO membership on the morning of the final day of the conference to discuss them. According to reports, the EU representative reiterated at the beginning of this final, closed-door meeting his long-standing position that all four Singapore issues must be negotiated. Some developing countries, on the other hand, opposed starting negotiations on those issues. As the meeting progressed, the EU agreed to drop two (investment and competition), maybe even three (government procurement), of the Singapore issues—leaving trade facilitation on the table. This EU concession reportedly prompted some traditional opponents such as Malaysia and India to show some flexibility. The Chairman then recessed the meeting and asked the ministers to confer with other ministers who were not present in the “green room” to see whether there was consensus to negotiate on at least one of the Singapore issues. During the break, at a meeting of the African, Caribbean, Pacific (ACP), LDC, and African Union members, many of the ministers present voiced surprise and indignation over the sequencing of topics under discussion in the closed-door meeting. They were upset that the Singapore issues were being discussed rather than agriculture. The Singapore issues were seen as rich members issues, while agriculture and cotton resonated with the poorer countries. Finally, members of the ACP/African Union/LDC coalition believed that no deal was better than a bad deal, and a deal on the Singapore issues in the absence of any agreement on agriculture or the cotton initiative was deemed a bad deal. As one country member rhetorically asked during the debate— “What are we taking home for the poor? We must say no.” When the 30-country meeting reconvened, Botswana reported the decision of the ACP countries to the group, indicating that they could not accept negotiation on any of the Singapore issues, including trade facilitation, because “not enough was on the table.” According to reports, Korea, on the other hand, said it could not accept dropping any of the Singapore issues. The Conference Chairman then said that consensus could not be reached and decided to close the conference without agreement on any issue. At a press briefing later that afternoon after the collapse of the talks, the Chairman explained that he had begun with the Singapore issues because of the dissent voiced on that issue during the meeting the night before. He further explained that he had decided to end the ministerial because it was clear to him that consensus could not be reached. Some countries, including certain EU member states and some developing countries, however, complained about what they saw as a precipitous decision to end the talks. The Cancun Ministerial Conference highlighted the challenge of meeting the high and sometimes competing expectations created at Doha of both developing and developed countries, particularly with respect to negotiations on critical agricultural issues. While the issue has been contentious for many years, the Cancun experience demonstrates that forward movement on agriculture is central to the possibility of making further progress in the Doha Development Round. Although the Cancun meeting ended because of the lack of consensus on negotiating the Singapore issues, what many developing nations wanted from the developed world were concessions on agriculture, in particular dramatic reductions in export subsidies and domestic support. At this point, it is difficult to predict how the setback at Cancun will ultimately affect the Doha Development Round negotiations. There are some signs that both developed and developing countries are rethinking their positions. The United States and the European Union have shifted away from taking an active leadership role, but have recently signaled some willingness to engage in further negotiations. Although a number of G-20 members have abandoned the group or made statements undercutting its unanimity of views, the group’s founders still appear intent to play a leadership role in pushing for global agriculture reform. While progress remains possible, political events scheduled to occur over the next year may add uncertainty to the negotiating process. For example, in the United States, the 2004 presidential and congressional elections are looming, and protectionist pressures are rising along with the U.S. trade deficit. Elections in Europe and in one of the largest developing countries, India, may also have an impact on the negotiations. Finally, how WTO members handle long-simmering disputes on such topics as corporate tax subsidies and steel could also affect the negotiating climate. In this regard, President Bush’s recent decision to lift safeguard tariffs on steel may be viewed as an important development. As we have noted in previous reports, the WTO has often found it difficult to achieve consensus and bridge its members’ strongly held, disparate views on politically sensitive issues, in part because it is an ever-growing, more complex, and diverse organization. Various devices, such as interim deadlines, were put in place for the first stage of Doha negotiations to redress these significant organizational challenges, but they fell short of achieving desired progress. The WTO Director General and General Council Chairman have been given the green light to work with WTO members to narrow differences on key issues in hopes that they can still salvage an agreement by the January 1, 2005, deadline. However, the failure to achieve substantive progress by mid-December casts further doubt. One important consideration is that the delay in WTO negotiations could intensify momentum for concluding bilateral, subregional, or regional trade agreements. This has already happened in the United States, which, though remaining engaged in the WTO, has recently concluded three such agreements (Chile, Singapore, and Central America), is currently conducting negotiations on three others (Australia, Morocco and Southern African Customs Union), and has committed to begin negotiations on five others (Dominican Republic, Bahrain, Thailand, Panama, and the Andean region) as well as the 34-nation Free Trade Area of the Americas. Additional possibilities are in the wings. The effect that a proliferation of these kinds of agreements would have on the WTO is unclear. We requested comments on a draft of this report from the U.S. Trade Representative, the Secretary of Commerce, the Secretary of Agriculture, and the Secretary of State, or their designees. USDA’s Foreign Agricultural Service agreed with our report’s factual findings and analysis. Commerce’s Deputy Assistant Secretary for Agreements Compliance provided us with technical oral comments on the draft, which we incorporated into the report as appropriate. The Secretary of State declined to comment on our report. The U.S. Trade Representative provided formal comments (see app. IV), indicating that many of the issues identified in GAO’s analysis are consistent with the U.S. assessment of issues that must be addressed to put negotiations back on track in 2004. He stressed the United States is ready to exercise leadership provided other countries are prepared to negotiate meaningfully. The Assistant U.S. Trade Representative for WTO and Multilateral Affairs and other USTR staff also provided us with oral comments. While agreeing with much of the report’s information, they provided a number of factual and technical comments, which we incorporated as appropriate. In addition, USTR staff expressed some concern that the overall tone of the report placed too much emphasis on the importance of the Cancun ministerial itself and on the North-South divide, particularly given the meeting’s mandate from Doha and individual country positions. While we stand by the overall balance struck in our report, we did add some information to reflect the diversity within developing country ranks evident on certain issues. We are sending copies of this report to interested congressional committees, the U.S. Trade Representative, the Secretary of Agriculture, the Secretary of Commerce, and the Secretary of State. 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. Additional GAO contacts and staff acknowledgments are listed in appendix V. The Chairman of the Senate Committee on Finance and the Chairman of the House Committee on Ways and Means asked us to analyze (1) the overall status of the World Trade Organization’s (WTO) negotiations on the eve of the WTO’s ministerial conference at Cancun, Mexico, in September 2003; (2) the key issues for the Cancun Ministerial Conference and how they were dealt with at Cancun; and (3) the factors that influenced the outcome of the Cancun Ministerial Conference. We followed the same overall methodology to complete the two first objectives. From the WTO, we analyzed the 2001 Doha Ministerial Declaration and related documents, the July and August versions of the draft Cancun Ministerial Declaration, and other speeches and proposals from WTO officials, as well as some negotiation proposals from WTO members. From the WTO, U.S. government agencies, and foreign country officials, we obtained background information regarding negotiating proposals and positions. We met with a wide variety of U.S. government and private sector officials, foreign government officials, and WTO officials. Before the Cancun ministerial, we met with officials from the Office of the U.S. Trade Representative (USTR) and the U.S. Departments of Commerce, Agriculture, and State. We also met with officials from the Grocery Manufacturers of America and the Pharmaceutical Researchers and Manufacturers of America. In addition, we met with representatives from developed and developing countries in Washington, D.C., including Australia, Malaysia, Brazil, and Costa Rica. Further, we traveled to the WTO’s headquarters in Geneva, Switzerland, where we met with WTO officials and member country representatives from developed and developing countries, including Australia, Canada, the European Union (EU), Japan, Brazil, China, Malaysia, Mexico, and India. To analyze the factors that influenced the outcome of the Cancun ministerial, we attended the Cancun Ministerial Conference in Mexico in September 2003. In Cancun, we attended USTR congressional briefings and went to press conferences and meetings open to country delegates. Also, we reviewed domestic and international news media reports; news releases on the developments at the ministerial conference and statements about the outcome of the ministerial conference from the WTO, the U.S. and foreign governments, and other international organizations. and the final tariff rate resulting from the negotiations is t. The expression, which relates the two tariff rates, where c is a constant parameter, would be: t× a ------------- t× B t×------------------------ tt is the final rate, to be bound in ad valorem terms t is the base rate t is the average of the base rates B is a coefficient with a unique value to be determined by the participants. For purposes of our analysis, we assumed a coefficient of 1 would be used for all countries. However, the Chair’s proposal does not specify the value of coefficient and leaves open the possibility that a different coefficient could be used. with would differ for countries with average tariffs of 4 percent, 15 percent, and 30 percent. We selected the United States, Malaysia, and Brazil as examples of countries that respectively fit into those categories on the basis of WTO annual World Trade Report data on average overall bound tariff rates. We performed our work from June to October 2003 in accordance with generally accepted government auditing standards. Trade Negotiations Committee (TNC) meets The Chairman of the TNC, which had been established to oversee the Doha Round of global trade talks, reported that while the work of the TNC and its subsidiary bodies intensified in 2003, real negotiations had not yet begun. WTO General Council Chairman prepares draft ministerial declaration The text is intended as a first draft of an operational text through which ministers at Cancun would register decisions and give guidance and instruction in the negotiations. It reflects a lack of progress on key issues, as shown by its skeletal nature and the bracketed (disputed) items relating to “modalities” (rules and guidelines for subsequent negotiations) for agriculture, nonagricultural market access, and the Singapore issues (investment, competition , government procurement, and trade facilitation). Montreal mini-ministerial occurs Approximately 30 trade ministers from WTO members meet in Montreal to prepare for the Cancun Ministerial Conference. At the meeting, the ministers encourage the United States and the EU to narrow their differences on the central issue of agriculture. U.S. and EU submit joint agriculture framework The framework includes reductions in domestic support, with those members with higher subsidies making deeper cuts, a three-pronged strategy to reduce tariffs, and reduction of export subsidies. Group of 20 Developing countries submit agriculture counterproposal The proposal includes substantial cuts in domestic subsidies by developed countries, a tariff reduction formula that allows developing countries to make less substantial cuts, and the elimination of export subsidies. General Council Chairman and WTO Director General submit revised draft ministerial declaration Now 23 pages, the text continues to reflect significant differences between members on many issues. It includes frameworks for modalities in agriculture and nonagricultural market access as well as proposed modalities on each of the Singapore issues. Additionally, it includes a section related to a proposal by Burkina Faso, Benin, Chad, and Mali to eliminate cotton subsidies and provide compensation to the four countries while the subsidies are phased out. General Council approves Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and public health solution WTO members complete discussions mandated in Doha to make it easier for poorer countries to import cheaper generic drugs made under compulsory licensing if they are unable to manufacture the medicines themselves. The United States, previously the only member preventing an agreement, joins the consensus after the General Council Chairman provides a statement regarding WTO members’ shared understanding of the interpretation and implementation of the decision. Day 1 of Cancun Ministerial Conference Mexican President opens the ministerial conference, and ministers start work on key issues. The Conference Chairman appoints ministers to facilitate discussions on key issues—agriculture, nonagricultural market access, development issues, Singapore issues, and other issues. Ministers also debate a proposal on cotton from four African members. Day 2 The first informal heads of delegation meeting occurs, and the Director General is appointed to facilitate discussions on the cotton initiative. Group discussions also take place on agriculture, nonagricultural market access, the Singapore issues, development issues, and other issues. Day 3 A second informal heads of delegation meeting occurs in the morning and includes reports by the facilitators on each issue. Working group meetings continue throughout the day and conclude with a heads-of-delegation meeting at night. The Conference Chairman commits to draft a new version of the ministerial text and circulate it by the middle of the following day. Day 4 The Conference Chairman distributes a new draft ministerial text at a meeting with heads of delegations and then asks them to study the text and reconvene in the evening. After ministers reconvene, many criticize the draft text, arguing that their particular concerns have not been included. At the close of the meeting, the Conference Chairman warns ministers that if the ministerial conference fails, the negotiations might take a long time to recover. Day 5 The Conference Chairman begins closed-door consultations with 30 ministers representing a wide range of regional and other groups on the subject of the Singapore issues. During these consultations, positions shift, allowing the possibility of dropping two or possibly three of the issues. The Conference Chairman then suspends the meeting to allow participants to meet with their respective groups. When they return, there is no consensus on three, and the Conference Chairman decides to close the ministerial conference. Ministers subsequently approve a ministerial statement that instructs members to continue working on outstanding issues and to convene a meeting of the General Council by December 15 to take necessary action. Developing country status in the WTO brings certain rights. For example, provisions in some WTO agreements provide developing countries with the right to restrict imports to help establish certain industries, longer transition periods before they fully implement agreement terms, and eligibility to receive technical assistance. See article XVIII of the General Agreement on Tariffs and Trade (GATT), articles IV, XII, and XXV of the General Agreement on Trade in Services, and articles 66 and 67 in the Agreement on Trade-Related Aspects of Intellectual Property Rights. In addition, developing countries may benefit from the Generalized System of Preferences, under which developed countries may offer nonreciprocal preferential treatment (such as zero or low duties on imports) to products originating in those developing countries the preference-giving country so designate. See Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, adopted under GATT in 1979. “lower middle income,” $736 - $2,935; “upper middle income,” $2,936 - $9,075; and “high income,” $9,076 or more. Under the World Bank definition, the WTO membership currently has 105 developing economies, 30 of which are defined by the United Nations as LDCs. This includes 44 low income countries; 35 lower middle income countries; and 26 upper middle income countries. There are 40 high income WTO members (not counting the EU’s separate membership). The Cancun ministerial also recognized that upon ratification in their national parliaments, Cambodia and Nepal will accede to the WTO, both of which are LDCs. In addition to the individuals named above, Jason Bair, Etana Finkler, R. Gifford Howland, David Makoto Hudson, José Martinez-Fabre, Rona Mendelsohn, Jon Rose, and Richard Seldin made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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 e-mail alerts” under the “Order GAO Products” heading. | Trade ministers from 146 members of the World Trade Organization (WTO), representing 93 percent of global commerce, convened in Cancun, Mexico, in September 2003. Their goal was to provide direction for ongoing trade negotiations involving a broad set of issues that included agriculture, nonagricultural market access, services, and special treatment for developing countries. These negotiations, part of the global round of trade liberalizing talks launched in November 2001 at Doha, Qatar, are an important means of providing impetus to the world's economy. The round was supposed to be completed by January 1, 2005. However, the Cancun Ministerial Conference ultimately collapsed without ministers reaching agreement on any of the key issues. GAO was asked to analyze (1) the divisions on key issues for the Cancun Ministerial Conference and how they were dealt with at Cancun and (2) the factors that influenced the outcome of the Cancun Ministerial Conference. Ministers attending the September 2003 Cancun Ministerial Conference remained sharply divided on handling key issues: agricultural reform, adding new subjects for WTO commitments, nonagricultural market access, services (such as financial and telecommunications services), and special and differential treatment for developing countries. Many participants agreed that attaining agricultural reform was essential to making progress on other issues. However, ministers disagreed on how each nation would cut tariffs and subsidies. Key countries rejected as inadequate proposed U.S. and European Union reductions in subsidies, but the U.S. and EU felt key developing nations were not contributing to reform by agreeing to open their markets. Ministers did not assuage West African nations' concerns about disruption in world cotton markets: The United States and others saw requests for compensation as inappropriate and tied subsidy cuts to attaining longer-term agricultural reform. Unconvinced of the benefits, many developing countries resisted new subjects--particularly investment and competition (antitrust) policy. Lowering tariffs to nonagricultural goods offered promise of increasing trade for both developed and developing countries, but still divided them. Services and special treatment engendered less confrontation, but still did not progress in the absence of the compromises that were required to achieve a satisfactory balance among the WTO's large and increasingly diverse membership. Several other factors contributed to the impasse at Cancun. Among them were a complex conference agenda; no agreed-upon starting point for the talks; a large number of participants, with shifting alliances; competing visions of the talks' goals; and North-South tensions that made it difficult to bridge wide divergences on issues. WTO decision-making procedures proved unable to build the consensus required to attain agreement. Thus, completing the Doha Round by the January 2005 deadline is in jeopardy. |
NASA and its international partners (Canada, Europe, Japan, and Russia) are building the space station as a permanently orbiting laboratory to conduct materials and life sciences research and earth observations and to provide for commercial utilization and related uses under nearly weightless conditions. Each partner is providing hardware and crewmembers and each is expected to share operating costs and use of the station. The program’s highest-priority goals are to (1) maintain a permanent human presence in space, (2) conduct world-class research in space, and (3) enhance international cooperation and U.S. leadership through international development and operations of the space station. The technical achievements of the station program have been exceptional. Assembly of the space station began in November 1998 with the launch of the U.S.-funded, Russian-built Zarya module, followed by the launch of the U.S. Unity module in December 1998. The station’s occupancy began in October 2000 with the launch of the Expedition I crew. Since then, four other three-person crews have occupied the station while assembly continues. In addition, the crews have been conducting hands-on scientific research. Figure 1 shows the International Space Station on-orbit. Since its inception in 1984, the space station has undergone a number of redesigns and has been mired by cost growth and schedule slips. In January 2001, NASA announced that an additional $4 billion in funding over the next 5 years would be required to complete the station’s assembly and fund its operation. By May 2001 the estimated cost growth had increased to $4.8 billion. In response to the announcement, the administration directed NASA to take a number of actions, including terminating the propulsion module, deferring the habitation module, deferring the crew return vehicle, and reducing funding for scientific research to stay within the President’s budget projections. The President’s fiscal year 2002 budget blueprint and budget request for the space station lay out a strategy for containing cost growth that ensures the completion of the U.S. core station and deploys the elements of the program’s international partners. To achieve this strategy, NASA was required to construct a plan of action that addressed institutional and program reforms to establish processes for executing the baseline program. In July 2001, the NASA Administrator appointed the International Space Station Management and Cost Evaluation Task Force to conduct an independent external review and assessment of the station’s cost, budget, and management. The Administrator also asked the task force to provide recommendations that could provide maximum benefit to the U.S. taxpayers and the international partners within the President’s budget request. The task force reported its findings to the NASA Advisory Council in November 2001. In response to the task force’s recommendations, NASA is undertaking a number of initiatives to restore credibility to the station program. In addition, the Office of Management and Budget (OMB), with input from NASA, is developing criteria that are to be used for measuring progress toward achieving a credible program. OMB has imposed a 2-year “probation” period on NASA to provide time to reestablish the space station program’s credibility. Activities that are to take place during this period include establishing a technical baseline and a life-cycle cost estimate for the remainder of the program, prioritizing the core complete science program, and reaching an agreement with the international partners on the station’s final configuration and capabilities. NASA is working toward completing these activities by September 2002 in order to include results in its budget request for fiscal year 2004. Over the past 8 years, we have performed a body of work that highlighted the space station program’s cost growth and weaknesses in cost control. In addition, we have pointed out weaknesses in the agency’s financial management system as well as inadequate contract management oversight. Appendix II lists prior GAO reports and testimonies related to the space station program. According to NASA officials, as a consequence of the inadequate definition of requirements, changes in program content, schedule delays, and inadequate program oversight, the estimated development cost of the space station has grown by about $13 billion since 1995 of which about $5 billion is attributable to growth since the fiscal year 2001 estimate. However, the agency could not associate specific amounts of the estimated growth with the reasons cited. The program did not utilize available cost control tools to monitor and contain the growth and ignored NASA’s guidance in many cases. In addition, because of its focus on managing annual budgets, NASA failed to heed indicators of future cost growth that contributed to the uncertainty regarding the ultimate cost of the space station. One of the major reasons for the cost growth was NASA’s inadequate definition of requirements. For example, NASA originally estimated that 500,000 source-lines-of-code of space flight software would be required for the station’s operations. However, that estimate has now tripled to 1.5 million lines of code. In addition, NASA assumed that it could rely on computer simulations as opposed to rigorous ground testing to integrate the hardware and software of the various elements. However, program schedule slips permitted additional ground testing, which discovered significant integration problems that escaped notice during the computer simulations. As a result, the program established a more rigorous multielement integrated testing program. Changes in program content also contributed to the cost growth. A significant item of cost was introduced to the program in 1997 through the addition of the requirement for a crew return vehicle. NASA had planned to use two Russian Soyuz vehicles, each with a maximum capacity of three crewmembers, attached to the station for emergency crew return after achieving permanent six-person crew capability. However, NASA later determined that the Soyuz vehicle did not meet the requirements necessary to return an ill or injured crewmember. Thus, the program was modified to require a U.S.-built crew rescue capability for returning seven crewmembers at an estimated total cost of about $1.5 billion. Also, because of Russian funding problems that delayed the service module’s launch, NASA took on an additional development effort in fiscal year 1997 to guard against Russian nonperformance. The actions became collectively known as Russian Program Assurance and included an interim control module and a U.S. propulsion module in the event the Russians could not supply the service module and propellant logistics flights. By February 2001, Russian Program Assurance had added $1.3 billion in total estimated cost through fiscal year 2006. Schedule delays increased costs because, at a minimum, fixed costs such as salaries, contractor overhead, and sustaining engineering continued for a longer period than planned. When the space station was redesigned in 1993, NASA established May 1997 as the launch date for the first element and June 2002 as the assembly’s completion date. However, the first element was not launched until November 1998. By August 2000, the assembly complete date had slipped to April 2006—a total slip of 46 months. On the basis of NASA’s projected spending rate, the program incurred an additional cost of about $100 million for every month of schedule slippage. The magnitude of the cost growth began to surface in the spring of 2000 during program operating plan reviews in preparation of the fiscal year 2002 budget request. Following the program operating plan reviews, the program manager ordered a detailed assessment of costs to more specifically determine funding requirements through fiscal year 2006. Table 1 shows some of the major events leading up to the identification of the space station’s cost growth. The table illustrates that the program office did not have a credible cost-estimating capability, as the cost estimate changed and grew as the office continued to uncover additional growth areas. NASA has controls in place that should have alerted management to the growing cost problem and the need for mitigating action. These include guidance requiring cost management on a project, and cost and risk modeling capabilities. However, the management and cost evaluation task force and the supporting studies found that NASA did not utilize or ignored many cost control mechanisms because of its focus on fiscal year budget management rather than on total program cost management. NASA guidance requires that life-cycle cost be estimated, assessed, and controlled throughout a program’s life cycle. The estimates are to be prepared to support major program reviews and the development of budget submissions. A handbook instructs cost estimators in selecting a cost model for use in the estimating process and on the proper documentation of the results of the cost analysis. NASA has considerable cost-modeling capability, including several cost models and information related to the type of costing situations for which they would be appropriate. A study performed by the Rand Corporation for the Office of Science and Technology Policy, which supported the management and cost evaluation task force, noted that NASA has “very good” cost and risk modeling capabilities. However, the study found that the in-house capabilities were not well integrated into the program’s planning and management. Because of its short-term budget focus, the program had been reluctant to integrate cost estimation and control practices sufficiently robust to yield confidence in its budget estimates. The management and cost evaluation task force found that the final space station’s cost estimate at completion had not been a management criterion within NASA. According to the task force, because of NASA’s focus on executing the program within annual budgets, total cost and schedule became variables. To stay within the annual budget limits, the program’s basic content slipped, and total program cost grew. In addition, the cost analysis team that supported the task force cited NASA’s culture of managing the program to its annual budgets as perhaps the single greatest factor in the program’s cost growth. The management and cost evaluation task force made recommendations aimed at restoring cost credibility to the program. Some of those recommendations mirror requirements already contained in NASA guidance, as follows: Develop a life-cycle technical baseline to use as the basis for a formal cost estimate. Develop a full space station cost estimate using the Department of Defense’s (DOD) cost assessment approach, including the use of a cost- analysis requirements document to document the assumptions and results of the cost analysis. Prepare an integrated program management plan delineating the work to be accomplished, the work breakdown structure, required resources, and schedules. In an effort to mitigate the effects of the large cost growth, NASA reduced planned funding for space station research by about $1 billion for fiscal years 2002 through 2006. The mitigation actions resulted in significant and perhaps long-term reductions in the scope and capability of the station for conducting scientific research. NASA proposed major changes in the station’s design for fiscal year 2001 that resulted in fewer on-orbit scientific facilities, and less research, and limited the crew available for conducting research. The research communities, international partners, and recent studies have raised concerns about the viability of the space station’s science program. The restructured science program will provide fewer facilities needed for conducting scientific research on board the space station. The station’s baseline for fiscal year 2001 supported a crew of six to seven astronauts and provided for the outfitting of 27 U.S. research facilities and experiment modules for research in a range of science disciplines. Following the announced cost growth, NASA’s Office of Biological and Physical Research, Office of Space Flight, and the space station’s Payloads Office at the Johnson Space Center initiated a program restructuring activity to align the research program with the on-orbit capabilities and resources available. This activity slowed down selected fiscal year 2001 expenditures to better match the availability of resources for fiscal year 2002 and optimized the scientific utilization of the reduced on-orbit capability. The reduction of content to the revised baseline was not reconciled against standing agreements with the program’s international partners. The budget content for fiscal years 2002 and 2003 for the core-complete station provides for the outfitting of 20 research facilities, known as “racks,” leaving about one fourth of the previously planned racks and their utilization unfunded. Some research disciplines were severely affected by the fiscal year 2002 reduction. For example, significant experiments planned to conduct research on materials such as metals, alloys, glasses, and ceramics, and in biotechnology were canceled. In addition to less hardware for research, there are constraints to utilization of the science facilities principally because the station’s crew size will be reduced from a planned seven to three. This will limit the crewmember hours that can be devoted to research. For example, astronauts will have limited time to be used as subjects in research on the effects of space flight on humans. According to NASA officials, crew research hours will be a major limiting factor on the number and complexity of experiments after the arrival of the international partner modules in 2004-2005, particularly constraining research that requires the crew’s interaction. NASA officials stated that some crew interaction is required for nearly all space station investigations. These activities include testing, monitoring, sampling, instrument readings, completing questionnaires, and recording results. NASA currently estimates that a minimum of 2.5 crewmembers will be required for maintaining the station, exclusive of their science-related duties during assembly. NASA had planned that crew time for scientific research would be 100 + hours per week, but the crewmember reduction would limit time to a minimum of 20 hours per week. The 20-hour minimum threshold was established by the space station program manager but has not been met. Table 2 shows NASA’s calculation of how the 20 research hours per week would be allocated among the station partners. NASA is looking at ways to mitigate the impact of this reduction. In addition to the funding-driven research cuts cited above, the United States would receive less research capability from an existing major barter arrangement with the Japanese. In return for NASA’s launch of the Japanese Experiment Module, Japan is providing the centrifuge accommodation module and centrifuge rotor, which are essential for conducting controlled biological experiments. As a result of technical risk and cost issues associated with the proposed design, NASA accepted a Japanese Space Agency request to reduce the number of science habitats supported from eight to four. The research communities and international partners are not satisfied with reductions in the space station’s capabilities. In the fall of 2000, Congress directed the National Research Council and the National Academy of Public Administration to organize a joint study of the status of microgravity research in the life and physical sciences as it relates to the station. In a late 2001 report, the team concluded that the viability of the overall science program in microgravity would be seriously jeopardized if the space station’s capabilities were reduced below fiscal year 2001 levels and there were no annual microgravity research dedicated shuttle flights. The study found that the U.S. scientific community is ready now to use the space station but that this readiness cannot be sustained if (1) proposed reductions in the scientific capabilities occur, (2) slippage continues in both the development and science utilization schedules for the space station, or (3) uncertainties continue in funding for science facilities and flight experiments on the space station. The study observed that readiness is beginning to deteriorate and that it will continue to erode with further delays in the completion of the space station. NASA officials stated that the station’s international partners have major concerns regarding the uncertainty that NASA will meet its international commitments for the habitation function and crew rescue capability. According to NASA, the partners have stated that a station configuration that provides for only three crewmembers is unacceptable. NASA plans to develop an optional space station configuration and hopefully obtain appropriate U.S. and partner concurrence by November/December 2002. Several recent studies and NASA’s actions highlight concerns regarding the space station’s science program. The November 2001 report of the management and cost evaluation task force found that the U.S. core complete configuration as an end-state would not achieve the unique research potential of the space station. A December 2001 NASA Independent Implementation Review found that budget reductions, crew hour limitations, and the realization of other resource constraints have all significantly reduced the anticipated space station research content in terms of quality and quantity. For example, there are fewer flight investigations and tests, and some science disciplines cannot achieve planned program goals. In addition, the scientific community and the international partners have raised concerns. The research reductions, if not mitigated, may jeopardize the scientific community/partner’s capacity for conducting high value research. NASA has several institutional and program reforms under way to respond to the management and cost evaluation task force’s recommendations and to bring cost-estimating credibility to the space station program. Specifically, the agency is preparing a life-cycle cost estimate, developing a plan to strengthen program management and controls, and reprioritizing the station’s science program. NASA is attempting to complete many of these tasks by September 2002 to influence its fiscal year 2004 budget submission. In July 2001, NASA developed a plan that described the actions that the agency believed were required to respond to the President’s budget blueprint requirements, defined conditions for closing the actions, and provided for OMB to monitor NASA’s progress in implementing the reforms. The plan called for measures to improve cost-management and cost-estimating accuracy, such as metrics designed to alert management to pending problems, including an early warning system for potential cost growth, and the establishment of a cost-estimating capability to take advantage of the latest estimating and management tools and techniques. To strengthen the cost-estimating and control function, the program office is also establishing a management information system and hiring cost estimators. An interim management information system will be used initially, and the permanent system is to be available by March 2003 during the implementation of a key component of the Integrated Financial Management Program at the Johnson Space Center. The program office has the authority to hire 10 estimators, which it plans to use to establish a cost- estimating capability in the station’s program office. NASA is in the process of preparing its life-cycle cost estimate using the DOD cost assessment approach and plans to have it completed in early August 2002. An independent team headed by a DOD Cost Analysis Improvement Group official will prepare an independent cost estimate, also scheduled for completion in August 2002. The in-house and independent cost estimates will then be reconciled. The program office is also developing a plan to strengthen program management and controls. According to NASA officials, cost, schedule, and technical reviews will be implemented to provide the program manager with an early warning of potential problems, such as cost growth and budget overruns. The program will also develop risk analysis tools and improve risk system and cost integration. NASA is also taking steps to reprioritize the science to be performed on the space station. In consultation with the White House Office of Science and Technology Policy and OMB, NASA has assembled an ad-hoc external advisory committee to assist the agency in prioritizing its entire research program, including both station-based research as well as nonstation-based research. Consistent with recommendations from the management and cost evaluation task force, NASA is attempting to place the highest priority on investigations requiring access to the space environment. The scientific community will have representation on the ad-hoc committee and will therefore be involved in helping to reestablish science objectives and improving scientific productivity. The research advisory committee’s charter is to evaluate and validate high- priority science and technology research that will maximize the research returns within the available resources. It plans to (1) assess the degree to which key research objectives can or should be addressed by the space station, (2) identify and assess how options among the key research objectives would change if the station remains at the U.S. core-complete configuration or evolves with additional funding, and (3) recommend modification or addition to the Office of Biological and Physical Research’s goals and objectives. In addition, the advisory committee will also identify and recommend criteria that can be used to implement specific research activities and programs on the basis of priorities. According to a NASA official, the agency plans to report the advisory committee’s findings to OMB in August 2002. The report is to include the prioritized research program and the roadmap to getting there. NASA’s goal is to reflect the science research priorities in its fiscal year 2004 budget submission. Successfully completing these initiatives is vitally important, since they are integral to providing Congress and agency decision makers with the information they need to make decisions on the future of the space station. But there are significant challenges facing NASA in completing them. NASA’s milestones provide for almost no slippage. Specifically, the preparation of a reliable life-cycle cost estimate may be difficult because NASA currently lacks a modern integrated financial management system to track and maintain data needed for estimating and controlling costs. Such a system was not available when NASA prepared the $4.8 billion cost growth estimate and thus the accuracy of that estimate is questionable. The NASA Administrator has established the integrated financial management program as one of his top priorities. The successful implementation of the first major component, the core financial system, by June 2003 is critical to the agency’s ability to control costs. In addition, many tasks and studies being undertaken will not be completed until September 2002, leaving NASA with a very short time frame to incorporate its results into the 2004 budget. These include NASA’s study and independent validation of life- cycle costs, its assessment of long-and short-term options for increasing the station’s crew complement, and its assessment of how research can be maximized with limited deliveries of samples and equipment. (Deliveries would be limited because NASA plans to reduce space shuttle flights from seven to four per year.) Lastly, NASA has not yet reached agreements with its international partners on an acceptable on-orbit configuration as well as how research facilities and costs should be shared. Such agreements are important not only to reach a decision on the end-state of the space station but also to strengthen support of the program’s international partners. NASA is at a critical juncture with the space station program. Because of the cost growth, the program is essentially unable to carry out the full intent of its original objectives. This has raised concerns from NASA’s international partners. To begin working through this dilemma, NASA must first develop a credible budget for the core-complete station, define a station configuration that will be acceptable to the international partners, and obtain OMB’s approval. This is a difficult endeavor in itself, since NASA is facing a highly compressed schedule and does not have an integrated system for estimating and controlling costs. The agency is attempting to use the latest estimating and management tools and techniques but needs accurate, detailed cost data and the ability to compare resulting estimates with actual costs. If NASA cannot succeed with a viable budget for fiscal year 2004, it will jeopardize the opportunity for Congress and the administration to regain confidence in the program. If NASA does succeed with the fiscal year 2004 budget, it still faces considerable challenges with the space station program. In the short run, it must successfully work with its international partners to decide how to best use the resources that remain available to the program. This is a significant challenge because it involves prioritizing research programs for which partners already have a vested interest. Moreover, in the long run, NASA must find ways to make sure that the restructured program stays on track. This not only means making sure that the root causes of problems that have plagued the program are sufficiently addressed, but that any schedule slippage or cost growth is immediately addressed and that oversight mechanisms already in place are vigilantly adhered to. In written comments on a draft of this report, NASA’s Associate Deputy Administrator for Institutions said that the report represents the issues and actions taken to address cost growth. He also stated that other external reviews are scheduled for September 2002 and that continued evaluations by GAO would be appreciated. To determine the reasons for the cost growth, we evaluated previous internal and independent analyses of the space station’s cost growth. We also interviewed NASA officials regarding cost estimates and the process by which cost information is studied and communicated throughout NASA. To assess program oversight mechanisms, we reviewed NASA’s policies and procedures governing program management. We also interviewed procurement and program management officials to identify specific tools used in the program’s oversight and assessed the extent to which the program relies on contractor inputs to perform its internal cost analyses. To assess the impacts of cost reduction proposals on the space station’s utility, we evaluated the minutes from Space Station Utilization Advisory Subcommittee meetings, along with internal and external studies on the effects of cost reduction proposals on station research activities. In addition, we reviewed a report by the National Research Council related to the research capabilities of the space station. We also interviewed cognizant program officials and officials within the research community. To accomplish our work, we visited NASA headquarters, Washington, D.C; Johnson Space Center, Texas; and Marshall Space Flight Center, Alabama. We also coordinated our work with independent and NASA-internal teams performing space station program reviews. We conducted our work from June 2001 through April 2002 in accordance with generally accepted government standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the NASA Administrator; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staffs have any questions about this report. Major contributors to this report are listed in appendix III. NASA: Compliance With Cost Limits Cannot Be Verified. GAO-02-504R. Washington, D.C.: Apr. 10, 2002. NASA: Leadership and Systems Needed to Effect Financial Management Improvements. GAO-02-551T. Washington, D.C.: Mar. 20, 2002. NASA: International Space Station and Shuttle Support Cost Limits. GAO-01-100R. Washington, D.C.: Aug. 31, 2001. Space Station: Inadequate Planning and Design Led to Propulsion Module Project Failure. GAO-01-633. Washington, D.C.: June 20, 2001. Space Station: Russian-Built Zarya and Service Module Compliance With Safety Requirements. GAO/NSIAD-00-96R. Washington, D.C.: Apr. 28, 2000. Space Station: Russian Compliance with Safety Requirements. GAO/T- NSIAD-00-128. Washington, D.C.: Mar. 16, 2000. Space Station: Russian Commitment and Cost Control Problems. GAO/NSIAD-99-175. Washington, D.C.: Aug. 17, 1999. Space Station: Cost to Operate After Assembly Is Uncertain. GAO/NSIAD- 99-177. Washington, D.C.: Aug. 6, 1999. Space Station: Status of Russian Involvement and Cost Control Efforts. GAO/T-NSIAD-99-117. Washington, D.C.: Apr. 29, 1999. Space Station: U.S. Life-Cycle Funding Requirements. GAO/T-NSIAD-98- 212. Washington, D.C.: June 24, 1998. International Space Station: U.S. Life-Cycle Funding Requirements. GAO/NSIAD-98-147. Washington, D.C.: May 22, 1998. Space Station: Cost Control Problems. GAO/T-NSIAD-98-54. Washington, D.C.: Nov. 5, 1997. Space Station: Deteriorating Cost and Schedule Performance Under the Prime Contract. GAO/T-NSIAD-97-262. Washington, D.C.: Sept. 18, 1997. Space Station: Cost Control Problems Are Worsening. GAO/NSIAD-97-213. Washington, D.C.: Sept. 16, 1997. NASA: Major Management Challenges. GAO/T-NSIAD-97-178. Washington, D.C.: July 24, 1997. Space Station: Cost Control Problems Continue to Worsen. GAO/T-NSIAD- 97-177. Washington, D.C.: June 18, 1997. Space Station: Cost Control Difficulties Continue. GAO/T-NSIAD-96-210. Washington, D.C.: July 24, 1996. Space Station: Cost Control Difficulties Continue. GAO/NSIAD-96-135. Washington, D.C.: July 17, 1996. Space Station: Estimated Total U.S. Funding Requirements. GAO/NSIAD- 95-163. Washington, D.C.: June 12, 1995. Space Station: Update on the Impact of the Expanded Russian Role. GAO/NSIAD-94-248. Washington, D.C.: July 29, 1994. Space Station: Impact of the Expanded Russian Role on Funding and Research. GAO/NSIAD-94-220. Washington, D.C.: June 21, 1994. Jerry Herley, James Beard, Fred Felder, Erin Baker, Cristina Chaplain, Belinda LaValle, and John Gilchrist made key contributions to this report. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | The National Aeronautics and Space Administration (NASA) revealed that the cost to complete assembly of the international space station has risen from $25 billion to $30 billion. Much of that cost growth is due to inadequate definition of requirements, changes in program content, schedule delays, and poor program oversight. Weaknesses in the program's cost-estimating process call into question the credibility of NASA's plans to carry out its budget through fiscal year 2006. The cost growth has also severely affected the space station's ability to conduct scientific research. NASA has instituted several management and cost-estimating reforms, including a life-cycle cost estimate, a program management plan, and a reprioritized science program. However, significant challenges remain. Preparation of the life-cycle cost estimate may be difficult because NASA's financial management system is unable to adequately track space station costs. Many tasks and studies being undertaken will not be completed until September 2002, leaving NASA with little time to incorporate its results into its budget for fiscal year 2004. Finally, NASA has yet to reach an agreement with its international partners on an acceptable on-orbit configuration, the sharing of research facilities, and cost sharing. |
The strategic objective of USAID’s Cuba Program—part of the agency’s Bureau for Latin America and the Caribbean—is to help build civil society in Cuba by increasing the flow of accurate information on democracy, human rights, and free enterprise to, from, and within Cuba. The responsibilities of the Cuba Program office include cochairing an interagency working group, developing assistance strategies and programs, recommending Cuba democracy assistance awards, and monitoring the implementation of USAID grants. Because of the absence of diplomatic relations between the United States and Cuba, USAID does not have staff in Cuba and its Washington-based staff have been unable to obtain visas to visit the island since 2002. State’s U.S. Interests Section (USINT) in Havana plays a key role in implementing USAID’s Cuba democracy assistance. From 1996 through 2005, USAID’s Cuba Program awarded about $67 million in democracy assistance grants to NGOs and universities to support numerous activities related to promoting democracy and developing Cuba’s civil society. In 2005, for example, Cuba Program grantees reported providing humanitarian and material assistance, training for independent civil society groups, and uncensored information. Several grantees also worked to increase international awareness of the Cuban regime’s human rights record through activities such as sponsoring conferences and publishing studies, while one grantee focused primarily on planning for a democratic transition in Cuba. USAID records show that Cuba Program grantees provided this assistance to, among others, human rights activists, political dissidents, independent librarians, journalists, and political prisoners and their families. From 2006 through 2008, USAID’s Cuba Program awarded 10 new democracy assistance grants totaling about $16.3 million, bringing the total value of grants since the Cuba Program’s inception to about $83 million. As of October 2008, the Cuba program had 13 grants totaling about $32 million; these grants ranged in size from $500,000 to nearly $11 million. Congress appropriated $45 million for U.S. democracy assistance for Cuba in 2008; USAID has been allocated about $30 million of the 2008 appropriation, with the remainder allocated to State. (Fig. 1 shows the funding for U.S. democracy assistance for Cuba for 1996-2008.) The administration has requested $20 million for 2009; agency allocations for these funds have not yet been established. Increased funding for democracy assistance was a recommendation of the interagency Commission for Assistance to a Free Cuba (CAFC). USAID’s Cuba Program plans other substantial awards over the next few years. The following summarizes our November 2006 report’s findings of problems with the USAID Cuba Program’s awards and oversight of its Cuba democracy assistance from 1996 through 2005. Awards. USAID’s Cuba Program relied on unsolicited proposals to award about 95 percent (about $62 million) of its democracy assistance, although agency policy generally encourages competition for such awards. USAID’s Cuba Program also frequently modified the amounts and length of existing grants, increasing the aggregate value of these initial agreements from about $6 million to about $50 million. In contrast, federal law and agency policy generally favor a competitive process; moreover, closing grants and initiating new ones has recognized advantages. Oversight. Weaknesses in USAID’s oversight of its assistance grants during the preaward, award, implementation, and closeout phases increased the risk of grantees’ improper use of grant funds and noncompliance with applicable laws and regulations. Preaward audits of some grantees were not always completed before grant award, and USAID did not follow up adequately to correct deficiencies identified by these audits. Standardized language in grant agreements lacked the detail necessary to support program accountability and the correction of grantee deficiencies identified during preaward reviews. Moreover, the Cuba Program office did not adequately identify, prioritize, or manage at-risk grantees and did not have critical review or oversight procedures in place to monitor grantee activities or cost sharing. Additionally, USAID did not appear to routinely follow prescribed closeout processes to identify and recover inappropriate expenditures or unexpended funds. Our limited review of 10 grantees’ financial records identified questionable expenditures and significant internal control weaknesses, which USAID had not detected, at 3 of the grantees; we referred these problems to the USAID Office of Inspector General. Figure 2 shows our 2006 recommendations to strengthen USAID’s oversight of the Cuba Program’s democracy grants. In 2006 and 2007, USAID said that it was taking steps to address our recommendations and improve its oversight of democracy assistance for Cuba. Since 2006, USAID has taken steps to improve the Cuba Program’s award and oversight of democracy assistance. To address identified problems with awards, since 2006, the Cuba Program has competitively awarded all democracy assistance grants and discontinued its use of funded grant extensions. To improve its oversight of the grants, USAID has provided additional resources to manage and oversee the Cuba Program’s aid and implemented specific improvements in grant oversight to address our recommendations. (See app. II, table 2, for a summary of our November 2006 findings and recommendations regarding the Cuba Program’s awards and oversight of democracy assistance as well as USAID’s proposed or reported corrective actions and the status of these actions.) However, as of November 2008, USAID had not yet achieved the staffing level it assessed as needed for appropriate oversight. Moreover, because many of USAID’s actions to improve oversight were taken recently, their impact on the risk of Cuba Program grantees’ misusing funds and failing to comply with U.S. laws and regulations is not yet evident. USAID’s Cuba Program has competitively awarded all $16 million (10 grants) of democracy assistance since 2006. In comparison, during its first 10 years, the Cuba Program competitively awarded only 5 percent (about $4 million, 5 grants) of its democracy assistance. The increased use of competition reflects the USAID Cuba Program’s implementation, in 2007 and 2008, of a policy of using competitive solicitation as the principal method for awarding its democracy assistance grants. Further, since 2006, USAID’s Cuba Program has discontinued its practice of modifying existing grants to provide substantial additional funding rather than awarding new grants and has implemented a policy that requires grantees to submit interim evaluations in conjunction with any future requests for additional funding. In 2006-2008, the Cuba Program approved a limited number of no-cost grant extensions but did not consider funded modifications to expand the program. Additionally, in 2007, the Cuba Program notified grantees that they would be required to submit interim program evaluations when requesting significant increases in funding or extensions; as of November 2008, the Cuba Program had received no such requests. Subsequent to these changes in the USAID Cuba Program’s practices and policy, the percentage of its grantees that are worldwide or regional NGOs increased while the percentage of grantees that are Cuba-specific NGOs declined (see fig. 3). According to the Cuba Program Director, the shift in grantee type reflects the more formal requirements for submitting a grant proposal contained in the Cuba Program’s 2007 and 2008 annual program statements, such as the requirement that proposals include a detailed implementation plan. In addition, the shift reflects a decision, starting with the 2008 program statement, to fund grants that incorporate capacity building for subgrantees as an important element of program activity. The Director noted that building subgrantee capacity supports the goal of improving grant oversight, as well as the program goal of developing civil society organizations that will be effective in assisting Cuba’s transition to democratic governance and a free market economy. USAID has recently taken, or plans to take, actions to increase the Cuba Program’s resources for oversight. In addition, USAID has recently taken actions aimed at improving specific aspects of the Cuba Program’s grant oversight. However, staffing of the Cuba Program has not reached the level that USAID has determined is needed to ensure adequate oversight. In addition, in some cases the impact of these actions on the risk of Cuba Program grantees’ misusing funds and failing to comply with U.S. laws and regulations is not yet apparent. To increase resources aimed at improving the management and oversight of Cuba Program democracy assistance, USAID established a Cuba project committee comprising key USAID and State senior managers in December 2006; has hired more staff for the Cuba Program office since January 2008; and contracted for financial services—including reviews of grantee internal controls, procurement practices, and expenditures—to enhance oversight of grantees in April 2008. In addition, the USAID Cuba Program plans to use contract services to provide technical assistance and build the capacity of its grantees, particularly smaller organizations. Cuba project committee. USAID established a project committee in December 2006 to lead the agency’s efforts to improve its management and oversight of Cuba Program democracy assistance and provide greater attention from senior management. This committee consisted of senior officials from USAID’s Bureau of Management (which includes the Office of Acquisition and Assistance) and General Counsel and State’s Bureau of Western Hemisphere Affairs (including the Cuba Transition Coordinator), in addition to the USAID Cuba Program Director. The committee met at least quarterly to address Cuba assistance planning, preaward reviews, and grantee monitoring and evaluation. According to USAID records, topics of discussion have included (1) identifying high-risk grantees, including outstanding audit issues, the need for follow-on reviews, and review of grantees’ monitoring and implementation plans; (2) issuing a communication to reinforce USAID guidance on preaward reviews and stress the importance of timely follow-up to identified findings; (3) reviewing standard grant provisions to ensure that grantees were provided clear guidance on how to access referenced regulatory materials; (4) obtaining and approving updated and expanded implementation plans from certain grantees; and (5) obtaining detailed cost-share records from contributing grantees and submitting them to the Office of Acquisition and Assistance for review. In late 2007, USAID divided the project committee’s responsibilities between two new committees. Cuba Program staffing. Since January 2008, to improve its implementation of Cuba democracy assistance, USAID has increased staffing in the program office from two to five persons; however, staffing remains short of the 11 persons recommended in USAID assessments. In December 2007, in response to concerns expressed in our November 2006 report and a recommendation in a September 2007 report by USAID’s Office of Inspector General, a formal USAID assessment recommended staffing the program office with a director and eight staff to ensure successful implementation of the program as well as appropriate monitoring and oversight of grantees and grant funds. Subsequently, a more informal assessment by the USAID Cuba Program office identified the need for two additional staff. Based on these assessments, the Cuba Program has hired three new staff members since January 2008, bringing the total staff to five persons as of October 2008. According to the Cuba Program Director, the program plans to hire two more staff members by January 2009 and a third by July 2009 at the earliest. Financial services contract. To strengthen grantee oversight and better manage program risks, USAID’s Cuba Program contracted in April 2008 with a firm headquartered in Washington, D.C., to conduct 10 to 12 financial reviews annually over 2 years, at an estimated cost of $1 million. USAID procured these services to strengthen program management and provide grantees—particularly smaller, less experienced organizations— needed guidance and technical support as recommended in our 2006 report. According to the contract statement of work and related documents, the contractor will (1) conduct annual financial reviews of grantees, including grantees’ internal controls, procurement practices, and expenditures; (2) follow up on the findings and recommendations of preaward reviews and other audits to advise whether grantees have corrected any weaknesses that were identified; and (3) conduct other special reviews as needed. The contracting officer and the Contract Audit Management Division within USAID’s Office of Acquisition and Assistance review and approve all work plans (including research design, data collection instruments, and analysis plans) and draft and final reports. In June 2008, the contractor began reviews of Cuba Program grantees’ procurement systems, starting with three Miami-based grantees. Program to build grantee capacity. To help improve the management and oversight of Cuba democracy assistance, USAID’s Cuba Program has taken initial steps to establish a means to provide essential training and additional oversight of smaller grants using a “grants under contract” mechanism. The decision to fund this program was based on USAID’s assessment of grantee risk, particularly the risks posed by smaller, less experienced grantees. USAID expects to start implementing this program in 2009. USAID has taken a number of actions specifically aimed at strengthening oversight by ensuring preaward reviews and follow-up; improving grantee internal controls and implementation plans; providing guidance and monitoring for assistance and cost sharing; and developing structured approaches for site visits and other monitoring. Preaward reviews and follow-up. USAID has taken several actions to ensure that preaward reviews are completed prior to grant awards. The agency also has taken several actions to improve follow-up on issues identified during preaward reviews. Since January 2007, the Cuba Program, working though the Cuba project and internal management committees, has worked to provide sufficient lead time for preaward reviews and tracked the resolution of preaward review issues. In March 2007, USAID’s Office of Acquisition and Assistance issued an agencywide bulletin that stressed the importance of (1) providing sufficient lead time for the completion of preaward reviews and (2) timely follow-up and resolution of deficiencies identified in those reviews. In 2007, USAID also developed revised grant agreement language linking resolution of issues and findings of preaward reviews and follow-up reviews to the obligation of incremental grantee funding; to date, this language has been used in grant agreements as appropriate. According to the Chief of the Contract Audit Management Division within USAID’s Office of Acquisition and Assistance, the Cuba Program’s planned use of the new financial review services contract will help ensure timely follow-up on the results of preaward reviews. Previously, competing demands on the division for preaward and follow-up reviews by other USAID bureaus and offices had delayed reviews for some Cuba grantees. Grantee internal controls and implementation plans. USAID has taken several actions to require that grantees establish and maintain adequate internal control frameworks and develop approved grant implementation plans. Internal controls. The Cuba Program office provided grantees guidance for accessing reference materials to relevant policies and procedures on several occasions. This guidance included an addendum for grant agreements, linked to relevant policies and procedures, that USAID developed in March 2007 and that USAID records show was provided to all grantees at, for example, grantee quarterly coordination meetings and by e-mail. Grantees also were e-mailed a list of Internet links for all statutory, regulatory, and legal references in their USAID grant agreements. Additionally, in 2007, the Cuba Program office developed a briefing outline to be used in explaining internal control and other requirements to new grantees. Implementation plans. In January 2007, the Cuba project committee recommended that the Cuba Program (1) review grantees’ existing implementation plans to ensure that such plans were documented and adequate and (2) request that grantees with significant remaining grant funding update and expand their implementation plans. The Cuba Program completed its initial round of reviews in May 2007; follow-up on recommended changes was completed April 2008. The approved plans provide a monthly summary of anticipated activities to assist in monitoring grantees and are to be updated annually. Further, in 2007, the Cuba project committee recommended that the Cuba Program and the Office of Acquisition and Assistance develop and include a new provision in grant agreements to require that grantees submit written implementation, monitoring, and evaluation plans for approval within 30 days of the award’s start date. In 2008, USAID officials agreed on the grant provision, which has been included in agreements for new awards. Guidance and monitoring for assistance and cost sharing. USAID has taken several steps to provide grantees specific guidance on permitted types of assistance and on cost sharing and to ensure monitoring of grantee expenditures for these items. Permitted assistance. To prevent the use of grant funds for inappropriate expenditures, as identified in our 2006 report, USAID has provided grantees clearer, more detailed guidance regarding items that may be provided as humanitarian or material assistance. In addition, in early 2007, the Cuba Program required existing grantees to include detailed lists of proposed items in their updated implementation plans and requires such lists in the implementation plans required to be submitted with new grant proposals. USAID reports that these lists enhance oversight and monitoring of grantee activities. In addition, the financial services contractor will verify whether grantee assistance costs were allowable. Cost sharing. USAID has provided agencywide guidance on cost sharing and reviewed grantees’ cost-share contributions. In January 2007, as recommended by the Cuba project committee, USAID’s Office of Acquisition and Assistance issued an agencywide bulletin that reemphasized the restrictions and limits on cost sharing for grants and clarified that USAID does not permit funds obtained from the National Endowment for Democracy to be counted toward grantee cost-share requirements. The cost-share policy is reflected in Cuba democracy grant agreements. In January 2007, the Cuba project committee recommended that the Cuba Program obtain detailed cost-share records from grantees and submit these records to the Office of Acquisition and Assistance for review. As of mid-June 2008, USAID had completed its review of the cost-share records for all nine then-current grantees with cost-share obligations and had found that three grantees had not met a substantial share of their cost-share obligations. USAID reduced one grantee’s cost-share obligation from $1,065,860 to $523,450 and was following up with the other two grantees regarding their failure to meet their cost-share obligations. During two site (monitoring) visits that we observed in June 2008, USAID staff reviewed the types of cost sharing permitted and emphasized the importance of keeping adequate records to support cost-share claims. In addition, the new financial services contractor will review grantee support for cost-share claims. Structured approach for site visits and other monitoring. USAID has taken, or plans to take, several actions to develop and implement a more formal, structured approach for site visits and other grant monitoring activities. These actions taken included the following: The USAID Cuba Program has developed and used a formal, structured approach for its quarterly site visits to grantees. To facilitate and ensure consistency in these visits, program staff use a form to describe grantee activities, evaluate grantee accomplishments, and assess compliance with grant internal control and other requirements. During our observation of two site visits, we noted that USAID sent copies of these forms to grantees via e-mail in advance of the visits so that grantees could confirm the accuracy of basic data. USAID reports taking initial steps to use information gathered to identify at-risk grantees and prioritize monitoring. For example, in May 2007, after noting poor grantee record keeping during several site visits, the former program Director e-mailed grantees to emphasize the need to maintain adequate documentation in their offices of labor costs, rent expenses, and telephone costs, as well as other records needed to demonstrate that U.S. funds were being spent for the grants’ authorized purposes. USAID also has emphasized this requirement during quarterly grantee coordination meetings and site visits. The current Cuba Program Director told us that, using new staff resources, she plans to develop and implement a formal system for performing detailed analyses of the site visit results to identify at-risk grantees and prioritize monitoring. As a first step, the Cuba Program recently initiated quarterly reviews of the program’s portfolio of grantees to identify at-risk grantees and other issues. Because many of USAID’s actions to improve its oversight of the Cuba democracy grants were implemented recently, in 2007 and 2008, their impact on the risk of grantees’ misusing grant funds or failing to comply with U.S. laws and regulations is not yet evident. In mid-June 2008, USAID’s financial services contractor’s review of financial records for three Cuba Program grants found that one of the grantees—GAD—lacked adequate support for some purchases. In late June 2008, we confirmed the USAID contractor’s finding during our limited review of financial and other records at 5 of the 10 grantees examined for our November 2006 report (see app. I for more information about this limited review). Specifically, we identified several cases where substantial charges to GAD’s credit card were not supported by receipts listing the items purchased. In response to reports of fraud at organizations that had received the USAID Cuba Program’s two largest democracy aid grants—CFC and GAD—USAID suspended both grants pending the results of USAID Inspector General investigations. Additionally, in mid-July 2008, USAID decided to accelerate planned reviews of Cuba democracy grantees’ procurement systems under the April 2008 financial review services contract and to conduct audits of grantees’ incurred cost under the Inspector General; pending the results of those reviews and audits, USAID partially suspended two more grants. The procurement reviews, which were completed in August 2008, identified weaknesses at three grantees; USAID is working with the grantees to correct these weaknesses. USAID expects the incurred cost audits to be completed by November 2008 under a contract with another firm. CFC. In March 2008, USAID suspended its $7.2 million grant to CFC, awarded in 2005, after the CFC’s Executive Director informed USAID that the organization’s former Chief of Staff had misused USAID grant funds. CFC’s grant expired on June 30, 2008, while it was suspended. In July 2008, auditors from USAID’s Contract Audit Management Division within the Office of Acquisitions and Assistance confirmed CFC’s estimate of the amount of funds stolen and concluded that the grantee had taken action to strengthen its system of internal control. On September 22, 2008, USAID reinstated the grant for 6 months. GAD. In July 2008, USAID suspended its $10.95 million grant to GAD, which was awarded in September 2000. On June 30, 2008, GAD’s Executive Director had informed USAID that, in following up on deficiencies that USAID’s financial services contractor and we had identified earlier that month, he had determined that one of GAD’s employees had used the organization’s credit card to make unauthorized purchases for his personal use; the employee had signed a statement admitting to these actions and had promised to repay the cost of these items and had been fired. USAID suspended the grant on July 2 and referred the matter to the USAID Inspector General for investigation; as of November 2008, the grant remained suspended, pending conclusion of the Inspector General’s investigation and the results of a financial system review by the financial review services contractor. The grant was scheduled to expire on September 30, 2008, but USAID extended the grant to March 31, 2009, to permit completion of the investigation and review. On July 18, 2008, USAID announced that, to determine whether financial vulnerabilities exist at grantees and how best to address them, it would initiate reviews of the Cuba Program grantees’ procurement systems under the April 2008 contract and subsequently conduct audits of grantees’ incurred cost under the USAID Inspector General. In addition, USAID reported that it had partially suspended two smaller grants pending the outcomes of the procurement reviews. The program’s other grants remained active, based on USAID’s review of the grantees’ A-133 audits and other relevant information, but pending the results of the procurement reviews and incurred cost audits announced in July 2008. Reviews of grantees’ procurement systems. In July 2008, USAID instructed the financial services contractor hired in April 2008 to accelerate planned reviews of current grantees’ procurement systems. The procurement reviews, completed in August 2008, identified internal control, financial management, and procurement weaknesses at three grantees. On September 24, 2008, USAID lifted one of the two partial suspensions after the grantee agreed to take several corrective actions. USAID is assessing whether to lift the other partial suspension based on grantee corrective actions, a change in grantee management, and other factors. GAD, the third grantee where the review found weaknesses, remains suspended. As of October 2008, the acceleration of the procurement reviews had used nearly half (about $450,000) of the $1 million set aside for the 2-year financial services contract signed in April. Further, USAID had not committed the additional funds needed to continue the planned reviews of grantees’ internal controls, procurement practices, and expenditures—key elements of the program’s approach to reducing grantee risks—over the contract’s remaining 18 months. Audits of grantees’ incurred cost. The USAID Inspector General will oversee the audits of grantees’ incurred cost, to be conducted under a separate contract with another firm. Initial work on the first three of these audits began in mid-September 2008; the Inspector General expects to complete nine audits by November 2008. USAID officials said that they would take steps, as appropriate, to address weaknesses identified by these audits. USAID estimated the total cost of these audits at about $300,000 to $340,000. Table 1 summarizes the status of USAID’s Cuba democracy grants as of October 2008. USAID has taken numerous actions since 2006 to improve the Cuba Program’s award processes and oversight of grantees. However, some planned actions have not yet been implemented. As recommended in our November 2006 report, USAID took steps to improve the timeliness of preaward reviews and resolve issues identified during those reviews and has provided more specific guidance on permitted types of humanitarian assistance and cost sharing. To provide resources and expertise, USAID also contracted with a financial review services firm to follow up on audit findings; review grantees’ internal controls, procurement practices, expenditures, and cost sharing; and provide grantees needed technical assistance. In addition, the Cuba Program now requires grantees to develop implementation plans and has developed a structured approach to monitoring grantees. However, staffing of the program office has not reached the level USAID determined is needed for effective grant oversight and, as a result, the office has taken only preliminary steps to implement a key part of its risk management approach—that is, to systematically analyze site visit and other grantee data to identify at-risk grantees and prioritize its monitoring. Moreover, the impact of USAID’s actions to improve the Cuba Program’s risk management on grantee risk is uncertain because most of the actions were taken recently. This uncertainty is underscored by the recent findings—similar to those we reported in 2006—of grantees’ misusing funds and of weaknesses in grantees’ internal control, financial management, and procurement systems that have not yet been resolved. Until the current audits of individual grantees’ incurred cost are completed and the Cuba Program takes steps to address any known risks and prevent their recurrence, the program’s ability to ensure the appropriate use of grant funds remains in question. To strengthen oversight of USAID’s Cuba Program grants and the program’s ability to ensure the appropriate use of grant funds, we recommend that the USAID Administrator take the following two actions: ensure that the Cuba Program office is staffed at the level that is needed to fully implement planned monitoring activities, such as the systematic analysis of grantee data to identify at-risk grantees, and that the agency has determined is necessary for effective oversight; and periodically assess the Cuba Program’s overall efforts to address and reduce grantee risks, particularly with regard to grantees’ internal controls, procurement practices, expenditures, and compliance with laws and regulations. USAID provided written comments on a draft of this report, which are reprinted in appendix III, as well as technical comments that we incorporated as appropriate. In its written comments, USAID concurred with our recommendation to staff the Cuba Program at levels needed to implement planned monitoring activities. The agency said that it was working to ensure that the Cuba Program has adequate staffing for strong program oversight and noted that it had temporarily assigned three staff to the program while implementing plans to recruit and hire additional permanent staff. USAID also concurred with our recommendation to periodically assess the Cuba Program’s overall efforts to address and reduce grantee risk. The agency said that the Bureau for Latin America and the Caribbean would take specific steps to assess the risks associated with the Cuba Program’s grantee pool in its ongoing risk assessment work. USAID noted that the bureau’s assessment would incorporate results from grantee monitoring and site visits, reviews by the financial services contractor hired in April 2008, preaward reviews, and results from audits by the agency’s Inspector General. We are sending copies of this report to the USAID Administrator, appropriate congressional committees, and other interested parties. 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) 512-3149 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 major contributions to this report are listed in appendix IV. To review the actions that U.S. Agency for International Development (USAID) has taken since 2006 to improve its award and oversight of the Cuba Program’s grants as well as actions taken in response to the recently detected misuses of program grant funds, we analyzed USAID and Department of State (State) records, including agendas and minutes for meetings of USAID’s Cuba project committee, draft and final changes to agency policy and guidance, and audit and financial reports of grantee activities. We reviewed and analyzed USAID budget, staffing, and procurement records. With regard to staffing, for example, we analyzed agency staffing assessments and related records; with regard to USAID Cuba Program awards and modifications, we analyzed agency grant documents and related records. We verified our analysis of these records with agency officials. In June 2008, we observed two quarterly grantee monitoring visits and one orientation visit to a grantee with a new award conducted by Cuba Program office staff. In addition, we conducted limited follow-up reviews of financial and other records at 5 of the 10 grantees that we had analyzed in our November 2006 report. In conducting these follow-up reviews, we employed the same methodology that we had used for our 2006 report. We also reviewed audit reports issued by the State and USAID Inspectors General in July and September 2007, respectively. We interviewed agency officials, including the current and former Cuba Program Directors, contracting officials, and auditors, about the actions taken in response to our report and actions taken in response to reported misuse of grant funds at two grantees. Additionally, we interviewed officials from the DMP Group, to which USAID awarded a contract in April 2008 to conduct a range of financial reviews of its Cuba Program grantees, and we reviewed DMP’s work papers and draft and final reports. We did not examine USAID’s selection of this firm or the reasonableness of the contractor’s fees. We conducted this performance audit from May through July 2007 and from May through November 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 2 summarizes our November 2006 findings and recommendations regarding USAID’s awards and oversight of democracy assistance for Cuba as well as USAID’s proposed or reported corrective actions, as of September 2008, and our assessment of the status of these actions. In addition to the individual named above, Jeanette M. Franzel, Director, Financial Management and Assurance; Emil Friberg, Jr.; Michael Rohrback; Bonnie Derby; Todd M. Anderson; Sunny Chang; Lisa M. Galvan-Treviño; and Reid Lowe made key contributions to this report. | The U.S. Agency for International Development's (USAID)Cuba Program provides assistance to support human rights and promote nonviolent democratic change in Cuba. From 1996 through 2008, the program awarded $83 million in grants to nongovernmental organizations and universities. In 2006, GAO found weaknesses in program oversight that increased the risk of grantees' improperly using grant funds and failing to comply with U.S. laws. In 2008, misuse of grant funds at organizations with the program's two largest grants was detected. GAO was asked to examine (1) actions that USAID has taken since 2006, or plans to take, to improve its award and oversight of the Cuba Program's grants and (2) actions that USAID has taken in response to the recently detected misuses of grant funds. GAO analyzed USAID and grantee records, conducted limited reviews at five grantees, and interviewed agency and grantee officials. Since 2006, USAID has taken a number of steps to address identified problems with the Cuba Program's awards of democracy assistance and improve oversight of the assistance. For example, USAID has competitively awarded all Cuba Program grants since 2006, compared with 5 percent of grants awarded in 1995-2006; has hired more staff for the program office since January 2008; and contracted in April 2008 for financial services--such as reviews of grantee internal controls and procurement systems--to enhance oversight of grantees. USAID also has worked to strengthen program oversight by, for instance, ensuring preaward and follow-up reviews, improving grantee internal controls and implementation plans, and providing guidance and monitoring about permitted types of assistance and cost sharing. However, USAID has not staffed the Cuba Program at the level the agency has determined is needed for appropriate oversight; as of October 2008, the program office had five staff, compared with the 11 recommended in two USAID assessments. Further, because many of USAID's actions to improve oversight were initiated recently, their impact on the risk of the program grantees misusing grant funds or failing to comply with U.S. laws and regulations is not yet evident. In June 2008, for example, USAID's new financial services contractor found unsupported purchases at the organization with the program's largest grant. In response to the misuse of funds at organizations with the two largest Cuba Program grants, USAID suspended the two grantees in March and July 2008, respectively, pending the results of criminal investigations. To detect financial vulnerabilities at other grantees, USAID announced in mid-July 2008 that it would accelerate planned reviews of program grantees' procurement systems and initiate audits of their incurred cost, and it partially suspended two additional grantees pending the results of the procurement reviews. The program's other grants remained active pending the results of these reviews and audits. The procurement reviews--completed in August 2008 by the new financial services contractor--identified internal control, financial management, and procurement weaknesses at three grantees; USAID is working with the grantees to correct these weaknesses. The USAID Inspector General will oversee the incurred cost audits, which USAID expects to be completed by November 2008 under a separate contract with another firm. |
The U.S. export control system for items with military applications is divided into two regimes. State licenses munitions items, which are designed, developed, configured, adapted, or modified for military applications, and Commerce licenses most dual-use items, which are items that have both commercial and military applications. Although the Commerce licensing system is the primary vehicle to control dual-use items, some dual-use items—those of such military sensitivity that stronger control is merited—are controlled under the State system. Commercial communications satellites are intended to facilitate civil communication functions through various media, such as voice, data, and video, but they often carry military data as well. In contrast, military communications satellites are used exclusively to transfer information related to national security and have one or more of nine characteristics that allow the satellites to be used for such purposes as providing real-time battlefield data and relaying intelligence data for specific military needs. There are similarities in the technologies used to integrate a satellite to its launch vehicle and ballistic missiles. In March 1996, the executive branch announced a change in licensing jurisdiction transferring two items—commercial jet engine hot section technologies and commercial communications satellites—from State to Commerce. In October and November 1996, Commerce and State published regulations implementing this change, with Commerce defining enhanced export controls to apply when licensing these two items. State and Commerce’s export control systems are based on fundamentally different premises. The Arms Export Control Act gives the State Department the authority to use export controls to further national security and foreign policy interests, without regard to economic or commercial interests. In contrast, the Commerce Department, as the overseer of the system created by the Export Administration Act, is charged with weighing U.S. economic and trade interests along with national security and foreign policy interests. Differences in the underlying purposes of the control system are manifested in the systems’ structure. Key differences reflect who participates in licensing decisions, scope of controls, time frame for the decision, coverage by sanctions, and requirements for congressional notification. Participants. Commerce’s process involves five agencies—the Departments of Commerce, State, Defense, Energy, and the Arms Control and Disarmament Agency. Other agencies can be asked to review specific license applications. For most items, Commerce approves the license if there is no disagreement from reviewing agencies. When there is a disagreement, the chair of an interagency group known as the Operating Committee, a Commerce official, makes the initial decision after receiving input from the reviewing agencies. This decision can be appealed to the Advisory Committee on Export Policy, a sub-cabinet level group comprised of officials from the same five agencies, and from there to the cabinet-level Export Administration Review Board, and then to the President. In contrast, the State system commonly involves only Defense and State. Other agencies, such as the Arms Control and Disarmament Agency, can be asked to review specific license applications. No formal multi-level process exists. Day-to-day licensing decisions are made by the Director, Office of Defense Trade Controls, but disagreements could be discussed through organizational levels up to the Secretary of State. This difference in who makes licensing decisions underscores the weight the two systems assign to economic and commercial interests relative to national security concerns. Commerce, as the advocate for commercial interests, is the focal point for the process and makes the initial determination. Under States’ system, Commerce is not involved, underscoring the primacy of national security and foreign policy concern. We should note that the intelligence community is brought into the licensing process in different ways. Under both systems, Defense could refer license requests to the National Security Agency, the Defense Intelligence Agency, and other components. According to Defense, license requests for commercial communication satellites are frequently referred to these agencies. Communications satellites that are exported under State-approved technical assistance agreements (including launch technology) are also referred to the interagency Missile Technology Export Committee, which includes the intelligence community. The executive order governing the Commerce system provides for participation by the Director of Central Intelligence as a non-voting member on the Export Administration Review Board and for participation by representatives of the Central Intelligence Agency in the Advisory Committee on Export Policy and the Operating Committee. Scope of controls. The two systems also differ in the scope of controls. Commerce controls items to specific destinations for specific reasons. Some items are subject to controls targeted to former communist countries while others are controlled to prevent them from reaching countries for reasons that include antiterrorism, regional stability, and nonproliferation. In contrast, munitions items are controlled to all destinations, and State has broad authority to deny a license; it can deny a request simply with the explanation that it is against U.S. national security or foreign policy interests. Time frames. Commerce’s system is more transparent to the license applicant than State’s system. Time frames are clearly established, the review process is more predictable, and more information is shared with the exporter on the reasons for denials or conditions on the license. Congressional notification. Exports under State’s system that exceed certain dollar thresholds (including all satellites) require notification to the Congress. Licenses for Commerce-controlled items are not subject to congressional notification, with the exception of items controlled for antiterrorism. Sanctions. The applicability of sanctions may also differ under the two export control systems. Commercial communication satellites are subject to two important types of sanctions: (1) Missile Technology Control Regime and (2) Tiananmen Square sanctions. Under Missile Technology sanctions, both State and Commerce are required to deny the export of identified, missile-related goods and technologies. Communication satellites are not so identified but contain components that are identified as missile-related. The National Security Council left the decision of how to treat such exports to Commerce and State. When the United States imposed Missile Technology sanctions on China in 1993, exports of communication satellites controlled by State were not approved while exports of satellites controlled by Commerce were permitted. Under Tiananmen Square sanctions, satellites licensed by State and Commerce have identical treatment. These sanctions prohibit the export of satellites for launch from launch vehicles owned by China. However, the President can waive this prohibition if such a waiver is in the national interest. Export control of commercial communications satellites has been a matter of contention over the years among U.S. satellite manufacturers and the agencies involved in their export licensing jurisdiction—the Departments of Commerce, Defense, State, and the intelligence community. To put their views in context, we would now like to provide a brief chronology of key events in the transfer of commercial communications satellites to the Commerce Control List. As the demand for satellite launch capabilities grew, U.S. satellite manufacturers looked abroad to supplement domestic facilities. In 1988, President Reagan proposed that China be allowed to launch U.S. origin commercial satellites. The United States and China signed an agreement in January 1989 under which China agreed to charge prices for commercial launch services similar to those charged by other competitors for launch services and to launch nine U.S.-built satellites through 1994. Following the June 1989 crackdown by the Chinese government on peaceful political demonstrations on Tiananmen Square in Beijing, President Bush imposed export sanctions on China. President Bush subsequently waived these sanctions for the export of three U.S.-origin satellites for launch from China. In February 1990, the Congress passed the Tiananmen Square sanctions law (P.L. 101-246) to suspend certain programs and activities relating to the Peoples Republic of China. This law also suspends the export of U.S. satellites for launch from Chinese-owned vehicles. In November 1990, the President ordered the removal of dual-use items from State’s munitions list unless significant U.S. national security interests would be jeopardized. This action was designed to bring U.S. controls in line with the industrial (dual-use) list maintained by the Coordinating Committee for Multilateral Export Controls, a multilateral export control arrangement. Commercial communications satellites were contained on the industrial list. Pursuant to this order, State led an interagency review, including officials from Defense, Commerce, and other agencies to determine which dual-use items should be removed from State’s munitions list and transferred to Commerce’s jurisdiction. The review was conducted between December 1990 and April 1992. As part of this review, a working group identified and established performance parameters for the militarily sensitive characteristics of communications satellites. During the review period, industry groups supported moving commercial communications satellites, ground stations, and associated technical data to the Commerce Control List. In October 1992, State issued regulations transferring jurisdiction of some commercial communications satellites to Commerce. These regulations also defined what satellites remained under its control by listing nine militarily sensitive characteristics that, if included in non-military satellites, warranted their control on State’s munitions list. (These characteristics are discussed in appendix I.) The regulations noted that parts, components, accessories, attachments, and associated equipment (including ground support equipment) remained on the munitions list, but could be included on a Commerce license application if the equipment was needed for a specific launch of a commercial communications satellite controlled by Commerce. After the transfer, Commerce noted that this limited transfer only partially fulfilled the President’s 1990 directive. Export controls over commercial communication satellites were again taken up in September 1993. The Trade Promotion Coordinating Committee, an interagency body composed of representatives from most government agencies, issued a report in which it committed the administration to review dual-use items on the munitions list, such as commercial communication satellites, to expedite moving them to the Commerce Control List. Industry continued to support the move of commercial communications satellites, ground stations, and associated technical data from State to Commerce control. In April 1995, the Chairman of the President’s Export Council met with the Secretary of State to discuss issues related to the jurisdiction of commercial communications satellites and the impact of sanctions that affected the export and launch of satellites to China. Also in April 1995, State formed the Comsat Technical Working Group to examine export controls over commercial communications satellites and to recommend whether the militarily sensitive characteristics of satellites could be more narrowly defined consistent with national security and intelligence interests. This interagency group included representatives from State, Defense, the National Security Agency, Commerce, the National Aeronautics and Space Agency, and the intelligence community. The interagency group reported its findings in October 1995. Consistent with the findings of the Comsat Technical Working Group and with the input from industry through the Defense Trade Advisory Group, the Secretary of State denied the transfer of commercial communications satellites to Commerce in October 1995 and approved a plan to narrow, but not eliminate, State’s jurisdiction over these satellites. Unhappy with State’s decision to retain jurisdiction of commercial communications satellites, Commerce appealed it to the National Security Council and the President. In March 1996, the President, after additional interagency meetings on this issue, decided to transfer export control authority for all commercial communications satellites from State to Commerce. A key part of these discussions was the issuance of an executive order in December 1995 that modified Commerce’s procedures for processing licenses. This executive order required Commerce to refer all licenses to State, Defense, Energy, and the Arms Control and Disarmament Agency. This change addressed a key shortcoming that we had reported on in several prior reviews. In response to the concerns of Defense and State officials about this transfer, Commerce agreed to add additional controls to exports of satellites designed to mirror the stronger controls already applied to items on State’s munitions list. Changes included the establishment of a new control, the significant item control, for the export of sensitive satellites to all destinations. The policy objective of this control—consistency with U.S. national security and foreign policy interests—is broadly stated. The functioning of the Operating Committee, the interagency group that makes the initial licensing determination, was also modified. This change required that the licensing decision for these satellites be made by majority vote of the five agencies, rather than by the chair of the Committee. Satellites were also exempted from other provisions governing the licensing of most items on Commerce’s Control List. In October and November 1996, Commerce and State published changes to their respective regulations, formally transferring licensing jurisdiction for commercial communications satellites with militarily sensitive characteristics from State to Commerce. Additional procedural changes were implemented through an executive order and a presidential decision directive issued in October 1996. According to Commerce officials, the President’s March 1996 decision reflected Commerce’s long-held position that all commercial communications satellites should be under its jurisdiction. Commerce argued that these satellites are intended for commercial end use and are therefore not munitions. Commerce maintained that transferring jurisdiction to the dual-use list would also make U.S. controls consistent with treatment of these items under multilateral export control regimes. Manufacturers of satellites supported the transfer of commercial communications satellites to the Commerce Control List. They believed that such satellites are intended for commercial end use and are therefore not munitions subject to State’s licensing process. They also believed that the Commerce process was more responsive to business due to its clearly established time frames and predictability of the licensing process. Under State’s jurisdiction, the satellites were subject to Missile Technology sanctions requiring denial of exports and to congressional notifications. Satellite manufacturers also expressed the view that some of the militarily sensitive characteristics of communications satellites are no longer unique to military satellites. State and Defense point out that the basis for including items on the munitions list is the sensitivity of the item and whether it has been specifically designed for military applications, not how the item will be used. These officials have expressed concern about the potential for improvements in missile capabilities through disclosure of technical data to integrate the satellite with the launch vehicle and the operational capability that specific satellite characteristics could give a potential adversary. The process of planning a satellite launch takes several months, and there is concern that technical discussions between U.S. and foreign representatives may lead to the transfer of information on militarily sensitive components. Defense and State officials said they were particularly concerned about the technologies to integrate the satellite to the launch vehicle because this technology can also be applied to launch ballistic missiles to improve their performance and reliability. Accelerometers, kick motors, separation mechanisms, and attitude control systems are examples of equipment used in both satellites and ballistic missiles. State officials said that such equipment and technology merit control for national security reasons. They also expressed concern about the operational capability that specific characteristics, in particular, antijam capability, crosslinks, and baseband processing, could give a potential adversary. No export license application for a satellite launch has been denied under either the State or Commerce systems. Therefore, the conditions attached to the license are particularly significant. Exports of U.S. satellites for launch in China are governed by a government-to-government agreement addressing technology safeguards. This agreement establishes the basic authorities for the U.S. government to institute controls intended to ensure that sensitive technology is not inadvertently transferred to China. This agreement is one of three government-to-government agreements with China on satellites. The others address pricing and liability issues. During our 1997 review and in recent discussions, officials pointed to two principal safeguard mechanisms to protect technologies. These safeguard mechanisms include technology transfer control plans and the presence of Defense Department monitors during the launch of the satellites. State or Commerce may choose to include these safeguards as conditions to licenses. Technology transfer control plans are prepared by the exporter and approved by Defense. The plans outline the internal control procedures the company will follow to prevent the disclosure of technology except as authorized for the integration and launch of the satellite. These plans typically include requirements for the presence of Defense monitors at technical meetings with Chinese officials as well as procedures to ensure that Defense reviews and clears the release of any technical data provided by the company. Defense monitors at the launch help ensure that the physical security over the satellite is maintained and monitor any on-site technical meetings between the company and Chinese officials. Authority for these monitors to perform this work in China is granted under the terms of the government-to-government safeguards agreement. Additional government control may be exercised on technology transfers through State’s licensing of technical assistance and technical data. State technical assistance agreements detail the types of information that can be provided and give Defense an opportunity to scrutinize the type of information being considered for export. Technical assistance agreements, however, are not always required for satellite exports to China. While such licenses were required for satellites licensed for export by State, Commerce licensed satellites do not have a separate technical assistance licensing requirement. The addition of new controls over satellites transferred to Commerce’s jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those at State. There remain, however, differences in how the export of satellites are controlled under these new procedures. Congressional notification requirements no longer apply, although the Congress is currently notified because of the Tiananmen waiver process. Sanctions do not always apply to items under Commerce’s jurisdiction. For example, under the 1993 Missile Technology sanctions, sanctions were not imposed on satellites that include missile-related components. Defense’s power to influence the decision-making process has diminished since the transfer. When under State jurisdiction, State and Defense officials stated that State would routinely defer to the recommendations of Defense if national security concerns are raised. Under Commerce jurisdiction, Defense must now either persuade a majority of other agencies to agree with its position to stop an export or escalate their objection to the cabinet-level Export Administration Review Board, an event that has not occurred in recent years. Technical information may not be as clearly controlled under the Commerce system. Unlike State, Commerce does not require a company to obtain an export license to market a satellite. Commerce regulations also do not have a separate export commodity control category for technical data, leaving it unclear how this information is licensed. Commerce has informed one large satellite maker that some of this technical data does not require an individual license. Without clear licensing requirements for technical information, Defense does not have an opportunity to review the need for monitors and safeguards or attend technical meetings to ensure that sensitive information is not inadvertently disclosed. The additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce’s control in 1996 were not applied to the satellites transferred in 1993. These satellites are reviewed under the normal interagency process and are subject to more limited controls. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have. Antennas and/or antenna systems with the ability to respond to incoming interference by adaptively reducing antenna gain in the direction of the interference. Ensures that communications remain open during crises. Allows a satellite to receive incoming signals. An antenna aimed at a spot roughly 200 nautical miles in diameter or less can become a sensitive radio listening device and is very effective against ground-based interception efforts. Provide the capability to transmit data from one satellite to another without going through a ground station. Permits the expansion of regional satellite communication coverage to global coverage and provides source-to-destination connectivity that can span the globe. It is very difficult to intercept and permits very secure communications. Allows a satellite to switch from one frequency to another with an on-board processor. On-board switching can provide resistance to jamming of signals. Scramble signals and data transmitted to and from a satellite. Allows telemetry and control of a satellite, which provides positive control and denies unauthorized access. Certain encryption capabilities have significant intelligence features important to the National Security Agency. Provide protection from natural and man-made radiation environment in space, which can be harmful to electronic circuits. Permit a satellite to operate in nuclear war environments and may enable its electronic components to survive a nuclear explosion. (continued) Allows rapid changes when the satellite is in orbit. Military maneuvers require that a satellite have the capability to accelerate faster than a certain speed to cover new areas of interest. Provides a low probability that a signal will be intercepted. High performance pointing capabilities provide superior intelligence-gathering capabilities. Used to deliver satellites to their proper orbital slots. If the motors can be restarted, the satellite can execute military maneuvers because it can move to cover new areas. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the military sensitivity of commercial communications satellites and the implications of the 1996 change in export licensing jurisdiction, focusing on: (1) key elements in the export control systems of the Departments of Commerce and State; (2) how export controls for commercial satellites have evolved over the years; (3) concerns and issues debated over the transfer of commercial communications satellites to the export licensing jurisdiction of Commerce; (4) safeguards that may be applied to commercial satellite exports; and (5) observations on the current export control system. GAO noted that: (1) the U.S. export control system--comprised of both the Commerce and State systems--is about managing risk; (2) exports to some countries involve less risk than to other countries and exports of some items involve less risk than others; (3) the planning of a satellite launch with technical discussions and exchanges of information taking place over several months, involves risk no matter which agency is the licensing authority; (4) recently, events have focused concern on the appropriateness of Commerce jurisdiction over communication satellites; (5) this is a difficult judgment; (6) by design, Commerce's system gives greater weight to economic and commercial concerns, implicitly accepting greater security risks; (7) by design, State's system gives primacy to national security and foreign policy concerns, lessening--but not eliminating--the risk of damage to U.S. national security interests; (8) the addition of new controls over satellites transferred to Commerce's jurisdiction in 1996 addressed some of the key areas where the Commerce procedures are less stringent than those of State; (9) there remain, however, differences in how the export of satellites is controlled under these new procedures; (10) Congress notification requirements no longer apply; (11) sanctions do not always apply to items under Commerce's jurisdiction; (12) the Department of Defense's power to influence the decisionmaking process has diminished since the transfer; (13) technical information may not be as clearly controlled under the Commerce system; and (14) the additional controls applied to the militarily sensitive commercial communications satellites transferred to Commerce's control in 1996 were not applied to the satellites transferred in 1993. |
Since the attacks of September 11, 2001, there has been concern that another terrorist attack on U.S. soil could occur involving biological, chemical, radiological, or nuclear weapons. Concerns like these have prompted increased federal attention to and investment in national emergency preparedness—that is, the nation’s ability to prevent, protect against, respond to, and recover from large-scale emergency events. Effective preparation for, detection of, and response to a major biological event requires effective pre- and postdisaster coordination and cooperation among different federal agencies, levels of government, nongovernmental organizations, and the private sector. In the case of biological threats, detection of biological agents is a first step in an effective response to a natural, accidental, or intentional outbreak of a biologically caused disease. In August 2007, the 9/11 Commission Act required DHS to establish NBIC to detect, as early as possible, a biological event of national concern that presents a risk to the United States, or the infrastructure or key assets of the United States. The 9/11 Commission Act provides that the mission of NBIC is to enhance the capability of the federal government to: rapidly identify, characterize, localize, and track a biological event of national concern; integrate and analyze data relating to human health, animal, plant, food, and environmental monitoring systems; and disseminate alerts to member agencies, and state, local, and tribal governments. The 9/11 Commission Act also requires NBIC to be fully operational by September 30, 2008. Prior to the passage of the 9/11 Commission Act, two presidential directives charged federal agencies to coordinate federal efforts and create a new biological threat awareness capacity to enhance detection and characterization of a biological attack. In response to these presidential directives, DHS began the National Biosurveillance Integration System (NBIS) program in 2004 as a means of integrating information across government agencies regarding biological events. The NBIS program developed an IT system, also known as NBIS, to bring together various data used for human, animal, and plant health surveillance; environmental monitoring data; and intelligence and threat analysis. Subsequently, the 9/11 Commission Act established NBIC as the entity responsible for, among other things, developing and running the IT system, still known as NBIS. Since it was created in March 2007, OHA has overseen NBIS and now the NBIC program office. DHS, in cooperation with other federal agencies, created the BioWatch program in 2003 to detect the release of airborne biological agents. The BioWatch program deploys detectors which collect data that, when analyzed, can be used to identify biological agents on the BioWatch threat list. Current BioWatch detection technology contains filters that collect air samples, but the filters must be collected manually, and testing of the samples is carried out in state and local public health laboratories. Using this manual process, results are usually obtained within 10 to 34 hours of an agent’s detection. BioWatch detectors are currently deployed in 30 cities, and local jurisdictions are responsible for the public health response to positive findings in the BioWatch program. OHA has responsibility for managing the operations of the BioWatch program. S&T, which is the primary research and development arm of DHS, is responsible for developing detectors for the BioWatch program. DHS has made progress making NBIC fully operational by September 30, 2008, as required by the 9/11 Commission Act, but has faced difficulties completing some key tasks, such as defining what capabilities the center will provide once fully operational, formalizing agreements to obtain interagency coordination, and fully implementing its IT system. NBIC has not yet defined what capabilities the center should have in place in order to be fully operational. According to NBIC officials, NBIC has drafted, but not finalized, planning documents to define these capabilities. In addition, NBIC has initiated coordination with member agencies through memoranda of understanding (MOUs) and interagency working groups. NBIC is working to establish additional coordination efforts to enhance NBIC’s integration capabilities. Further, a contractor DHS hired to enhance NBIC’s IT system delivered an upgrade to the system on April 1, 2008, but more work remains to be done. For example, member agencies will not have full access to the IT system until NBIC employees have been trained to use the system. Additionally, NBIC reports that it continues to negotiate agreements with member agencies on the data they are to provide for the IT system. DHS has made progress making NBIC fully operational by the mandated September 30, 2008, deadline; however, it is unclear what operations the center will be capable of carrying out at that point. NBIC has acquired a facility that accommodates office space, a 24-hour watch center, as well as secure areas to handle classified materials. Additionally, in January 2008 NBIC hired a permanent Director to oversee NBIC operations. As of July 2008, NBIC has also filled 26 of 37, or 70 percent, of NBIC’s available staff positions, and according to NBIC officials, NBIC is in the process of hiring four additional staff members, including a Deputy Director. NBIC officials are planning to use contractors to fill the remaining 7 positions. Furthermore, NBIC has also acquired one detailee from a member agency, the Department of Health and Human Services, and is working to acquire additional detailees. NBIC has drafted a concept of operations; a finalized version is pending comments from NBIC’s member agencies. Officials have also drafted, but not finalized, standard operating procedures. In fiscal year 2008, $8 million were available to NBIC officials to establish the center; officials told us that they recently requested an additional $4.2 million in a reprogramming that DHS has not yet approved. NBIC has not yet defined the capabilities the center should have in order to be considered fully operational. The 9/11 Commission Act does not define fully operational or what capabilities NBIC needs to have in place by the statutorily mandated September 30, 2008, deadline. NBIC officials told us that they are currently trying to define “fully operational” and are drafting detailed plans for the final 90 days of planning before the deadline. Officials told us that these documents describe the details of NBIC’s expected operational capabilities and functions, such as the state of their IT system, personnel expectations, analytic capabilities, and include specific goals, objectives, milestones, and cost estimates. DHS did not provide us with these planning documents because the documents are in draft form. NBIC has initiated coordination efforts with 11 federal agencies but faces difficulties completing formal agreements to obtain their cooperation. Since the new NBIC Director started in January 2008, NBIC has organized interagency working groups and has finalized MOUs with 6 of the 11 agencies that NBIC identified as important to the operational needs of the center. NBIC has an interagency working group consisting of these 11 agencies, in addition to DHS, that first met under the direction of the new Director in March 2008. As part of the interagency working group, DHS officials stated, NBIC has created a sub-working group that meets on a weekly basis to discuss issues such as the daily operations of NBIC, reporting requirements, and data-sharing issues. NBIC also organized an interagency oversight council, which includes representatives from member agencies, private-sector organizations, and academia, to provide technical oversight and guidance in the development and implementation of NBIC’s operations. The oversight council plans to meet for the first time in August 2008. NBIC has begun facilitating interagency coordination while continuing to implement additional elements of the program. For example, NBIC officials told us that they helped coordinate the federal government’s efforts to deal with the recent national salmonella outbreak, while simultaneously continuing to work on making NBIC fully operational to meet the September 30, 2008, deadline. As part of its efforts to establish interagency coordination, NBIC is seeking to formalize its relationship with federal agencies through three types of documents: MOUs, interagency security agreements (ISAs), and interagency agreements (IAAs). First, DHS is asking federal agencies to sign MOUs to confirm the agency or department’s initial agreement to participate in NBIC as a member agency. Second, DHS is asking agencies to sign ISAs that formalize the technical exchange of information, such as data on human health, between NBIC and these agencies. Finally, DHS is asking agencies to sign IAAs that define programmatic, financial, and staffing arrangements between NBIC and these agencies. As part of the IAAs, agencies are to agree to provide detailees to work at NBIC. These detailees will provide subject-matter expertise and facilitate NBIC coordination with their respective home department or agency. To date, NBIC and potential member agencies have finalized 6 of 11 MOUs; however, they have not finalized any ISAs or IAAs. DHS has signed MOUs with the Departments of Defense, Agriculture, Health and Human Services, Interior, State, and Transportation. DHS is still working to finalize MOUs with another 5 agencies to formalize their membership in NBIC. NBIC does not have ISAs or IAAs in place with any of its current and potential member agencies. According to NBIC officials, one difficulty in finalizing the ISAs is due, in part, to defining the data-sharing arrangements with member agencies given the constraints on arrangements for sharing data imposed by the traditional roles of these agencies. For example, interagency coordination for the purposes of characterizing a biological event may require data that NBIC member agencies have not previously shared with other agencies. In addition, DHS faces difficulty finalizing IAAs, the formal mechanisms through which NBIC obtains detailees from federal agencies. In the absence of IAAs, according to NBIC’s draft concept of operations, the center cannot effectively perform its integration and analytical mission without the subject-matter knowledge from interagency detailees. As of July 2008, NBIC has been able to secure one detailee from a member agency. Officials were unable to predict how many additional MOUs, ISAs, IAAs, or detailees NBIC will have in place by September 30, 2008. A contractor DHS hired to enhance NBIC’s IT system delivered an upgrade to the system in April 2008; however, NBIC officials stated that they need to complete additional work before granting member agencies full access to the system. The system, known as NBIS, provides tools to enhance NBIC’s data integration capabilities and collaboration with member agencies. Such tools include a worldwide geographical map displaying emergent and ongoing adverse health events, an assessment of the homeland security implications of those events, a library of all referenced data, and general disease and situational reports. NBIC officials told us that additional work needs to be done before giving member agencies full access to the system. For example, NBIC does not have interagency security agreements in place with member agencies that specify the data that agencies will share with the system. In addition, as NBIC officials work with the NBIS system, they are identifying additional improvements that need to be made to the system. Furthermore, while member agencies will have access to some of the individual tools that are a part of NBIS, until NBIC analysts have been trained to use NBIS, member agencies will not have full access to all of the system’s interagency collaboration functions. Officials estimate that training will not be completed until at least early 2009. DHS has two ongoing efforts to improve the detection technology used by the BioWatch program. S&T is developing a new technology. OHA is developing an interim solution to enhance the detectors currently in use. S&T is developing new detection technology known as Generation 3.0 which would replace the existing technology used by the BioWatch program. This new technology is to provide a fully automated detector which not only collects air samples but also analyzes them for threats. The current technology collects air samples which are periodically manually removed from the equipment and taken to a laboratory for analysis, a process that could take 10 to 34 hours. Officials stated that automating analysis of air samples could reduce the elapsed time between air sampling and testing it for threats from the current 10 to 34 hours to 4 to 6 hours, reducing detection time by at least 4 hours and possibly as much as 30 hours. In addition to the automated detection capability, Generation 3.0 is to detect a broader range of identified biological agents to eventually cover all the biological agents on the BioWatch threat list—a list of specific biological agents that could pose a health threat if aerosolized and released to the environment. The estimated cost for acquiring these detectors is $80,000 to $90,000 per unit, with yearly operation and maintenance costs of $12,000 to $41,000 per unit. Operational testing and evaluation of this technology is scheduled for April 2009, about a year later than initially planned because OHA provided S&T with revised functional requirements about 4 months before S&T was scheduled to complete the Generation 3.0 prototype detector. S&T developed the original requirements for the Generation 3.0 technology, which required the automatic detectors to, among other things, operate continuously, detect more biological threats, be less expensive to operate, and be deployed in both indoor and outdoor environments. S&T planned to complete the development of the hardware and software and conduct field tests of its prototype Generation 3.0 detectors by April 2008, at which point OHA was to take responsibility for final operational testing and evaluation of the detectors. However, OHA provided S&T with new requirements for the Generation 3.0 detector in January 2008, which delayed operational testing and evaluation by 1 year, from April 2008 to April 2009. The new requirements included additional requirements and provided additional details for some of the original requirements. For example, OHA’s new requirements contain restrictions for the size and weight of the Generation 3.0 detector which were not specified in the original requirements. As a result of the 1-year delay, S&T also designed an additional field test for the Generation 3.0 prototypes, scheduled to begin in the first quarter of fiscal year 2009, which will occur in an urban environment and allow for the prototypes to be tested in real-world conditions. According to S&T and OHA officials, the Generation 3.0 detector will ultimately replace all current BioWatch detectors by 2013, with initial deployment beginning in 2010. While S&T is completing is work on the Generation 3.0 detectors, OHA is developing an interim solution to enhance the detectors currently in use by adding the capability to automatically analyze air samples for some biological agents. OHA’s interim technology, known as Generation 2.5, is intended to add the capability to automatically analyze air samples for the same number of biological agents currently monitored by the existing BioWatch detector technology. However, the enhanced detectors will not have the capability to identify additional biological agents listed on the BioWatch threat list. According to OHA officials, Generation 2.5 detectors will, like Generation 3.0 detectors, reduce the elapsed time between sampling the air and detecting a biological agent by at least 4 hours and possibly as much as 30 hours. Further, OHA officials stated that they plan to operationally test and evaluate new prototype detectors beginning in November 2008 and to acquire over 100 of these new detectors, contingent on successful completion of operational testing and evaluation. The estimated cost for acquiring and testing these detectors is $120,000 per unit, with yearly maintenance costs of $65,000 to $72,000 per unit. According to DHS officials, OHA plans to deploy these new detectors both indoors and outdoors; however, no procedural guidance exists for responding to positive results from detectors placed indoors. According to OHA officials, they plan to develop this guidance by October 2008 and apply it to all future BioWatch detectors deployed indoors. 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 regarding this testimony, please contact me or E. Anne Laffoon, Assistant Director, at (202) 512-4199. Michelle Cooper, Jessica Gerrard-Gough, Tracey King, Amanda Krause, Juan Tapia-Videla, John Vocino, and Sally Williamson made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 faces potentially dangerous biological threats that occur naturally or may be the result of a terrorist attack. The Department of Homeland Security (DHS) is developing two major initiatives to provide early detection and warning of biological threats: the National Biosurveillance Integration Center (NBIC), a center for integrating and coordinating information on biological events of national significance, and the BioWatch program that operates systems used to test the air for biological agents. The Implementing Recommendations of the 9/11 Commission Act of 2007 requires DHS to establish a fully operational NBIC by September 30, 2008. This statement discusses the status of DHS's efforts to (1) make NBIC fully operational by the mandated deadline, and (2) improve the BioWatch program's technology. GAO's preliminary observations of these two programs are based on our ongoing work mandated by the Implementing Recommendations of the 9/11 Commission Act of 2007 to review U.S. biosurveillance efforts. To conduct this work, GAO reviewed related statutes; federal directives; and DHS planning, development, and implementation documents on these two initiatives. We also interviewed DHS program officials to obtain additional information about NBIC and BioWatch. DHS reviewed a draft of this testimony and provided technical comments, which were incorporated as appropriate. DHS has made progress making NBIC fully operational by September 30, 2008, as required by the Implementing Recommendations of the 9/11 Commission Act of 2007, but it is unclear what operations the center will be capable of carrying out at that point. DHS has acquired facilities and hired staff for the center but has not yet defined what capabilities the center will have in order to be considered fully operational. DHS has also started to coordinate biosurveillance efforts with other agencies, but DHS has not yet formalized some key agreements to fulfill NBIC's integration mission. For example, DHS has signed memoranda of understanding with 6 of 11 agencies DHS identified to support the operations of NBIC. However, DHS has not yet completed other key agreements to, for example, facilitate the technical exchange of information, such as data on human health, between NBIC and the agencies. In addition, a contractor DHS hired to enhance NBIC's information technology system delivered an upgrade to the system on April 1, 2008, intended to enhance data integration capabilities. However, before this upgrade can be used effectively, DHS officials said that NBIC will need to train its employees to use the system and negotiate interagency agreements to define the data that the agencies using the system will provide. DHS officials expect that NBIC will complete the training in early 2009. DHS has two ongoing efforts to improve the detection technology used by the BioWatch program, which deploys detectors to collect data that are then analyzed to detect the presence of specific biological agents. First, the Directorate for Science and Technology (S&T) within DHS is developing next-generation detectors for the BioWatch program. DHS plans for this new technology to collect air samples and automatically test the samples for a broader range of biological agents than the current technology. Under the current system, samples are manually collected and taken to a laboratory for analysis. DHS plans to operationally test and evaluate the new automatic technology in April 2009 and to begin replacing its existing detection technology in 2010. Operational testing and evaluation of the new technology is planned to take place in April 2009, about 1 year later than DHS initially planned, because S&T officials received revised requirements for the new system about 4 months before S&T was scheduled to complete development of the system. Second, while S&T is completing its work on the new detection technology, DHS is developing an interim solution, managed by the Office of Health Affairs, to enhance its current detection technology. This interim solution is intended to automatically analyze air samples for the same number of biological agents currently monitored by the BioWatch program. Contingent on successful operational testing and evaluation that is to start in November 2008, DHS plans to decide whether to acquire over 100 of these enhanced detectors. |
While about half of all employers are aware of their local one-stops, awareness increases with employer size, with about half of small, two- thirds of medium, and three-quarters of large employers knowing about their local one-stops. Similarly, of all employers aware of the one-stops, about three-quarters of large employers are likely to use one-stop services, while approximately one-half of medium and one-quarter of small employers are likely to do so. Employers of all sizes primarily use one-stop services to help fill job vacancies. About three-quarters of employers that used one-stops said that they are satisfied with the services they received, and 83 percent would consider using them again in the future. Labor has taken steps to support employer awareness and use of the system. However, it lacks data on employer usage. Because Labor collects little information on employers’ use of the one-stops, the extent to which these services help employers is unknown, as is how these services could be more effectively targeted to meet employers’ workforce needs. In this report, we are making a recommendation to the Secretary of Labor to require states to collect and report on employer use of the workforce system. In its comments on a draft of this report, Labor agreed with our recommendation and provided technical comments, which we included as appropriate. While about half of all employers are aware of their local one-stops, awareness levels increase with employer size, with about half of small, two-thirds of medium, and three-quarters of large employers knowing about their local one-stops. (See fig. 1.) Regardless of size, most employers learn about one-stops through word of mouth in the private sector. Moreover, large and medium employers are more likely than small employers to learn about one-stops from a one-stop official or government representatives. This may be because larger employers are more likely to hire workers. Large and medium employers who know about one-stops are more likely than small employers to use their services. Of all employers aware of the one-stops, approximately three-quarters of large employers are likely to use one-stop services, while about one-half of medium and one-quarter of small employers are likely to do so. As shown in figure 2, employers of all sizes generally use one-stop services to help fill job vacancies through posting job announcements and screening job applicants, with large employers being three to four times more likely than small employers to use these services. (See app. III for more information.) Small employers’ lower rate of usage could be associated with their lower likelihood of hiring. Small employers are less likely than large and medium employers to have hired an employee in the previous year. In addition, few employers of any size are likely to access training services through one-stops. This is consistent with what most employers we interviewed on our site visits told us—they said they did the majority of their training internally. Awareness and use of two other resources of the workforce system— America’s Job Bank and labor market information funded by Labor—also vary by size of employer, with larger employers more likely than small employers to use them. While 56 percent of large employers are aware of the America’s Job Bank Web site, 17 percent of small employers are aware of this resource. Likewise, large employers are about twice as likely as small employers to be aware of labor market information funded by Labor (74 percent versus 40 percent). In addition, large and medium employers are significantly more likely than small employers to use both of these resources. According to Labor, employers use the America’s Job Bank Web site to find prospective employees, and they use labor market information to learn about employment trends and wages. Several employers we interviewed on our site visits said they used labor market information on current wage rates in order to comply with wage laws or to set compensation rates. The vast majority of employers who use one-stop services are satisfied with them; particularly, they express satisfaction with the timeliness of services and the extent to which services address their needs. In addition, most employers who use one-stop services would likely use them again, and about one-third of employers who are aware of one-stop services but do not use them would consider using them in the future. Among employers who are aware of one-stop services, very few decline to use them because of concerns about the quality of services. Instead, many of these employers choose not to use one-stops because they rely on other resources to hire and train workers or do not have enough information about the services one-stops offer. Overall, about 78 percent of employers in the United States who have used one-stops are satisfied with the services they received. These employers are most satisfied with one-stop efforts to provide timely services and respond to their needs. Most employers we interviewed on our site visits also expressed satisfaction with one-stop services, and some pointed to cost and time savings as the primary benefit of using one-stops. For example, one employer said that because one-stop staff selected qualified applicants using the company’s own screening criteria, the company saved a lot of time. Furthermore, our survey showed that the majority of employers who use one-stop services would consider using them in the future, and a majority would also recommend one-stop services to another businessperson. Eighty-three percent of employers who use one-stops said they are willing to consider using one-stops in the future, and this proportion does not vary much by employer size. Similarly, about three- quarters of employers who use one-stops are willing to recommend one- stop services to other businesses. Furthermore, about one-third of employers who are aware of one-stop services but have not used them would consider using them in the future. Of those employers who are aware of but not using one-stop services, very few (3 percent), had concerns about service quality. The most common reason employers did not use one-stop services was that they primarily use other resources to hire and train workers—this was true for all employer size categories. About 21 percent of employers chose not to use one-stops because they lacked information about their services. In addition, several employers we interviewed on our site visits said that although they were aware of one-stops, they did not know about the breadth of services they offered. Nearly all employers we interviewed on our site visits thought that one-stops should try to increase general awareness of one-stops among employers. Labor has initiatives to support employer awareness and use of the one- stop system but does not know the extent to which employers use the system. Labor has developed partnerships with businesses and industry to provide employers easier access to the resources of the one-stop system. To measure how the one-stop system is meeting the needs of employers, Labor requires states to collect information on employer satisfaction with the one-stop system but not on employer use of the system. Labor’s employer satisfaction measure provides a high-level indicator of whether employers are satisfied with the one-stop services they receive. It does not, however, provide enough information on the services employers use to help Labor manage its resources. Labor has developed a number of initiatives to support employer awareness and use of the one-stop system but has limited information about the extent to which employers use the system. Labor established its Partnerships for Jobs Initiative with 23 large, multistate employers, including the Home Depot and Citigroup, to provide better access to the resources of the approximately 1,900 one-stops nationwide. This initiative helps employers learn about state and local workforce resources provided through the one-stop system. Through its ongoing High-Growth Training Initiative, Labor has also directed more than $92 million, as of June 2004, to public-private partnerships in which growing industries work with education and training providers to ensure that workers get the skills they need to compete in growing fields like biotechnology and high-tech manufacturing. In addition, Labor provided a $1.6 million grant to a seven- state consortium to develop model outreach strategies for marketing one- stop services to employers. Labor has identified various ways to measure the success of these initiatives, such as hiring rates and expansion of services. For example, through its Partnership for Jobs initiative, the 23 national employers have hired approximately 15,000 individuals through the one-stop system as of June 2004. Through its High-Growth Job Training Initiative, Labor has identified workforce solutions, such as expanding the pipeline of youth entering high-growth industries and enhancing the capacity of educational institutions to train students in industry-defined competencies. To measure the success of the one-stops in meeting employer workforce needs, Labor requires states to report on employers’ overall satisfaction with one-stop services, but not on their use of these services. Labor requires that states conduct quarterly telephone surveys of employers to obtain information on their overall satisfaction with the services provided by the one-stops. Each state negotiates with Labor to set its own goal for employer customer satisfaction. Because of the general nature of the employer satisfaction measure, it has limited usefulness to Labor for management of its one-stop system resources. Moreover, usage information, such as the number of employers using one-stop services, is not available to Labor because it does not require that states collect information on employers’ use of one-stop services. Labor recognizes that the satisfaction measure provides only general information and that there is a need for more information than the employer satisfaction measure provides. Labor’s Employment and Training Administration (ETA) has proposed a new data collection and reporting system called the ETA Management Information and Longitudinal Evaluation (EMILE) to, among other things, obtain more detailed information about employers’ use of one-stop services. Labor’s proposed reporting system would require states to collect specific employer-related information, such as the characteristics of the employers and the services they use. However, Labor is in the process of responding to public comments on the proposal and has not yet finalized its implementation plans. While many local areas track their own measures of how one-stops serve employers, this information is not reported to most states or Labor. At least half of the local areas track such measures as the number of employers that use one-stop services, the type of services that employers use, and the number of employers that hire one-stop job seekers. While this type of information allows local areas to better manage their resources to respond to the changing needs of their employer clients, information on employer usage is not communicated to most states or Labor. Relatively few states require local workforce areas to report on employer measures, such as the number of employers they serve and the number that hire one-stop job seekers. For example, about one-third of all states require local areas to report on the number of employers that use their services, while 11 states track the type of one-stop services that employers use. Because states are currently not required by Labor to collect this type of information, it is unavailable at the state and federal level to help them manage federal workforce resources. The federal government currently invests in a workforce system with multiple programs to help workers find jobs, and to help employers find the workers they need. We found that large numbers of employers know about, use, and are satisfied with their local one-stops. While Labor has taken steps to support employer awareness and use of the system, it collects little information on employers’ use of the workforce system. Although many local areas and some states collect information on employer use of the one-stop system to manage their resources, this information is not reported to Labor. Collecting employer information involves additional effort for states and local areas but enhances their ability to manage their resources. Without this information on employer use of the one-stop system, Labor cannot identify whether or not state and local programs are responding to the needs of employers and what types of services best meet employers’ workforce needs. As a result, Labor does not have the information necessary to identify areas where additional employer assistance may be needed or to design a strategy for effectively targeting limited workforce funds. To ensure that Labor has a better understanding of the degree to which the publicly funded workforce system meets employers’ needs, we recommend that the Secretary of Labor require states to collect and report on employer use of the one-stop system in addition to continuing to collect general employer satisfaction information. We provided officials at the Department of Labor an opportunity to comment on a draft of this report. Formal comments appear in appendix IV. Labor agreed with our findings and recommendation that the Secretary of Labor require states to collect and report on employer use of the one-stop system to better understand the degree to which the system is meeting the needs of employers. Labor stated that one component of its proposed revised reporting system would collect information on employers’ use of one-stop services. However, the agency continues to reconcile comments on its proposed reporting system and to determine its feasibility. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of Labor, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. A list of related GAO products is included at the end of this report. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or Joan Mahagan, Assistant Director, at (617) 788-0521. You may also reach us by e-mail at nilsens@gao.gov or mahaganj@gao.gov. Other contacts and staff acknowledgments are listed in appendix V. To what extent are employers, including small businesses, aware of and using the one-stop system? To what degree do employers who use one-stop services report satisfaction, and what factors cause employers not to use them? What has the Department of Labor (Labor) done to support employer awareness and use of the workforce system and how does Labor measure its success in meeting the needs of employers? two employees. A business establishment is the physical location of a certain economic activity, such as a factory, mine, store, or office. For example, the Home Depot is a large national business with multiple store locations nationwide. For our study, each store counted separately as an employer. We chose to survey personnel at individual business establishments rather than corporate headquarters because these employers are more likely than headquarters staff to be responsible for local hiring and training practices, such as use of one-stops. We defined the size of employers by their number of employees: small: 2-49, medium: 50-499, and large: 500 or more. one-stop centers: all services provided to employers through one-stop career centers, including services such as applicant screening, skills assessment, and training; America’s Job Bank (AJB): an employment Web site; and labor market information funded by Labor, such as current wage rates. large private sector employers from a nationwide database of businesses and generalized our survey results to all private sector business establishments in the United States. We achieved a 54 percent response rate after adjusting for cases that were ineligible for our study or whose eligibility could not be determined. We interviewed some of those that did not respond to our survey and found that their views did not differ substantially from the views of those that responded to our survey. We surveyed employers between June and October 2004. We report on their use of one-stop services during the 12 months prior to the period when we surveyed them. For more details about our survey methods and the limitations to the survey, see appendix II. their collection of information on services to employers. We received responses from all 50 states and 463 of the 568 local workforce investment areas (81.5 percent). employment growth rates: Florida, Michigan, Oklahoma, and Wyoming. In each state, we visited urban and rural areas and interviewed workforce officials and employers of various size that had either used or not used their local one-stops. We interviewed Labor officials about their efforts to support employer awareness and use of the workforce system and reviewed related documentation. We interviewed representatives from employer associations, such as the U.S. Chamber of Commerce and others. awareness and use increases with employer size. Of all employers aware of the one-stops, about one-quarter of small employers are likely to use one-stop services, while approximately one-half of medium and three-quarters of large employers are likely to do so. About three-quarters of employers that used one-stops said that they are satisfied with the services they received, and 83 percent would consider using them again in the future. Labor has taken steps to support employer awareness and use of the system. However, it lacks data on employer usage. Because Labor collects little information on employers' use of the one-stops, the extent to which these services help employers is unknown. errors for estimates presented on this page do not exceed 6 percentage points. (in percentages) one-stop system. Labor requires states to collect information on overall employer satisfaction with one-stop services, but not on employer use of one- stop services. Many local areas collect information on employer use of one-stop services, but most states do not track this type of information. Labor requires states to report on employer satisfaction with one-stop services, but not on their use of these services. The general employer satisfaction measure has limited usefulness as a management tool because it lacks detailed information about employers and the services they use. Labor has proposed a new data collection and reporting system, called the ETA Management Information and Longitudinal Evaluation (EMILE), which would, among other things, provide more detailed information about employers’ use of one-stop services. Implementation of the EMILE system has been delayed as Labor responds to public comments on its proposal. At least half of all local areas track some information on employers, such as the number of employers that use one-stop services, the number that hire one-stop jobseekers, and the types of one-stop services they use. Currently, about one-third of states require local workforce areas to report on the number of employers that use their services, while 11 states track the type of services that employers use. Number of employers that use one-stop services Number of employers that hire one-stop job seekers Type of one-stop services that employers use Number of employers that repeatedly use one-stop services Characteristics of employers (size, industry sector, etc.) programs to help workers find jobs, and to help employers find the workers they need. We found that about half of all employers are aware of their local one-stops, and large and medium-sized employers are more likely than small employers to use one-stop services. The vast majority of employers that use the one-stops report satisfaction with the services they receive, and the most common reasons employers aware of one-stops do not use them is because they use other resources to hire workers or do not know enough about one-stop services. Although most local areas collect information on employer use of the one-stop system to manage their resources, this information is not reported to Labor. Without this information on employer use of the one-stop system, Labor cannot identify whether or not state and local programs are responding to the needs of employers and what types of services best meet employers’ workforce needs. As a result, Labor does not have the information necessary to identify areas where additional employer assistance may be needed or to design a strategy for effectively targeting limited workforce funds. To ensure that Labor has a better understanding of the degree to which the publicly funded workforce system meets employers’ needs, we recommend that the Secretary of Labor require states to collect and report on employer use of the workforce system in addition to continuing to collect general employer satisfaction information. We examined (1) the extent to which employers, including small businesses, are aware of and using the one-stop system; (2) the degree to which employers who use one-stop services report satisfaction and what factors cause employers not to use them; and (3) what Labor has done to support employer awareness and use of the workforce system and how Labor measures its success in meeting the needs of employers. To address these questions, we surveyed a nationally representative sample of private sector employers, surveyed states and local areas, interviewed officials from the Department of Labor and employer associations, reviewed relevant studies, and visited four states and two local areas within each state. To determine the extent to which employers are aware of and using the workforce system and their satisfaction with the one-stop services they received, we surveyed a nationally representative sample of employers. We developed a questionnaire and contracted with Opinion Research Corporation, a national public opinion research firm, to conduct a telephone survey of a stratified random sample of all sizes of private sector business establishments in the United States. We divided these business establishments into groups depending on their number of employees (small: 2-49 employees, medium: 50-499 employees, and large: 500 or more employees). Before calling began, an independent reviewer within GAO reviewed the questionnaire, and we pretested the survey with two businesses. Opinion Research Corporation attempted to contact 3,232 business establishments between July and October 2004 and completed 1,356 interviews. The overall response rate to the survey was 54 percent after taking into account out-of-scope cases and cases whose eligibility could not be determined. The response rate for each employer size category is as follows: small and unknowns, 50 percent; medium, 53 percent; and large, 60 percent. Response rates were calculated using the American Association for Public Opinion Research (AAPOR) response rate three method of calculation. Although we do not know the views of all the remaining business establishments that did not respond to our survey, we did some limited interviewing and found that their views did not differ substantially from the views of those that responded to our survey. We attempted to contact 183 of these nonrespondents and completed a short interview with 27 of them. We purchased the sample from infoUSA, a national provider of business addresses and phone numbers. InfoUSA’s database contained approximately 11.3 million relevant business establishments. We conducted routine steps, such as document review and interviews with officials, to examine the reliability of the infoUSA data for our purposes. To provide us with the sample, infoUSA conducted a stratified random sample selection process that we specified. InfoUSA completed this process in two phases. This process allowed for a sample of all sizes of private sector business establishments in the United States. We forwarded contact information for 3,232 of these sampled business establishments to Opinion Research Corporation for the survey. (See table 2.) We chose to survey business establishments (as opposed to corporate headquarters) because personnel at the establishments are more likely than headquarters staff to be responsible for their business’ local hiring and training practices, such as use of one-stops. We used the Bureau of Labor Statistics (BLS) definition of business establishment: the physical location of a certain economic activity, for example, a factory, mine, store, or office. To qualify for inclusion in our sample, the establishment must have had at least two or more employees and must also have been engaged in a commercial enterprise. Using four-digit Standard Industrial Classification (SIC) code designations, we excluded religious, governmental, and academic institutions from the sample because they are not primarily engaged in commercial enterprise. We noted that religious organizations that have a primary business as a nonprofit enterprise (such as a social service provider) would be identified as such on the basis of the SIC code associated with the listing. We noted that the schools and universities were classified as public sector for some of Labor’s BLS employment reports and decided to use this approach for our employer sample. We excluded single-employee businesses, assuming they have not hired additional employees. In addition to survey nonresponse, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents in answering a question, or the types of people who do not respond can introduce unwanted bias into the survey results. We included steps in the development of the survey, the collection of data, and the editing and analysis of data for the purpose of minimizing such nonsampling error. For example, in cases where an employer gave an answer other than the choices provided, we reviewed, verified, and then categorized each answer. Another type of nonsampling error that exists in this survey is coverage error. The infoUSA listing was used as a proxy listing for private sector business establishments. We are aware that coverage error exists in this database but we cannot quantify the amount of this error. To determine what information states and local areas collect on services to employers, we surveyed all 50 states and all 568 local workforce investment areas. We conducted both surveys using the Internet. We received responses from all 50 states and 463 local areas (81.5 percent). Because these were not sample surveys, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors. We took steps in the development of the questionnaires, the data collection, and data analysis to minimize these nonsampling errors. For example, we pretested the questionnaires to ensure that questions were clear and understandable. In that these were Web-based surveys whereby respondents entered their responses directly into our database, there was little possibility of data entry error. In addition, we verified that the computer programs used to analyze the data were written correctly. We selected four states—Florida, Michigan, Oklahoma, and Wyoming— and traveled to at least two local areas in each of these states. We selected these states based on their geographic dispersion and the diversity of their employment growth rates. We chose two states that had relatively high employment growth rates (Florida and Wyoming) and two states that had relatively high employment loss rates (Oklahoma and Michigan). In each state we visited two local areas, one urban and one rural, and interviewed workforce officials and local employers. We interviewed local employers of various sizes based on their number of employees: small (2-49), medium (50-499), and large (500 or more). See table 3 for a list of the states and local areas in our study. Information that we gathered on our site visits represents only the conditions present in the local areas at the time of our site visits, from May 2004 through August 2004. Furthermore, our fieldwork focused on in- depth analysis of only a few selected states and local areas or sites. On the basis of our site visit information, we cannot generalize our findings beyond the local areas we visited. Appendix III: Additional Employer Survey Data Obtain information on employee supports (e.g., child care or transportation) Obtain financial information (e.g., loans, grants, or tax benefits) Susan Pachikara and Paul Schearf made significant contributions to this report in all aspects of the work, and Chris Moriarity and Walter Vance provided methodological assistance throughout the assignment. In addition, Stefanie Bzdusek, Cathy Hurley, and Art James contributed to the administration of our employer survey, and Nitin Rao and Blake Walters assisted in the data collection and analysis phase of this assignment. Jessica Botsford and Richard Burkard provided legal support. Workforce Investment Act: Labor Has Taken Several Actions to Facilitate Access to One-Stops for Persons with Disabilities, but These Efforts May Not Be Sufficient. GAO-05-54. Washington, D.C.: December 14, 2004 Public Community Colleges and Technical Schools: Most Schools Use Both Credit and Noncredit Programs for Workforce Development. GAO-05-4. Washington, D.C.: October 18, 2004 Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725 and related testimony GAO-03-884T. Washington, D.C.: June 18, 2003. Workforce Training: Employed Worker Programs Focus on Business Needs, but Revised Performance Measures Could Improve Access for Some Workers. GAO-03-353. Washington, D.C.: February 14, 2003. Older Workers: Employment Assistance Focuses on Subsidized Jobs and Job Search, but Revised Performance Measures Could Improve Access to Other Services. GAO-03-350. Washington, D.C.: January 24, 2003. Workforce Investment Act: States and Localities Increasingly Coordinate Services for TANF Clients, but Better Information Needed on Effective Approaches. GAO-02-696. Washington, D.C.: July 3, 2002 Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA’s Effectiveness. GAO-02-275. Washington, D.C.: February 1, 2002. Workforce Investment Act: Better Guidance Needed to Address Concerns over New Requirements. GAO-02-72 and related testimony GAO-02-94T. Washington, D.C.: October 4, 2001. | The economy of the United States is fueled by 8 million private sector businesses that employ 106 million of the nation's 137 million workers. Employers are seeking better ways to meet their workforce needs as they compete in the global economy. This report examines (1) the extent to which employers, including small businesses, are aware of and using the one-stop system; (2) the degree to which employers who use one-stop services report satisfaction and what factors cause employers not to use them; and (3) what Labor has done to support employer awareness and use of the workforce system and how Labor measures its success in meeting the needs of employers. While about half of all employers are aware of their local one-stops, awareness increases with employer size, with about half of small, two-thirds of medium, and three-quarters of large employers knowing about their local one-stops. Similarly, of all employers aware of the one-stops, about three-quarters of large employers are likely to use one-stop services, while approximately one-half of medium and one-quarter of small employers are likely to do so. Employers of all sizes primarily use one-stop services to help fill job vacancies. Overall, about three-quarters of employers who use one-stop services are satisfied with the services they receive. These employers are most satisfied with one-stop efforts to provide timely services and respond to their needs. In addition, most employers who have used one-stop services would likely use them again, and about one-third of employers who are aware of one-stop services, but have not used them, would consider using them in the future. Among employers who are aware of one-stop services, very few decline to use them because of concerns about the quality of services. Instead, many of these employers choose not to use one-stops because they rely on other resources to hire and train workers or do not have enough information about the services one-stops offer. Labor has initiatives to support employer awareness and use of the one-stop system but does not know the extent to which employers use the system. Labor has developed partnerships with businesses and industry to provide employers easier access to the resources of the one-stop system. To measure how the one-stop system is meeting the needs of employers, Labor requires states to collect information on employer satisfaction with the one-stop system, but not on employer use of the system. Labor's employer satisfaction measure provides a high-level indicator of whether employers are satisfied with the one-stop services they receive; it does not, however, provide enough information on the services employers use to help Labor manage its resources. |
Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually review all programs and activities to identify those that are susceptible to significant improper payments, estimate the annual amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce improper payments for programs with estimates that exceed $10 million. IPERA, enacted July 22, 2010, amended IPIA by expanding on the previous requirements for identifying, estimating, and reporting on programs and activities susceptible to significant improper payments and expanding requirements for recovering overpayments across a broad range of federal programs. IPERA included a new, broader requirement for agencies to conduct recovery audits, where cost effective, for each program and activity with at least $1 million in annual program outlays. This IPERA provision significantly lowers the threshold for required recovery audits from $500 millionall programs and activities. Another IPERA provision calls for federal agencies’ inspectors general to annually determine whether their respective agencies are in compliance with key IPERA requirements and to report on their determinations. Under Office of Management and Budget (OMB) implementing guidance, federal agencies are required to complete these reports within 120 days of the publication of their annual PARs or AFRs, with the fiscal year 2011 reports for most agencies due on March 15, 2012. to $1 million and expands the scope for recovery audits to OMB continues to play a key role in the oversight of the governmentwide improper payments issue. OMB has established guidance for federal agencies on reporting, reducing, and recovering improper paymentshas established various work groups responsible for developing recommendations aimed at improving federal financial management activities related to reducing improper payments. Each year, hundreds of thousands of our nation’s most vulnerable children are removed from their homes and placed in foster care, often because of abuse or neglect. While states are primarily responsible for providing safe and stable out-of-home care for these children until they are returned safely home, placed with adoptive families, or placed in other arrangements, Title IV-E of the Social Security Act provides states some ACF under HHS is responsible for federal financial support in this area.administering this program and overseeing Title IV-E funds. HHS’s reported fiscal year 2010 outlays to states for their Foster Care programs under Title IV-E totaled more than $4.5 billion, serving over 408,000 children, as of September 30, 2010, the most recent data available at the time of our study. Past work by the HHS Office of Inspector General (OIG), GAO, and others have identified numerous deficiencies in state claims associated with the Title IV-E Foster Care program. In particular, the HHS OIG found hundreds of millions of dollars in unallowable claims associated with Title IV-E funding. A 2006 GAO report also found variations in costs states claimed under the Title IV-E program and recommended a number of actions HHS should take to better safeguard federal resources. In addition, annual state-level audits have identified weaknesses in states’ use of federal funds, such as spending on unallowed activities or costs and inadequate state monitoring of federal funding. As required under IPIA, as amended, HHS has identified the Foster Care program as susceptible to significant improper payments, and has reported annually on estimated improper payment amounts for the program since 2005. For fiscal year 2010, HHS reported estimated improper payments for Foster Care of about $73 million. The reported estimate slightly decreased to about $72 million for fiscal year 2011. Federal agencies reported improper payment estimates totaling $115.3 billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior year reported estimate of $120.6 billion. Based on the agencies’ estimates, OMB estimated that improper payments comprised about 4.7 percent of the $2.5 trillion in fiscal year 2011 total spending for the agencies’ related programs (i.e., a 4.7 percent error rate). The decrease in the fiscal year 2011 estimate—when compared to fiscal year 2010—is attributed primarily to decreases in program outlays for the Department of Labor’s (Labor) Unemployment Insurance program, and decreases in reported error rates for fiscal year 2011 for the Department of the Treasury’s (Treasury) Earned Income Tax Credit program, and HHS’s Medicare Advantage program. According to OMB, the $115.3 billion in estimated federal improper payments reported for fiscal year 2011 was attributable to 79 programs spread among 17 agencies. Ten of these 79 programs account for most of the $115.3 billion of reported improper payments. Specifically, these 10 programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported for fiscal year 2011. Table 1 shows the reported improper payment estimates and the reported primary cause(s) for the estimated improper payments for these 10 programs. While the programs identified in the table above represented the largest dollar amounts of improper payments, 4 of these programs also had some of the highest program improper payment error rates.table 2, the 10 programs with the highest error rates accounted for $45 billion, or 39 percent of the total estimated improper payments, and had rates ranging from 11.0 percent to 28.4 percent for fiscal year 2011. Despite reported progress in reducing estimated improper payment amounts and error rates for some programs and activities during fiscal year 2011, the federal government continues to face challenges in determining the full extent of improper payments. Specifically, some agencies have not yet reported estimates for all risk-susceptible programs, and some agencies’ estimating methodologies need to be refined. Until federal agencies are able to implement effective processes to completely and accurately identify the full extent of improper payments and implement appropriate corrective actions to effectively reduce improper payments, the federal government will not have reasonable assurance that the use of taxpayer funds is adequately safeguarded. In this regard, at the request of this Subcommittee, we recently completed our review of the improper payment estimation methodology used by HHS’s Foster Care program. As discussed in our report released today, we found that the Foster Care program’s improper payment estimation methodology was deficient in all three key areas—planning, selection, and evaluation—and consequently did not result in a reasonably accurate estimate of the extent of Foster Care improper payments. Further, the validity of the reporting of reduced Foster Care program error rates was questionable, and we found that several weaknesses impaired ACF’s ability to assess the effectiveness of corrective actions to reduce improper payments. We found that not all agencies have developed improper payment estimates for all of the programs and activities they identified as susceptible to significant improper payments. Specifically, three federal entities did not report fiscal year 2011 estimated improper payment amounts for four risk-susceptible programs. In one example, HHS’s fiscal year 2011 reporting cited statutory limitations for its state- administered Temporary Assistance for Needy Families (TANF) program, that prohibited it from requiring states to participate in developing an improper payment estimate for the TANF program. Despite these limitations, HHS officials stated that they will continue to work with states and explore options to allow for future estimates for the program. For fiscal year 2011, the TANF program reported outlays of about $17 billion. For another program, HHS cited the Children’s Health Insurance Program Reauthorization Act of 2009 as prohibiting HHS from calculating or publishing any national or state-specific payment error rates for the Children’s Health Insurance Program (CHIP) until 6 months after the new payment error rate measurement rule became effective on September 10, 2010. According to its fiscal year 2011 agency financial report, HHS plans to report estimated improper payment amounts for CHIP in fiscal year 2012. For fiscal year 2011, HHS reported federal outlays of about $9 billion for CHIP. As previously mentioned, OMB excluded estimated improper payment amounts for two DOD programs from the governmentwide total because those programs were still developing their estimating methodologies— Defense Finance and Accounting Service (DFAS) Commercial Pay, with fiscal year 2011 outlays of $368.5 billion, and U.S. Army Corps of Engineers Commercial Pay, with fiscal year 2011 outlays of $30.5 billion. In DOD’s fiscal year 2011 agency financial report, DOD reported that improper payment estimates for these programs were based on improper payments detected through various pre-payment and post-payment review processes rather than using methodologies similar to those used for DOD’s other programs, including statistically valid random sampling or reviewing 100 percent of payments. GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments, GAO-11-950T (Washington, D.C.: Sept. 22, 2011), and Improper Payments: Significant Improvements Needed in DOD’s Efforts to Address Improper Payment and Recovery Auditing Requirements, GAO-09-442 (Washington, D.C.: July 29, 2009). improper payments.statistically valid estimating process for its commercial payments and addresses the known control deficiencies in its commercial payment processes, the governmentwide improper payment estimates will continue to be incomplete. We are currently working on an engagement related to improper payment reporting at DOD. Until DOD fully and effectively implements a For fiscal year 2011, two agency auditors reported on compliance issues with IPIA and IPERA as part of their 2011 financial statement audits. Specifically, the Department of Agriculture (USDA) auditors identified noncompliance with the requirements of IPERA regarding the design of program internal controls related to improper payments. In the other noncompliance issue, while for fiscal year 2011 HHS estimated an annual amount of improper payments for some of its risk-susceptible programs, a key requirement of IPIA, it did not report an improper payment estimate for its TANF program and CHIP. Fiscal year 2011 marked the eighth consecutive year that auditors for HHS reported noncompliance issues with IPIA. We recognize that measuring improper payments for federal programs and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on administration efforts at the state level. The estimation methodologies for these types of programs may vary considerably because of differences in program designs across the states. For example, as I will discuss in more detail later in this statement, the Foster Care program leveraged an existing process to estimate improper payments that included a review of a child’s eligibility for Title IV-E federal funding as claimed by the states administering the program. In another example, the improper payment estimate for HHS’s Medicaid program is based on the results of three different reviews—eligibility, fee-for-service, and managed care—of claims payments made by states to health care providers. The fee-for- service and managed care reviews both include a data processing review to validate that claims were processed correctly. The fee-for-service review also includes a medical necessity determination. The eligibility review identifies payments made for services to beneficiaries that were improperly paid because of erroneous eligibility decisions. We are currently working on an engagement related to improper payment reporting for the Medicaid program. Because of these state differences and complexities within programs, as we previously reported, communication, coordination, and cooperation among federal agencies and the states will be critical to effectively estimate national improper payment rates and meet IPIA reporting requirements for state- administered programs. The results of our recently completed study of the improper payment estimation methodology used by HHS’s Foster Care program serve to provide a more detailed perspective on the challenges one federal agency faced in attempting to develop a complete and accurate nationwide estimate for a program largely administered at the state level. Further, this case study provides an example of the types of problems that may exist but go undetected because of the lack of independent assessments of the reported information. As we previously testified before this Subcommittee,auditors provide a valuable independent validation of agencies’ efforts to report reliable information under IPIA. Independent assessments can also enhance an agency’s ability to identify sound performance measures, monitor progress against those measures, and help establish performance and results expectations. Without this type of validation or other types of reviews performed by GAO or agency OIGs, it is difficult to reliably determine the full magnitude of deficiencies that may exist governmentwide in agencies’ IPIA implementation efforts. For example, our case study of the Foster Care program found that although ACF had established a process to calculate a national improper payment estimate, the estimate was not based on a statistically valid methodology and consequently did not reflect a reasonably accurate estimate of the extent of Foster Care improper payments. Further, without accurate data, the separate assessments conducted by agency validity of the Foster Care program’s reported reductions in improper payments was questionable, and ACF’s ability to reliably assess the effectiveness of its corrective actions was impaired. For programs administered at the state level such as Foster Care, OMB guidance provides that statistically valid annual estimates of improper payments may be based on either data for all states or on statistical data from a sample to generate a national dollar estimate and improper payment rate. In this case, ACF took its existing Title IV-E Foster Care program eligibility review process, already in place under the Social Security Act, and also used it for IPIA estimation. ACF provides a national estimated error rate based on a rolling average of error rates identified in states examined on a 3-year cycle. As a result, ACF’s IPIA reporting for each year is based on new data for about one-third of the states and previous years’ data for the remaining two-thirds of the states. To calculate a national estimate of improper payments, ACF uses error rates that span a 3-year period of Title IV-E eligibility reviews in the 50 states, the District of Columbia, and Puerto Rico. ACF applies the percentage dollar error rate from the sample to the total payments for the period under review for each state. ACF’s methodology for estimating Foster Care improper payments was approved by OMB in 2004 with the understanding that continuing efforts would be taken to improve the accuracy of ACF’s estimates of improper payments in the ensuing years. ACF, however, has since continued to generally follow its initial 2004 methodology. When compared to federal statistical guidance and internal control standards, we found it to be deficient in all three phases of its fiscal year 2010 estimation methodology—planning, selection, and evaluation—as summarized in table 3. These deficiencies impaired the accuracy and completeness of the Foster Care program improper payment estimate of $73 million reported for fiscal year 2010. Planning. ACF’s annual IPIA reporting for the Foster Care program did not include about two-thirds of program expenditures, as shown in figure 1. Specifically, the estimate included improper payments for only one type of program payment activity—maintenance payments—which, for fiscal year 2010, represented 34 percent of the total federal share of expenditures for the Foster Care program. Administrative and other payments, such as those related to the operation and development of the Statewide Automated Child Welfare Information System (SACWIS), were not considered in ACF’s IPIA estimation process and thus were not included in the Foster Care program improper payment estimate. OMB’s December 2004 approval of ACF’s proposed methodology included an expectation that ACF would develop a plan and timetable to test administrative expenses by April 2005. ACF has conducted various pilots in this area since 2007 with the goal of ensuring that improper payment data for administrative costs are sufficiently reliable and valid without imposing undue burden on states. Although ACF expects to estimate for administrative improper payments and recognizes the importance of doing so, it has not yet taken action to augment its existing methodology. Selection. The population of data from which ACF selected its sample— the Adoption and Foster Care Analysis and Reporting System (AFCARS)—were not reliable because ACF’s sampling methodology did not provide for up-front data quality control procedures to (1) ensure that the population of cases was complete prior to its sample selection and (2) identify inaccuracies in the data field used for sample selection. Specifically, ACF had to replace a high percentage of cases sampled from the database of Foster Care cases for the fiscal year 2010 reporting period because of inaccurate information in AFCARS. Of the original 4,570 sample cases ACF selected for testing in its primary and secondary reviews for fiscal year 2010, 298 cases (almost 7 percent) had to be replaced with substitutes because the selected cases had not received Title IV-E Foster Care maintenance payments during the period under review. Of the 298 over-sampled cases used to replace the cases initially selected, 63 cases (more than 21 percent) then had to be replaced again because those cases had also not received Title IV-E Foster Care maintenance payments during the period under review. Further, although we were able to determine how many sampled (or over-sampled) cases had to be replaced because available records showed no Title IV-E payment was received during the reporting period, neither GAO nor ACF were able to determine the extent to which the opposite occurred—cases that had received a payment (and therefore should have been included in the sample population) had not been coded as receiving Title IV-E payments. Without developing a statistically valid sampling methodology that incorporates up-front data quality controls to ensure complete and accurate information on the population, including payment data, ACF cannot provide assurance that its reported improper payment estimate accurately and completely represents the extent of improper maintenance payments in the Foster Care program. Evaluation. Although ACF’s methodology identified some errors related to underpayments and duplicate or excessive payments, it did not include procedures to reliably determine the full extent of such errors. In its fiscal year 2010 agency financial report, ACF reported that underpayments and duplicate or excessive payments represented 19 percent and 6 percent, respectively, or 25 percent of the errors that caused improper payments. However, the extent of underpayments and duplicate or excessive payment errors identified varied widely by state, and in some instances were not identified at all. For example, ACF did not identify underpayments in 31 of 51 state eligibility reviews and did not identify duplicate or excessive payments in 36 of 51 state eligibility reviews.did not assess the validity of the reported data. However, the absence of such errors for some states seems inconsistent with the general distribution of errors reported elsewhere. Further, the lack of detailed We procedures for identifying any such payment errors may have contributed to the variation or to whether the teams found any errors. The purpose of the eligibility reviews is to validate the accuracy of a state’s claim for reimbursement of payments made on behalf of eligible children or the accuracy of federal financial assistance provided to states. Without detailed procedures to guide review teams in the identification of underpayments and duplicate or excessive payments, ACF cannot provide assurance that it has identified the full extent of any such errors in its Foster Care program. The weaknesses we identified in ACF’s methodology to estimate improper payments in the Foster Care program also impaired its ability to reliably assess the extent to which its corrective actions reduced Foster Care program improper payments. For example, although ACF has reported significantly reduced estimated improper maintenance payments, from a baseline error rate of 10.33 percent for 2004 to a 4.9 percent error rate for 2010, the validity of ACF’s reporting of reduced improper payment error rates is questionable because the previously discussed weaknesses in its estimation methodology impaired the accuracy and completeness of the reported estimate and error rate. In addition, we found that ACF’s ability to reliably assess the extent to which its corrective actions reduced improper payments was impaired by weaknesses in its requirements for state-level corrective actions. For example, ACF used the number of cases found in error rather than the dollar amount of improper payments identified to determine whether a state was required to implement corrective actions. ACF required states to implement corrective actions through a program improvement plan, if during the Title IV-E primary eligibility review, a state was found to have an error rate exceeding 5 percent of the number of cases reviewed. We identified six states that were found substantially compliant in their primary eligibility reviews as their case error rates were below the established 5 percent threshold. However, the dollar-based improper payment rates for those six states ranged from 5.1 percent to 19.8 percent—based on the percentage of improper payment dollars found in the sample. Because dollar-based improper payment rates are not used in applying the corrective action strategy, ACF’s method cannot effectively measure states’ progress over time in reducing improper payments. It also cannot effectively help determine whether further action is needed to minimize future improper payments. This limits the extent to which states are held accountable for the reduction of improper payments in the Foster Care program. Our report released today includes seven recommendations to help improve ACF’s methodology for estimating improper payments for the Foster Care program and its corrective action process. In commenting on our draft report, HHS agreed that its improper payment estimation efforts can and should be improved, generally concurred with four of our recommendations, and agreed to continue to study the remaining three recommendations. We reaffirm the need for all seven recommendations. A number of actions are under way across the federal government to help advance improper payment reduction goals. Completing these initiatives, as well as designing and implementing enhanced strategies in the future, will be needed to effectively reduce the federal government’s improper payments. Identifying and analyzing the root causes of improper payments is key to developing effective corrective actions and implementing the controls needed to reduce and prevent improper payments. In this regard, implementing strong preventive controls are particularly important as these controls can serve as the front-line defense against improper payments. Proactively preventing improper payments increases public confidence in the administration of benefit programs and avoids the difficulties associated with the “pay and chase”aspects of recovering improper payments. For example, addressing program design issues that are a factor in causing improper payments may be an effective preventive strategy. Effective monitoring and reporting will also be important to help detect any emerging improper payment issues. In addition, agencies’ actions to enhance detective controls to identify and recover overpayments could help increase the attention to preventing, identifying, and recovering improper payments. For instance, agency strategies to enhance incentives for grantees, such as state and local governments, will be important. Agencies cited a number of causes for the estimated $115.3 billion in reported improper payments, including insufficient documentation; incorrect computations; changes in program requirements; and, in some cases, fraud. Beginning in fiscal year 2011, according to OMB’s guidance, agencies were required to classify the root causes of estimated improper payments into three general categories for reporting purposes: (1) documentation and administrative errors, (2) authentication and medical necessity errors, and (3) verification errors.information on the root causes of the current improper payment estimates is necessary for agencies to target effective corrective actions and implement preventive measures. While agencies generally reported some description of the causes of improper payments for their respective programs in their fiscal year 2011 reports, many agencies did not use the three categories prescribed by OMB to classify the types of errors and quantify how many errors can be attributed to that category. Of the 79 programs with improper payment estimates in fiscal year 2011, we found that agencies reported the root cause information using the required categories for 42 programs in their fiscal year 2011 PARs and AFRs. Together, these programs represented about $46 billion, or 40 percent of the total reported $115.3 billion in improper payment estimates for fiscal year 2011. Of the $46 billion, the estimated improper payments amounts were spread across the three categories, with documentation and administrative errors being cited most often. We could not calculate the dollar amounts associated with each category because the narratives included in some of the agencies’ reporting of identified causes were not sufficiently detailed or documented. Thorough and properly documented analysis regarding the root causes is critical if federal agencies are to effectively identify and implement corrective and preventive actions across their various programs. Many agencies and programs are in the process of implementing preventive controls to avoid improper payments, including overpayments and underpayments. Preventive controls may involve a variety of activities, such as up-front validation of eligibility, predictive analytic tests, training programs, and timely resolution of audit findings, as described below. Further, addressing program design deficiencies that have caused improper payments may be considered as part of an effective preventive strategy. Up-front eligibility validation through data sharing. Data sharing allows entities that make payments—to contractors, vendors, participants in benefit programs, and others—to compare information from different sources to help ensure that payments are appropriate. When effectively implemented, data sharing can be particularly useful in confirming initial or continuing eligibility of participants in benefit programs and in identifying any improper payments that have already been made. Also, in June 2010, the President issued a presidential memorandum, titled Enhancing Payment Accuracy Through a “Do Not Pay List”, to help prevent improper payments to ineligible recipients. This memorandum also directs agencies to review prepayment and reward procedures and ensure that a thorough review of available databases with relevant information on eligibility occurs before the release of any federal funds. Analyses and reporting on the extent to which agencies are participating in data sharing activities, and additional data sharing efforts that agencies are currently pursuing or would like to pursue, are other important elements that merit consideration as part of future strategies to advance the federal government’s efforts to reduce improper payments. For example, Labor reported that its Unemployment Insurance program utilizes HHS’s National Directory of New Hires database to improve the ability to detect overpayments caused by individuals who claim benefits after returning to work—the largest single cause of overpayments reported in the program. In June 2011, Labor established the mandatory use of the database for state benefit payment control no later than December 2011. Labor also recommended operating procedures for cross-matching activity for national and state directories of new hires. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C: November 1999). identifying opportunities for streamlining or changing the eligibility or other program control requirements. Although strong preventive controls remain the frontline defense against improper payments, agencies’ improper payment reduction strategies could also consider actions to establish additional effective detection techniques to quickly identify and recover those improper payments that do occur. Detection activities play a significant role not only in identifying improper payments, but also in providing data on why these payments were made and, in turn, highlighting areas that could benefit from strengthened prevention controls. The following are examples of key detection activities to be considered. Data mining. Data mining is a computer-based control activity that analyzes diverse data for relationships that have not previously been discovered. The central repository of data commonly used to perform data mining is called a data warehouse. Data warehouses store tables of historical and current information that are logically grouped. As a tool in detecting improper payments, data mining of a data warehouse can enable an organization to efficiently identify potential improper payments, such as multiple payments for an individual invoice to an individual recipient on the same date, or to the same address. For example, in the Medicare and Medicaid program, data on claims are stored in geographically disbursed systems and databases that are not readily available to CMS’s program integrity analysts. Over the past decade, CMS has been working to consolidate program integrity data and analytical tools for detecting fraud, waste, and abuse. The agency’s efforts led to the initiation of the Integrated Data Repository (IDR) program, which is intended to provide CMS and its program integrity contractors with a centralized source that contains Medicaid and Medicare data from the many disparate and dispersed legacy systems and databases. CMS subsequently developed the One Program Integrity (One PI) program,analytical tools by which these data can be accessed and analyzed to a web-based portal and set of help identify any cases of fraudulent, wasteful, and abusive payments based on patterns of paid claims. Recovery auditing. While internal control should be maintained to help prevent improper payments, recovery auditing could be included as a part of agencies’ strategy for identifying and recovering contractor overpayments. The Tax Relief and Health Care Act of 2006 required CMS to implement a national Medicare recovery audit contractor (RAC) program by January 1, 2010. HHS reported that the Medicare Fee-for-Service recovery audit program identified $961 million in overpayments and recovered $797 million nationwide. Further, the Medicaid RAC program was established by the Patient Protection and Affordable Care Act. Under this program, each state is to contract with a RAC to identify and recover Medicaid overpayments and identify any underpayments. The final regulations provided that state Medicaid RACs were to be implemented by January 1, 2012. Similar to the Medicare RACs, Medicaid RACs will be paid on a contingency fee basis—a percentage of any recovered overpayments plus incentive payments for the detection of underpayments. Pub. L. No. 109-432, div. B., title III, § 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006), codified at 42 U.S.C. § 1395ddd(h). drafted language to address the issue and is working to publish a notice of proposed rule making to amend its regulation. In another instance, USDA reported that Section 281 of the Department of Agriculture Reorganization Act of 1994 precluded the use of recovery auditing techniques because Section 281 provides that 90 days after the decision of a state, county, or an area committee is final, no action may be taken to recover the amounts found to have been erroneously disbursed as a result of the decision unless the participant had reason to believe that the decision was erroneous. This statute is commonly referred to as the Finality Rule. As part of its annual improper payments reporting, USDA did not cite an alternative approach for implementing a recovery auditing strategy. Federal-state incentives. Another area for further exploration for agencies’ improper payment reduction strategies is the broader use of incentives for states to implement effective detective controls. Agencies have applied limited incentives and penalties for encouraging improved state administration to reduce improper payments. Incentives and penalties can be helpful to create management reform and to ensure adherence to performance standards. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-2623 or DavisBH@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony included Carla Lewis, Assistant Director; Sophie Brown; Francine DelVecchio; Gabrielle Fagan; and Kerry Porter. Foster Care Program: Improved Processes Needed to Estimate Improper Payments and Evaluate Related Corrective Actions. GAO-12-312. Washington, D.C.: March 7, 2012. Improper Payments: Moving Forward with Governmentwide Reduction Strategies. GAO-12-405T. Washington, D.C.: February 7, 2012. For our report on the U.S. government’s consolidated financial statements for fiscal year 2011, see Department of the Treasury. 2011 Financial Report of the United States Government. Washington, D.C.: December 23, 2011, pp. 211-231. Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and Opportunities for Assisting States. GAO-12-288T. Washington, D.C.: December 7, 2011. DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments. GAO-11-950T. Washington, D.C.: September 22, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Status of Fiscal Year 2010 Federal Improper Payments Reporting. GAO-11-443R. Washington, D.C.: March 25, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Improper Payments: Significant Improvements Needed in DOD’s Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-09-442. Washington, D.C.: July 29, 2009. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Improper Payments: Status of Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies’ Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Improper Payments: Weaknesses in USAID’s and NASA’s Implementation of the Improper Payments Information Act and Recovery Auditing. GAO-08-77. Washington, D.C.: November 9, 2007. Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-07-635T. Washington, D.C.: March 29, 2007. Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem. GAO-07-254T. Washington, D.C.: December 5, 2006. Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete. GAO-07-92. Washington, D.C.: November 14, 2006. Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs. GAO-06-347. Washington, D.C.: April 14, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Over the past decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually identify programs and activities susceptible to significant improper payments, estimate the amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce them. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs. This testimony addresses (1) federal agencies reported progress in estimating and reducing improper payments; (2) challenges in meeting current requirements to estimate and evaluate improper payments, including the results of GAOs case study of the estimation methodology and corrective actions for the Foster Care program; and (3) possible strategies that can be taken to move forward in reducing improper payments. This testimony is primarily based on prior GAO reports, including the report released today on improper payment estimates in the Foster Care program. It also includes unaudited improper payment information recently presented in federal entities fiscal year 2011 performance and accountability reports and agency financial reports. Federal agencies reported an estimated $115.3 billion in improper payments in fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate of $120.6 billion. According to the Office of Management and Budget (OMB), the $115.3 billion estimate was attributable to 79 programs spread among 17 agencies. Ten programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported. The reported decrease in fiscal year 2011 was primarily related to 3 programsdecreases in program outlays for the Unemployment Insurance program, and decreases in reported error rates for the Earned Income Tax Credit program and the Medicare Advantage program. Further, OMB reported that agencies recaptured $1.25 billion in improper payments to contractors and vendors. The federal government continues to face challenges in determining the full extent of improper payments. Some agencies have not reported estimates for all risk-susceptible programs, while other agencies estimation methodologies were found to be not statistically valid. For example, GAOs recently completed study of Foster Care improper payments found that the Administration for Children and Families (ACF) had established a process to calculate a national improper payment estimate for the Foster Care program, which totaled about $73 million for fiscal year 2010, the year covered by GAOs review. However, the estimate was not based on a statistically valid methodology and consequently did not provide a reasonably accurate estimate of the extent of Foster Care improper payments. Further, GAO found that ACF could not reliably assess the extent to which corrective actions reduced Foster Care improper payments. A number of strategies are under way across government to help advance improper payment reduction goals. For example, Additional information and analysis on the root causes of improper payment estimates will assist agencies in targeting effective corrective actions and implementing preventive measures. Although agencies were required to report the root causes of improper payments in three categories beginning in fiscal year 2011, of the 79 programs with improper payment estimates that year, 42 programs reported the root cause information using the required categories. Implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult pay and chase aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility using data sharing, predictive analytic technologies, and training programs. Further, addressing program design issues, such as complex eligibility requirements, may also warrant further consideration. Effective detection techniques to quickly identify and recover improper payments are also important to a successful reduction strategy. Detection activities include data mining and recovery auditing. Another area for further exploration is the broader use of incentives to encourage states in efforts to implement effective detective controls. Continuing work to implement and enhance these strategies will be needed to effectively reduce federal government improper payments. |
Nearly all nursing homes accept residents with either Medicare or Medicaid and are projected to receive nearly $39 billion in federal payments from these programs in 1999. The federal government, through HCFA, has responsibility for establishing requirements that nursing homes must meet to participate in the Medicare and Medicaid programs and ensuring that these standards are met. HCFA carries out this responsibility by contracting with states to monitor nursing homes. As part of these contracts, the states agree to comply with regulations and other general instructions that HCFA prescribes. The Omnibus Budget Reconciliation Act of 1987 revised the standards for homes’ participation in these federal programs and defined federal and state roles for ensuring that nursing homes meet these standards. In this regulatory framework, states (1) license nursing homes to do business in the state, (2) certify to the federal government, by conducting reviews of nursing homes, that homes are eligible for Medicare and Medicaid payment, and (3) investigate complaints about care provided in the homes. As part of their oversight, the states are required to conduct annual surveys of homes. While the annual surveys seek to provide a nationally uniform process to evaluate whether nursing homes meet a comprehensive range of federal standards, they are often predictable in their timing. Complaint investigations can be less predictable than annual surveys and generally provide a unique opportunity for more frequent state inspections that assess conditions at the nursing home while focusing on specific concerns raised by residents, their families, or other observers. HCFA oversees states’ performance by monitoring at least 5 percent of states’ surveys and by requiring states to develop a quality improvement program that incorporates performance goals and measures in seven required core performance areas--including complaint investigations--and other optional state-identified areas. In addition to the requirement that states establish a complaint investigation process, HCFA requires that states investigate the most serious complaints that allege situations immediately jeopardizing the health or safety of residents within 2 workdays, but leaves the timing, scope, duration, and conduct of other complaint investigations to the discretion of the state survey agency. Thus, states establish their own priorities and time frames for investigating complaints that they determine do not represent immediate jeopardy to resident health and safety. In addition, states require nursing homes to report and investigate incidents such as injuries that might signal neglect or abuse. The state then determines whether it will further investigate the incident. When states conduct a complaint investigation, they attempt to substantiate whether the allegations are valid. If a complaint is substantiated, the state may cite the nursing home for violating either federal or state standards. In such cases, the state agency will require the home to develop an approved plan of correction. The state may choose to take action under the state’s licensing authority, using applicable state remedies and sanctions. If the deficiency relates to federal standards, information regarding the deficiency is also to be reported to HCFA. Serious deficiencies require that the home attain compliance within a set time frame or face enforcement sanctions, such as civil monetary penalties, by HCFA or the state. Both federal and state funds finance the costs state agencies incur in inspecting nursing homes and investigating complaints. In 1998, the federal government paid states about $210 million for the nursing home survey and certification process, including about $42 million (20 percent) for investigating complaints. States contributed an additional $17 million for complaint investigations. On average, federal funds account for 71 percent of states’ complaint investigation expenditures. Table 1 compares these expenditures for the states visited. Appendix II includes additional expenditure information for all states and further discusses the allocation of federal and state shares. Generally, the federal government finances states’ complaint investigation costs for nursing homes in the same proportion that it finances annual and other surveys. Although investigations of complaints filed against nursing homes can provide a valuable opportunity for determining whether the health and safety of residents are threatened, complaint investigation practices do not consistently achieve this goal. Some states use procedures that may discourage the public from filing complaints. Furthermore, some states fail to recognize and promptly respond to complaints that may pose immediate jeopardy to a resident’s health, safety, or life. Likewise, some states do not require that other serious complaints, including those that allege harm to residents, be investigated for months after the complaint’s receipt. Additionally, many complaints are not investigated within states’ required time frames for conducting an investigation. Consequently, we found several instances in which, after an extended delay, the complaint investigators substantiated that residents had been harmed and other cases in which the state was unable to determine whether the allegations were true partly because so much time had elapsed since the complaint was received. Because nursing home residents and the public need an effective and expedient means to seek correction of problems that they perceive endanger the health and safety of nursing home residents, the process of filing a complaint should not place an unnecessary burden on the complainant. Nevertheless, some states we reviewed have procedures or practices that may limit the number of complaints. For example, when a person calls with a complaint, Maryland and Michigan encourage him or her to submit the complaint in writing. Michigan requires that either complainants write a complaint or the state will provide assistance in writing the complaint. About 95 percent of publicly reported complaints were submitted in writing between July 1997 and June 1998. Maryland’s policy is to accept and act on a complaint by phone even though callers are encouraged to submit a written complaint. However, state officials provided us conflicting information as to whether calls would be consistently documented and investigated when callers agreed to submit a written complaint but did not do so. Over 70 percent of Maryland’s publicly reported complaints that the state investigated were identified as written complaints between July 1997 and June 1998. In contrast, Washington readily accepts complaints by phone and nearly all complaints are received by phone. This contributes to Washington receiving a considerably higher number of complaints than Michigan or Maryland. See table 2 for a comparison of the total number of nursing home complaints received in a year by these states. When a complaint is received, the state agency ascertains its potential seriousness. HCFA requires that complaints that may involve immediate jeopardy of a resident’s health, safety, or life be investigated by states within 2 workdays of receipt. For other complaints, states are permitted to establish their own categories and time frames for investigation. States have established varying time requirements for complaint responses and varying criteria for prioritizing these complaints, including criteria for complaints that may involve a significant risk of actual harm to nursing home residents. Some states permit relatively long periods of time to pass between the receipt of all such complaints and their investigation. For example, for complaints that may involve significant risk of actual harm to residents, Michigan’s statute allows 30 days, but in 1998 Michigan’s operating practice was to allow 45 days; Tennessee allows 60 days; and, Kansas allows 180 days. Some states have established other priority categories with similar time frame classifications, but their criteria for determining which complaints to include in these classifications differ substantially. Maryland and Washington both have classification schemes that include categories for complaints to be investigated within 2, 10, or 45 workdays or at the next on- site investigation. Similarly, Pennsylvania classifies complaints to be investigated within 2, 5, 10, or 45 workdays or at the next on-site survey. Criteria for complaints to be included in the 10-day category for Washington and Pennsylvania are similar. Washington’s 10-day category includes complaints alleging significant potential harm to a resident’s physical and/or mental health or safety. Similarly, Pennsylvania characterizes 10-day complaints as those in which residents’ needs, including medical, nursing, and dietary, are not being met. Maryland’s 10- day time frame states that complaints in this category are those that appear to be especially significant, sensitive, or could attract broad public attention; those forwarded from a government or public official; and those where the provider has a history of poor performance relative to the allegations. States sometimes place complaints in an inappropriately low investigation category, thus postponing a prompt review. The infrequent use of high- priority levels in some states raises a question as to whether complaints are being appropriately categorized. Some states have explicit procedures or operating practices that result in the downgrading of a complaint’s severity. We found several instances of complaints that, in our opinion, were inappropriately placed in a low-priority category. As shown in table 3, two of the three states we visited seldom placed complaints in the immediate jeopardy category for the 1-year period we analyzed. Maryland did not identify a single complaint as potentially representing immediate jeopardy. Michigan did prioritize some complaints as immediate jeopardy, but they accounted for only 2 percent of total complaints received. The Pennsylvania state auditor also noted that the number of complaints considered immediate jeopardy in that state had dropped considerably during the first quarter of 1998 in comparison to earlier years, raising the auditor’s skepticism and concern. Some states also categorized relatively few complaints in other high- priority categories, such as those that should be investigated within 10 days. For example, Maryland placed most complaints in its lowest-priority category–to be investigated at the next on-site survey. This contrasts with Washington, which categorized nearly 90 percent of its complaints to be investigated within either 2 or 10 workdays. Table 4 compares the use of similar priority time frames among the states visited. Several states have explicit procedures or operating practices that place serious complaints in lower-priority categories. A Maryland official, for example, acknowledged reducing the priority of some complaints because the state recognized that it could not meet shorter time frames because of insufficient staff. Similarly, a Michigan official also told us that her office gives a complaint low priority if the resident is no longer at the nursing home when the complaint is received--even if the resident died or was transferred to a hospital or another nursing home. The state may investigate these complaints during the home’s next survey or not at all. Failure to investigate such a complaint in a timely manner may compromise the health and safety of other residents who may also be affected by problems cited in the complaint. We identified several cases in which a resident had died or been transferred from the nursing home that were assigned to Michigan’s lower-priority (45-day) category, were uninvestigated for several months, or had not yet been investigated at the time of our visit. For example, a complaint in Michigan alleged in July 1998 that a resident died because the home did not properly manage his insulin injections or perform blood sugar tests. Because the resident died, the state had not investigated the complaint as of January 1999. We question why the state agency would not have concerns that this situation might affect other diabetic residents in the home. Michigan also delays investigating certain nonimmediate jeopardy complaints against nursing homes that are undergoing federal enforcement action. Officials told us that they adopted this practice to avoid potential confusion that may result from having two enforcement actions pending simultaneously. We believe this practice could unreasonably delay the investigation of serious complaints at nursing homes already identified as violating federal standards. In reviewing complaints from the states visited, we identified several complaints in two states that raise questions about why they were not considered as potentially immediate jeopardy. Examples of these allegations include the following: The complaint alleged that a resident was found dead with her head trapped between the mattress and the side rail of the bed, with her body lying on the floor. The state categorized this complaint as one needing to be investigated within 45 days. The state investigated this complaint within 13 days and determined that 11 of 24 sampled beds had similar side rail violations. Our concern about whether this complaint was appropriately classified is supported by another HCFA region’s interpretation of HCFA’s guidance to states. The Denver region would have considered this situation to be an immediate jeopardy complaint to be investigated within 2 workdays, noting that “an unexplained resident death related to a medical device, side rails, or other restraints exemplifies a possible immediate jeopardy situation requiring an on-site investigation within two workdays.” Another complaint alleged that an alert resident who was placed in a nursing home for a 20-day rehabilitation stay to recover from hip surgery was transferred in less than 3 weeks to a hospital because of what the complainant termed an “unprecedented rapid decline [in the resident’s condition].” One of the members of the ambulance crew transporting the resident to the hospital filed a written report stating that the resident “had dried . . . blood in his fingernails and on his hands . . . sores all over his body . . . smelled like feces and unable to walk or take care of himself. Patient is in very poor condition as far as his hygiene. I personally feel he was not being properly cared for.” The state categorized this complaint as needing an investigation at the next on-site inspection, took more than 4 months to begin its investigation, and determined that the nursing home had harmed the resident. Another complaint alleged that the home’s staff would not send a resident with maggots in the sores on his feet to the hospital because the home’s director of nursing did not want the state agency to be notified by the hospital and investigate the home. The state categorized this complaint, received 105 days before our visit, as needing to be investigated within 45 days, but it had not yet been investigated. In another instance, the police reported suspected abuse and neglect to the state survey agency after a resident was brought twice to the hospital emergency room because of falls. The resident’s first hospitalization identified a broken elbow, and the second found a contusion on the resident’s cheek. The police did not believe the nursing home staff’s account of how the resident had sustained these injuries. This complaint, filed 13 workdays before our visit, was being held by the state until the next on-site investigation. State auditors’ reports identified additional complaints that the auditors found should have been placed in a higher category. Examples follow: Kansas’ auditors said that about 10 percent of 213 complaints reviewed were classified too low, given their potential seriousness. Among the complaints categorized as not requiring an investigation until the earlier of the home’s next annual survey or within 6 months of receipt was one alleging that a resident had skin tears, purple lesions, feces and food on his clothing, broken eyeglasses, and was not being fed regularly. Another complaint charged that a nurse’s aide abused several residents. Pennsylvania’s auditors identified several complaints as categorized too low, including one filed by a licensed practical nurse recently employed by the home. The nurse alleged that there had been at least 12 deaths at the home over a 2-week period, including a resident who choked to death because she had mistakenly been given solid food; a resident who was sent to the emergency room because her feeding tube had become dislodged and was entirely within her stomach; and a resident who had received 10 times the prescribed dosage of a medication. This nurse’s complaint was placed in the lowest category, delaying its investigation until the home’s next annual survey. States often do not conduct investigations of complaints within the time frames they assign, even though some states frequently place complaints in lower investigation categories to increase the time available to investigate them. Some of these complaints, despite alleging serious risk to resident health and safety, remained uninvestigated for several months after the deadline for investigation. These delays may contribute to investigators being unable to determine whether the allegations are true because, by the time the investigation starts, evidence needed to establish validity may no longer be available. To determine whether states investigate complaints within state-required time frames, we reviewed state data covering 1 year from July 1997 through June 1998. Table 5 shows the percentage of complaints that met the assigned time frame for investigation. We asked each state visited to provide copies of all complaints in the Baltimore, Detroit, and Seattle areas that had not yet been investigated and that exceeded the assigned time frame. Baltimore and Detroit each had over 100 such complaints, while Seattle had 40. From the complaints provided, we identified those for homes having at least three outstanding complaints not investigated within the states’ prioritized time frames, and we summarized the allegations of each complaint. Many of these complaints alleged potential resident abuse by staff; resident neglect, including malnutrition and dehydration; preventable accidents; medication errors; and understaffing. See appendix III for this summary. Failure by states to investigate complaints promptly can delay the identification of serious problems in nursing homes and postpone needed corrective actions. Furthermore, delayed investigations can prolong, for extended periods, situations in which residents are harmed. Table 6 identifies complaints received in early 1998 in which the state’s complaint investigation concluded that the resident had been harmed. In Maryland and Michigan, a large percentage of such cases was not investigated for extended periods. Although HCFA funds, on average, 71 percent of state agencies’ complaint investigation costs, HCFA has established minimal standards for investigating complaints and has conducted little monitoring of states’ complaint practices. HCFA provides limited guidance to states on complaints beyond the 2-workday requirement for allegations classified as posing immediate jeopardy to resident health and safety. HCFA established a taskforce in 1993 to develop more stringent federal policies for complaint investigations, but it was disbanded in 1995, and formal policies were not revised. Finally, HCFA’s ability to oversee states’ performance in handling complaints is limited because major monitoring efforts are focused instead on annual surveys; it primarily relies on states to develop performance measures for complaint investigations; and it has inadequate reporting systems for capturing the results of complaint investigations. Between 1993 and 1995, a HCFA task force worked to develop formal complaint guidance for states and a complaint investigation manual to help state investigators. The task force activities included consideration of additional minimum federal priority and time frame classifications, including requirements that time frames be set for complaints alleging serious care issues but at levels less than immediate jeopardy. However, the formal guidance and the manual were never finalized or released. HCFA attributes the decision to discontinue this initiative to a shift in HCFA’s focus toward revising enforcement regulations and its concern that some states that exceeded the proposed federal standards might weaken their standards. Instead of formal guidance, HCFA sent a portion of the task force’s work to its 10 regional offices as a set of optional protocols. These were released as “tools, not rules” for specific situations an investigator may encounter while conducting an on-site complaint investigation. These protocols did not address the prioritization and timeliness aspects of complaint investigations. This optional guidance has not been widely used. Officials at several HCFA regional offices did not recall receiving these on-site investigative protocols. Another HCFA regional office reported that it did not release the document to states in its area because the document appeared to be in draft form. HCFA does not provide additional guidance to states on ways to manage complaint workloads efficiently, how to categorize complaints, or when to expand a review beyond the residents involved with the original complaint. In contrast, the HCFA regional office in Boston established its own task force to enhance the protocols. The region adopted its own guidance for how state agencies should classify complaints. This guidance suggests that “at a minimum, your agency should have at least three action levels based on the degree of safety or health hazard alleged: high-level action, mid-level action, and low-level action.” Although HCFA had not established a priority and timeliness scheme for complaints other than those alleging immediate jeopardy to residents, the form it uses for states to report the results of investigations includes four priority and timeliness categories. The form asks states to specify whether an investigation was conducted within 2, 10, or 45 workdays or at an annual survey. It is intended for reporting state agencies’ investigation results for all types of health care facilities--including home health agencies and clinical laboratories–as well as nursing homes. Thus, the form does not formally establish additional time frames for nursing home investigations. However, some states have interpreted the categories included on the HCFA form as suggested priority and timeliness categories and have modeled their standards after them. For example, officials in Maryland and Washington indicated that they adopted their priority categories in part to conform with the categories on the HCFA form. Other states, however, maintain complaint priority levels and time frames that are distinct, and often less stringent, than those identified on the HCFA form. HCFA’s major efforts to monitor states’ performance in surveying and certifying nursing homes are largely focused on annual surveys–not on complaint investigations. HCFA requires its regional investigators to replicate or observe a 5-percent sample of state investigators’ nursing home inspections and requires states to develop performance measures and quality improvement programs. However, nearly all of the state nursing home inspections that HCFA monitors are annual surveys rather than complaint investigations. Even though HCFA has begun requiring states to include complaint investigations as part of their performance measurement and improvement programs, some states have not yet begun to do so. For states that have developed quality improvement programs, some programs have not identified or focused on concerns that state auditors and we have found. HCFA’s principal method for monitoring state agencies’ performance in certifying nursing homes is through the statutory requirement that HCFA staff conduct monitoring surveys of at least 5 percent of the states’ nursing home investigations. This process allows HCFA either to repeat a state’s survey of a nursing home and compare findings or to observe state investigators while they perform a nursing home survey. However, these federal monitoring surveys are largely intended to focus on annual surveys rather than on complaint investigations, and few federal monitoring surveys are conducted of complaint investigations. In 1998, of the 824 federal monitoring surveys that HCFA conducted nationwide, only 39 were of complaint investigations. Furthermore, 25 of the 39 were conducted by HCFA’s Chicago regional office, which oversees 6 states, and 10 were conducted in Illinois. Therefore, in the remaining 44 states and the District of Columbia, only 14 federal monitoring surveys focused on complaint investigations. Thus, federal monitoring surveys provide HCFA with little insight into state agencies’ performance in conducting nursing home complaint investigations. As of October 1, 1998, HCFA had revised its requirements for federal monitoring surveys, allowing its regions to include only a small number of complaint investigations in each state to meet the requirement that 5 percent of surveys be monitored. Under this revision, HCFA may assess only one complaint investigation as part of its quota for most states, while even in the largest states, HCFA may include no more than four complaint investigations as part of the 5-percent requirement. As a result, it is clear that HCFA intends that federal monitoring surveys principally should be a method to oversee state agencies’ performance in conducting annual surveys, resulting in minimal oversight of states’ complaint investigations. HCFA requires each state to evaluate its performance in complaint investigations beginning in 1998 as part of the State Agency Quality Improvement Program. However, our review of the 1998 reports submitted to HCFA by states that either we visited or had a recent state auditor’s report indicated that several states had not yet developed performance measures or improvement plans related to nursing home complaints, and that the states that had evaluated complaint processes ignored concerns that we and the state auditors raised. Furthermore, under the new Quality Improvement Program, HCFA regional offices appeared to be less directly involved in evaluating state agencies’ performance in complaint handling than with previous oversight approaches. Among the states visited, Maryland had not developed a Quality Improvement Program or baseline performance measures for nursing home complaints. Michigan’s final 1998 quality improvement report noted that staff turnover had delayed its ability to begin evaluating whether all complaints were investigated and processed within the time frames but stressed that the state agency “feels confident that this [performance standard] will be (and currently is) met.” This statement conflicts with our findings that most investigations in Michigan were conducted later than the 45-day time frame adopted by the state agency. Although Washington’s quality improvement program includes performance measures related to training staff in conducting complaint investigations and properly documenting the results, it did not evaluate the timeliness of complaint investigations. As noted above, we found that Washington categorizes its complaints at a higher priority level than do Maryland and Michigan and is more timely in investigating them. Nevertheless, Washington met its time frames in only about 55 percent of the complaints investigated. For the states reviewed by state auditors, our review of the quality improvement reports submitted to HCFA showed that several states had not yet initiated quality improvement programs while few others identified concerns regarding complaints. Examples follow: New York had not yet established performance standards for nursing home complaints. Tennessee reported that it planned to begin implementing new complaint performance standards in October 1998. Wisconsin cited the implementation of a new data system as the cause of its delay in tracking complaints as part of quality improvement efforts but stressed that “our belief is that we are fine, but we have no data to support or refute this belief.” North Carolina’s 1998 quality improvement report acknowledged that the state agency “has fallen behind significantly on investigating complaints within 60 days for nursing homes due to shortage in nursing staff and the large number of complaints.” As remedial actions, North Carolina reported that it intended to reevaluate its hiring practices, increase salaries to attract and retain qualified staff, improve training, and request that the state legislature either provide additional funds or repeal the 60-day statutory requirement. The relatively new process relies largely on self-measurement of performance, resulting in less direct involvement by the HCFA regional offices than previous approaches to evaluating state agencies’ performance. For example, HCFA regional offices are no longer required to review state procedures for complaint investigations and other types of nursing home oversight. Based on our interviews, some HCFA regional offices have had very little involvement in developing or monitoring states’ quality improvement plans, even though this involvement is a HCFA requirement. An effective complaint reporting system is important to support both federal and state efforts to maintain an accurate and complete record of a nursing home’s federal compliance history as well as to track the state agencies’ performance in complaint investigations. Tracking of complaints is integral to identifying the status of complaint investigations and to managing complaint workloads to appropriately protect residents’ health. In particular, a full compliance history is key to several parts of the survey and certification process, such as HCFA’s enforcement and oversight of standards, states’ prioritization of complaints, and HCFA’s ability to provide full information to consumers via its Internet page and other sources. We found that inadequacies in HCFA’s data system and the linkage between state and federal systems hinder HCFA’s and states’ ability to adequately track the status of complaint investigations and for HCFA to maintain a full nursing home compliance history. In short, one HCFA official stated that the complaint system is “not used as a management tool.” HCFA requires states to develop tracking systems and to submit summary information about all complaint investigations. For monitoring purposes, HCFA maintains a database of nursing home complaint investigation information. Although HCFA standards require states to report this information, the process for collecting it results in inaccurate and incomplete information. For example, HCFA collects summary information for on-site complaint investigations with a form that was created for recording information about a single complaint. Some states, including Maryland and Michigan, use the form for multiple complaints. Therefore, timeliness, prioritization, and other important tracking information that relates to multiple complaints is reported as though it applies to one complaint. In this situation, states typically record the highest priority level assigned to any of the individual complaints and are limited to choosing timeliness dates reflective of only one of the complaints. As a result, HCFA is unable to effectively monitor states’ performance on prioritization and timeliness. In our report on California nursing homes, we determined that the results of complaint inspections are often cited as state, not federal, deficiencies. Thus, the results of complaint investigations may not appear in federal databases. Furthermore, state officials reported that complaints might appear to be unsubstantiated in federal databases when the state has actually substantiated the complaint. In contrast, Washington and Michigan report that they record most violations they identify in both federal and state information systems. For example, Washington has developed a crosswalk between its state licensing and federal regulations to assist providing full information in both federal and state information systems. Overall, there is also a time lag on states reporting data to HCFA. Washington, for example, estimated that its input into the federal data system was 3 months behind. HCFA estimated that some states might lag by as much as 6 months in entering complaint investigation information into federal management systems. Our work in selected states reveals that serious complaints alleging harm to residents often remain uninvestigated for extended periods. Such delays do not provide this vulnerable population the protections intended by the federally mandated complaint investigation process. Some practices, such as Washington’s ready acceptance of phone complaints and its relatively prompt investigation, as well as the HCFA Boston office’s guidance to states recommending improved prioritization of complaints, merit replication. Despite these positive efforts, we identified frequent systemic weaknesses in HCFA’s and many states’ practices that can leave nursing home residents in poor care and unsafe conditions for extended periods. The combination of inadequate state practices and limited HCFA guidance and oversight have too often resulted in extensive delays in investigating serious complaints alleging harmful situations, a lack of careful review of states’ policies and practices, and incomplete reporting on nursing homes’ compliance history and states’ complaint investigation performance. To make complaint investigations a more effective tool for protecting nursing home residents’ health and safety, we recommend that the HCFA Administrator revise federal guidance and ensure state agency compliance through the following actions: Develop additional standards for the prompt investigation of serious complaints alleging situations that may harm residents but are categorized as less than immediate jeopardy. These standards should include maximum allowable time frames for investigating serious complaints and for complaints that may be deferred until the next scheduled annual survey. States may continue to set priority levels and time frames that are more stringent than these federal standards. Strengthen federal oversight of state complaint investigations, including monitoring states’ practices regarding priority-setting, on-site investigation, and timely reporting of serious health and safety complaints. Require that the substantiated results of complaint investigations be included in federal data systems or be accessible by federal officials. We obtained comments on our draft report from HCFA and the three states we visited. (See apps. IV through VII for their written comments.) In general, HCFA and the states concurred with our recommendations and highlighted efforts being taken to improve complaint investigations. They also suggested clarification on certain findings and technical changes, which we included in the report where appropriate. HCFA, in concurring with our recommendations, also immediately announced several initiatives to address issues we raise. These include a new interim requirement that states should investigate complaints alleging actual harm to residents within 10 workdays, and a complaint improvement project with the intention of developing additional minimum standards for complaint investigations; increased federal oversight of complaints, including allowing HCFA regional offices to conduct additional monitoring surveys based upon complaints and new state agency performance measures relating to complaints; and improved reporting on complaint information, including a review of the form states use to report complaint information to HCFA, further direction to states requiring that complaint findings be included in the federal as well as state database in a timely manner, and a review of potential long-term improvements in the federal data system. Maryland, Michigan, and Washington each highlighted resource limitations as contributing to the problems we identify. Specifically, Maryland noted that in recognition of many of the problems we identify, the state has recently hired additional staff and plans additional improvements, including merging its complaint and annual survey investigative staff and improving the tracking of complaints. Maryland also commented that the scope of our work was narrowly focused on complaint investigations and, as only one component of its broader nursing home oversight efforts, should not be used to evaluate the state’s entire regulatory process. While we concentrated this aspect of our work on complaints, we continue to believe that, in coordination with annual surveys, complaint investigations are an essential component of state efforts to protect residents and ensure that nursing homes provide adequate care. They afford a unique opportunity to increase state inspectors’ unexpected presence in homes and to target specific areas of potential problems identified by residents and other concerned individuals. Michigan’s comments noted that prior to the period we examined the state had experienced a loss of staff and that it has been hiring and training additional investigators. Michigan also reiterated its criteria for including complaints in its highest priority level. However, we found several cases that appear to meet these criteria but were not classified as requiring a 24- hour visit. Michigan also noted that several state practices we highlight were developed with guidance from the HCFA regional office, including investigating complaints concurrently with annual surveys and delaying the investigation of certain complaints regarding nursing homes nearing the deadline for enforcement actions. Michigan disputes that its policy or practice places egregious complaints in a lower priority level. However, we remain concerned that state investigators we interviewed reported that some complaints where residents died or left the nursing home would not be investigated until the next on-site inspection. Furthermore, several cases we reviewed where a resident had died or had been transferred from the home were assigned to Michigan’s lower (45-day) category, were uninvestigated for several months, or had not yet been investigated at the time of our visit. Michigan indicated that it plans a more thorough review of its handling of complaints and intends to make recommendations to address any concerns it identifies by April 1999. Washington concurred with the importance of an effective complaint system and stressed attributes of its system, including prioritizing most complaints at a high level and a highly trained professional staff. Washington acknowledged that, because of the large volume of complaints categorized as requiring an investigation within 10 days and the need for increased resources, the timeliness of complaints within this category depends on investigators’ determinations of which complaints are the most serious. We also provided a copy of the report for review by the American Health Care Association (AHCA) and the American Association of Homes and Services for the Aging (AAHSA). AHCA officials expressed agreement with the report’s recommendations. Both AHCA and AAHSA officials noted that the report summarizes some uninvestigated complaints and that the allegations had not yet been substantiated or unsubstantiated. We acknowledge that many of the complaints summarized reflect allegations rather than substantiated problems and believe that the report adequately reflects that many had not yet been investigated at the time of our visit to determine their validity. We included these allegations to reflect the information that a state agency would have as it determines the priority level to assign complaints and how promptly to investigate them. We are making copies of this report available to the honorable Nancy-Ann Min DeParle, the HCFA Administrator; appropriate congressional committees; and interested parties upon request. Please contact me or Kathryn G. Allen, Associate Director, at (202) 512- 7114 if you or your staffs have any further questions. This report was prepared by Jack Brennan, Mary Ann Curran, C. Robert DeRoy, Gloria Eldridge, and Chick Walter under the direction of John Dicken. To develop this report, we examined state nursing home complaint investigation practices in Maryland, Michigan, and Washington. We selected these three states as case studies because they are geographically diverse and have different approaches to investigating complaints. For each state, we reviewed laws, regulations, and policies and interviewed leading state agency officials and complaint investigators. In each of the three states visited, we interviewed state officials and complaint investigators and obtained documentation of each state’s complaint investigation procedures and practices, analyzed computerized data on all complaints the states had received from July 1997 through June 1998, obtained and reviewed the files of complaints that each state received and investigated in early 1998, and obtained and reviewed the files of complaints that the states had not yet investigated at the time of our visits in late 1998 and early 1999. For each of the 14 states included in our work, we reviewed the state agency quality improvement program report that was submitted to HCFA at the end of 1998. In addition, we interviewed HCFA officials, including representatives of each of HCFA’s 10 regions, regarding federal guidance to and oversight of state agencies. We also obtained from HCFA data on federal and state expenditures on nursing home complaint investigations for all states. State Auditors’ Reports We also reviewed reports from 11 states whose state auditor (or similar organization such as the Office of Inspector General) had performed reviews of the state’s long-term-care activities and whose investigation reports were issued between December 1995 and April 1998. Each of these reports addressed some aspect of the state’s nursing home complaint process. The 11 states were Iowa, Kansas, Kentucky, Louisiana, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, and Wisconsin. Each of the three states we visited provided us with electronic databases on complaints received in 1997 and 1998. These data include information such as the number of complaints received and investigated, the priority category assigned, and when the complaint was received and investigated. Recognizing that there may be a lag in recording information regarding complaints, we excluded data on complaints received after June 30, 1998, and report data for the 1-year period from July 1, 1997, to June 30, 1998. We also only included complaints related to federally certified nursing homes. For data on timeliness, we report data only for state-investigated complaints, excluding any complaints that were either not investigated at all or were investigated only by another entity, such as the ombudsman, local law enforcement agencies, or the nursing home itself. We excluded any complaint that either did not have all dates in the database or would have resulted in a negative number of days between receipt and investigation of the complaint. We asked each state to give us access to its file of complaints received in early 1998. In Maryland, we reviewed 102 complaints that the state received between January 1, 1998, and February 27, 1998. In Michigan, we reviewed the 59 complaints the state received between January 1, 1998, and January 15, 1998. In Washington, we reviewed the 133 complaints received between January 1, 1998 and January 7, 1998. We reviewed the nature of complaints received, the priority levels assigned, whether the complaint resulted in an investigation and the timeliness of the investigation, and whether an investigation substantiated the allegations and resulted in any federal or state deficiencies. Table 6 summarizes all complaints received in the three states during these periods in early 1998 that resulted in the state identifying a violation of federal standards and that were of a severity level that actual harm to residents was found. Each of the three states visited had a backlog of uninvestigated complaints and we asked each state to give us the files for these complaints. For the Baltimore, Detroit, and Seattle metropolitan areas, the tables in appendix III summarize the uninvestigated complaints that (1) had already exceeded the state’s assigned time frame at the time of our visit and (2) were lodged against nursing homes with at least three such pending complaints. In Baltimore, these include only complaints that had not yet been assigned to an investigator; they do not include additional uninvestigated complaints assigned to an investigator. For Detroit and Seattle, appendix III includes any uninvestigated complaint (whether unassigned or uninvestigated) meeting these criteria. We contacted each of HCFA’s 10 regional offices and requested the number of federal monitoring surveys the region conducted during 1996, 1997, and 1998, and how many of these represented reviews of complaint investigations; State Agency Quality Improvement Program reports for the 14 states we or state auditors had reviewed and that the states had submitted to HCFA at the end of 1998; and any additional guidance or oversight methods for complaint investigations that the regional office had developed. To estimate 1998 expenditures by state for nursing home complaints, we collaborated with HCFA to develop a method to distinguish expenditures associated with (1) nursing homes for the elderly and physically disabled from other types of facilities, including those serving individuals with mental health disabilities, and (2) complaint investigations from annual surveys and other state certification and licensing activities. These estimates are based in large part on survey hours for complaint investigations compared with all survey hours as reported to HCFA by the states. Expenditure data are from 1998, except in some states where the information was not yet available for the fourth quarter of the federal fiscal year. In addition, 1997 survey hours were used because 1998 data were not complete at the time of the analysis. In addition to Medicare and Medicaid expenditures, the expenditures include state licensing activities of federally certified nursing homes in all states where federal certification and state licensing activities are conducted as part of the same process. Appendix II further discusses, by state, how these costs are allocated between federal and state governments and reports expenditures for all types of surveys; complaint investigations; federal and state shares; complaint expenditures per visit, nursing home, and bed; and the number of complaint visits per home and per thousand beds. We conducted our work between October 1998 and March 1999 in accordance with generally accepted government auditing standards. In fiscal year 1998, about $300 million was spent by the federal and state governments to certify and perform state licensing functions of federally certified nursing homes, with the federal government contributing about 70 percent ($210 million) of these costs. The federal government pays the states for costs associated with certifying that nursing homes meet Medicare’s standards and pays for 75 percent of the costs associated with certifying that they meet Medicaid’s standards. States contribute the remaining share of the costs associated with Medicaid standards, and they also pay additional costs related to ensuring that nursing homes meet state- established licensing standards. States generally conduct these licensing reviews concurrently with their federal certification activities. HCFA and each of the states agree on the share of total costs that corresponds to the effort spent for state licensure during federal certification. Most nursing homes (77 percent) are dually certified for both the Medicare and Medicaid programs. The expenditures for these homes are split evenly between the Medicare and Medicaid programs after deducting the portion to be paid by the state for its licensing activities. Nearly $60 million, about 20 percent of total nursing home certification and licensing expenditures, was spent on complaint investigations. The federal government contributed about $42 million, or 71 percent, of the costs associated with investigating complaints. The proportion of federal and state expenditures for annual surveys is similar to that for complaints. Table II.1 shows the total expenditures by state for the federal certification and state licensing activities for federally certified nursing homes, the percentage dedicated to complaint investigations, and federal and state shares of complaint investigations. The total expenditures include those for Medicare, Medicaid, and state licensing activities related to federally certified nursing homes. The amount spent on complaint investigations was estimated by HCFA and GAO on the basis of the staff time dedicated to complaints. The distribution of federal and state shares varied depending on the share of costs that are attributed to state licensing activities and not shared by the federal government and the proportion of nursing homes that are Medicare certified, Medicaid certified, and dually certified for Medicare and Medicaid. Table II.2 presents complaint investigation expenditures, by state, per on- site investigation, nursing home, and federally certified bed, as well as the number of complaint investigations per home and per 1,000 beds. (continued) Nursing home complaint expenditures as a percentage of total expenditures (continued) Nursing home complaint expenditures as a percentage of total expenditures (continued) Number of complaint visits per 1,000 beds (continued) As of December 14, 1998, there were 101 complaints, received between January and November 1998, filed against 56 nursing homes in the Baltimore metropolitan area that had not yet been assigned to an investigator and that also exceeded Maryland’s investigation timeframes. The following table summarizes the complaints filed against 12 of these homes that received three or more such complaints. Table III.1: Unassigned Complaints for Nursing Homes in Baltimore With Three or More Such Complaints Summary of allegation(s) A nurse allowed a respite resident with Alzheimer’s disease to leave the nursing home; family disputes nurse’s belief that resident was aware of where she was going. Family requested that a physician examine resident; however, a nurse examined her instead. Family was also unaware that home ordered a psychiatric consultation resulting in medication being ordered, and disputes home’s claim that family was notified. Family alleges that the resident's medical records were falsified. Blind resident does not get needed assistance—such as identifying food provided her, or help leaving room. Understaffing, with 64 residents and only 3 to 4 aides. Understaffing, with 64 residents and only 3 to 4 aides. Nurse aide struck resident in the chest. Nursing home and complainant agreed on a time to discharge a 91-year-old resident with dementia. Home discharged the resident earlier, and the new nursing home was unprepared for resident's arrival. The family was not notified that resident was transferred early and arrived to help the resident move to find that resident had already been transferred. Visitor overheard a nurse aide verbally abusing a resident. Resident alleged that a nurse aide verbally abused her. Aide was suspended pending investigation. (continued) Summary of allegation(s) No hot water for several weeks or months at a time, so resident was not bathed or cleaned properly. Inadequate supply of diapers, towels, washcloths, resulting in resident sitting in urine for extended periods of time. Lack of staff, resulting in resident not being adequately hydrated, fed, turned, or kept clean. Unskilled nursing assistants attended resident. Charting of intake and bowel movements was false. It was charted that resident had a bowel movement, but resident was severely impacted and needed immediate medical intervention. Scales and thermometers did not always function properly. Fluids were not routinely offered and time was not taken to make sure that the resident drank enough. If feeding took too long, the staff would not wait to ensure that the resident ate enough. Resident was admitted to the hospital 4 times in 10 years with dehydration and a urinary tract infection. Complainant visited resident on a Saturday and Sunday and found resident dirty with dried feces and no sheet on the bed. On Sunday, resident was wet. When complainant asked aide for a towel, wash cloth, and soap, she was given paper towels and told the home did not have any soap. The complainant asked the home's staff for a water pitcher and was told that the home does not use water pitchers, only cups in the utility closet. Complainant could not find a cup in the closet and the aide told her that none was available. Call lights unanswered on both days. Staff does not stay to ensure that resident takes medications. Resident in same clothes for 3 days. Resident received no medications for 10 days; family not notified. Resident sent to emergency room with diagnosis of possible infection. Hospital staff found resident’s intravenous line dirty and clogged because nursing home staff did not flush the line. Physical, verbal, and emotional abuse of a resident by nursing home staff and resident’s physician who is part of the home’s staff. Resident feeds self with a special spoon but is dependent in all other activities of daily living. On two shifts, aides refused to help the resident out of bed. Resident’s supper tray was delivered but the resident was not provided any assistance to eat. Aide grabbed the resident’s shoulder after the resident told the aide that her shoulder hurt. Pressure sores have worsened since admission to the home. Resident developed contractures because the home did not provide range-of-motion exercises as ordered. Management’s treatment of employees is affecting care. Promised pay raise never came. Nursing home staff did not answer call lights. A resident with infection was not given an antibiotic as ordered. Nursing home offered no explanation to family for resident’s leg fracture, so the family moved resident to another home. Home told state survey agency that it would investigate; however, no indication as of December 1998 that agency had received the home’s report. Understaffing: unit has 1 nurse and 7 aides for 52 residents, including 2 with stage III and IV pressure sores, 13 with stomach feeding tubes, and 13 requiring injections. The nurse is unable to complete what she needs to do. (continued) Summary of allegation(s) Understaffing: only 1 nurse on the 7 a.m. to 3 p.m. shift with 8 aides for 52 residents, including 2 residents requiring treatment, others requiring injections, and 13 stomach tube feedings. Resident alleged caregiver at the home bruised her right forearm and later threw the resident onto the bed. The hospital emergency room report indicated that the arm had soft tissue injury. Pictures of the resident show a “badly bruised arm.” Complainant not satisfied with the home’s investigation of an incident report that a resident had fallen about 13 times in 4 months. The last fall resulted in laceration of the resident’s forehead. Understaffing—call lights not answered in a timely manner; residents not bathed as scheduled; and residents not turned and changed as needed. One aide for 15 residents requiring total care on 7 a.m. to 3 p.m., and 3 p.m. to 11 p.m. shift. Discharge planning at home is not done appropriately, for example, a hospital-style bed was not ordered until resident’s Friday discharge, so was not delivered until Monday. Residents not given choices of home health agencies or equipment companies. Residents' medical records do not indicate discharge planning. Discharge planning form usually is not completed and given to families to inform them of arrangements. Family requested restraints for resident because of falls, but home refused. Understaffing. Resident lost 22 lbs. in 5 months. Resident's feet have sores and are bandaged, but not always changed as ordered. Sores are beginning to smell. Complainant found resident's face swollen, but staff was unable to explain what happened. Resident told therapist that an aide verbally abused her. Home was to investigate and report to the state survey agency. However, as of December 1998, the state did not have the home’s investigative report. Aide smokes in the home and around residents. Same aide mishandled residents—threw them into bed and used nasty language. Home was to investigate and report to the state; however, as of December 1998, there was no indication home had done an investigation. After contacting home about its investigation of physical abuse of a resident, ombudsman was uncomfortable with the home’s inconsistent responses. Resident had discoloration of chest that family believed was bruise caused by physical abuse. Home to investigate and report to the state; but, as of December 1998, there was no indication home had investigated. Understaffing, resulting in the dining room being closed for 2 days. During this time, there were only 3 aides for 70 to 80 residents. Complainant saw a nursing home employee shaking resident. Employee terminated by home. Hygiene inadequate--resident was not bathed, teeth not cleaned, and hair not combed. Weight loss from April to June, was 134 lbs. to 120 lbs. Home said resident spit food out and that home had recommended a stomach tube. (continued) Summary of allegation(s) Resident was not provided food from Monday night until Wednesday at 3:00 p.m. Resident was sent to hospital after complainant insisted. At hospital, the resident was found to have infected sacral decubitus ulcer, was dehydrated, and had urinary tract infection. Nursing home staff said they had not sent resident to the hospital because resident was dying. New aide tried to transfer resident without another aide to assist, although the care plan called for two people for transfers. Aide said she could not get timely help, so attempted to do it by herself. Five days later, resident was found to have two fractured legs. Home wrote incident report, but did not interview new aide as required until ombudsman opened a case as a result of family's concern about home misrepresenting circumstances of resident's fall. Family called doctor, who ordered X-rays. It is unclear whether home also called doctor simultaneously, or earlier—as home reported. Resident was blind, intelligent, and sociable. Complainant has found resident alone, begging for help, screaming “ . . .help, where am I?”, or “please, someone get me a drink of water,” or “please take me to the bathroom." No one responded or reassured resident that she was not alone. On one occasion, resident was found still in bed at 3:00 p.m.—urine-soaked, hungry, and thirsty. She had no breakfast or lunch. Nurse said home was short of staff that day. Aide spoke to resident in a very poor manner--told resident to “shut up” and if she kept ringing her call bell, she would be the last one to be answered. Administrator spoke with other staff who noted that the aide’s attitude was poor toward residents and some staff had seen him in altercations with residents. They indicated that the aide appeared to be “fired/wired up.” Aide was verbally abusive to resident in presence of the family. When admitted to home from hospital in July, resident could bathe, walk, and feed self. After 1 month in home, these activities stopped. Family met with home's staff about three times on quality-of-care issues, but problems persisted. Resident readmitted to hospital three times in her 2-month stay--a result of poor care at the home. Resident had series of falls. Home said no injuries resulted, but the resident suffers pain to the touch of bruised areas. As organ transplant recipient, needs sufficient fluids, but had not been getting, as evidenced by hospital diagnosis of dehydration. Hospital staff questioned whether resident had been receiving medications as prescribed. Staffing ratio at home was sometimes 1 aide to 20 residents on evening shift, so family had to bathe resident and put to bed. Resident placed on a toileting program by the home, but family has found her with a saturated diaper on, indicating resident was not being toileted on a regular basis. Caregiver handled resident roughly causing her to “suffer all night.” The resident was in a rehabilitation unit receiving treatment for a fractured hip. Resident’s roommate witnessed the incident. Aide was verbally abusive: called resident a “witch” and threatened to throw water on the floor and make her walk in it, hoping she would slip; said he would put her out of the unit because he was the boss on the floor; put a pillowcase over his head to try to disguise himself as resident’s doctor; threatened to unplug another resident’s call bell. Police were notified. Resident had two bruises on her arms. Ombudsman found no documentation of the bruises in records. (continued) Summary of allegation(s) A resident diagnosed with schizophrenia alleged someone in the home was sexually abusing her. Complaint investigated by nursing home, but no formal report generated. Resident alleged an aide placed a pillow over the resident’s face; resident removed pillow, and aide did it again. Resident said a nurse aide yanked the bed covers off and grabbed resident’s hand real hard. Ombudsman noted resident’s hand had a discolored area. This column represents the number of days from the date the complaint was received to the day GAO visited the state agency. As of January 11, 1999, there were 129 complaints, received between February and November 1998, filed against 62 nursing homes in the Detroit metropolitan area that had not been investigated and that exceeded the state’s 45-day investigation time frame. The following table summarizes the complaints filed against 17 of these homes that received three or more such complaints. Table III.2: Uninvestigated Complaints for Nursing Homes in Detroit With Three or More Such Complaints Summary of allegation(s) The nursing home changed its billing formula resulting in a large increase in fees. The air conditioning does not work properly in one of the wings of the home. Questionable infection control practices. Two roommates died within days of each other of complications of infections. One roommate was admitted to the home with gangrene between two toes and an ulcer on her foot, but with no oozing or infection. Despite being diabetic, which required close monitoring of her feet, the home did not change the dressings as her physician ordered. The resident’s foot began to ooze and became swollen. A culture was taken and the resident was moved to another room without explanation. Twenty-five days after being admitted to the nursing home, she was returned to the hospital where she died 6 days later. The resident’s roommate, who entered the home 11 days after the resident, was a diabetic with open wounds on her feet and legs when she was admitted. Twelve days after being admitted, the roommate had an elevated temperature. Despite her family’s request to have her hospitalized, her doctor prescribed liquid Tylenol. That same day, she experienced breathing problems, was given antibiotics for an infection, and died. Resident was not repositioned timely, developed pressure sores, and was neglected, resulting in dehydration requiring hospitalization. Resident’s condition declined visibly in a short period of time resulting in her becoming lethargic, weak, and listless. The complainant suspected dehydration even though she was taken to the hospital and not treated for dehydration. Later that week, the home advised the complainant that the resident had “perked up” and that she would have dressings applied to her feet because of skin breakdowns. During a 4-hour visit 2 days later, the complainant contends that staff did not reposition the resident during this 4-hour period and that the dressings promised earlier had not been applied. (continued) Summary of allegation(s) Complaint discussed treatment of several different residents over the past several years. One resident was dropped on the floor during the middle of the night, suffered knee damage, and was placed back in bed. She moaned with severe pain until the day shift nurse found her at 7:00 a.m. She was sent to the hospital where her knee, although severely damaged, could only be bandaged. She died days later. A second resident received the wrong medication that burned her mouth, throat, and lower regions causing discomfort for many weeks. She was later dropped while being weighed. A third resident entered the home with no visible skin problems but developed bedsores that led to the amputation of a limb. Resident’s feeding tube was running and vomit was evident in her mouth and on her hands and face. She was found lying in a urine-soaked sheet, and a pressure sore was also urine soaked. She also had skin tears, but no wound care was performed. On the day she was admitted, she received no insulin as scheduled. The staff reportedly said that there was no insulin in the nursing home at that time. The home failed to assess a resident’s injury in a timely manner. The resident fell at 12:30 p.m. suffering a broken left hip, but was not transferred to the hospital until the next day. A resident sustained a fracture of unknown origin to the right hip. Neglect is alleged. A resident sustained a fracture of her wrist while taking a shower without supervision. Family member found a portable X-ray company taking X-rays of resident without an explanation. The floor nurse said the resident’s knee was swelling. X-rays revealed a fracture in the knee. Family questions if resident was properly restrained. The hospital physician felt the resident was either dropped or fell down. The home staff stated they thought the resident might have bumped the side rail. The family also felt the resident was not receiving required assistance with eating. During lunchtime an employee of the nursing home slapped a resident who needs assistance with eating. A resident was not adequately groomed (soiled clothing), did not receive services ordered by a physician, was harmfully neglected, and suffered a preventable injury. Resident fell sometime during the evening or the early morning of the next day. The facility put her back in bed without ordering X-rays, even though she complained of pain in her leg. X-rays were not taken for 3 days and then were taken only upon the family’s insistence. The resident was transferred to the hospital where it was determined that she had a shattered hip. A resident fell from her bed and suffered injuries including a skin tear on her hand and an abrasion on her left temple. X-rays also revealed a fracture to her left hip. Complainant alleged a series of problems with the care provided to her father: he had no access to water despite being diabetic and was often very thirsty; he frequently slipped down in his cardiac chair but was not offered a wheelchair because the home did not have one that would fit him; the home failed to provide an assessment of the resident’s breast for breast cancer; his oxygen machine was broken but complainant suspects that the home nevertheless bills Medicare for oxygen; resident was advised that his family should come and help to feed him; the resident’s belongings were missing and he was wearing the clothes of other residents; complainant was told by staff that the laundry in the home is done infrequently. (continued) Summary of allegation(s) During a 16-month period, the resident–who is unable to turn in bed, speak, or move her right side–suffered pneumonia, numerous bruises, cracked ribs, a broken hip, a broken shoulder, and a broken leg. A resident was brought into the hospital and was not breathing, was severely dehydrated, and had acute rib fractures and pneumonia. A resident signed himself out of the home and did not return. The resident had an untreated pressure sore. The complainant indicated that the staff intentionally hid the resident’s condition from her for possibly up to one year. Resident ran a temperature of 100+ degrees for three days without the home contacting the family. The resident died from bronchial pneumonia and a closed-head injury. Nursing staff failed to provide the resident with a breakfast tray. When the resident asked the nursing assistant for the tray, the nursing assistant responded “because of your attitude, no one wants to give it to you. Do it yourself.” The home schedules only one aide per floor on the midnight shift. The home reuses the feeding tube bags between the residents. One resident was found to have maggots in the sores on his feet, but the home would not send him to the hospital because it was afraid the hospital would call the state. The Director of Nursing specifically told the staff that the resident was not to go anywhere “because the state would be called in to investigate and we do not need that right now.” Resident sustained an injury (fracture of the femur) of unknown origin. Resident sustained an injury (femoral neck fracture) of unknown origin. Resident had a hematoma over her left eye, with bruising, as well as a black left eye. The cause of the injuries is unknown. Resident sustained a fracture (left ankle and lower leg) of unknown origin. Home was understaffed; a resident was found sitting in the dining room with wet pants; resident found in a gown with no underwear; resident’s clothing missing; resident not helped to bathroom in a timely manner; no therapeutic activities for residents; meals are inadequate; a dog is allowed to roam through the nursing home; offensive odors in the home; resident has been injured as a result of falls. The resident was not allowed to take a leave of absence from the home; her privacy was not protected; she had a difficult time getting her personal expense money from the administration. The resident fell out of a chair and was sent to the hospital where she received six stitches in the back of her head. This was the fourth time she had fallen. One of the falls resulted in permanent loss of vision in her right eye. The family also alleges that they have been denied access to her clinical records. (continued) Summary of allegation(s) When resident returned to the home following amputation of part of his leg, the home did not take necessary precautions to ensure that the leg did not become infected. It became infected and more of the leg had to be subsequently amputated. He was also handled roughly, over- medicated, and his feeding tube was not kept clean. Although the resident could not get out of bed without assistance, the home informed the family that he had to be taken to the hospital emergency room because he had gotten out of bed and fallen. When the family saw him, his arm was completely black and blue. He was also constantly overmedicated. The resident was in the home for three months recovering from a stroke. Complainant alleges that the resident was left in soiled clothing for hours and was prescribed a mixture of medication that caused internal bleeding that led to a blood transfusion. The nursing home advised the resident on numerous occasions that insurance would cover all her costs and convinced her to remain in the home for the entire period of Medicare coverage. After leaving the home, she received a bill for $7,000, which a credit agency is attempting to collect from her son. The resident was not properly groomed; food was observed in the heaters; staff did not answer call bells; staff harassed the resident and his family if they complained about care. Resident developed pressure sores on both feet and had to have part of one leg amputated due to improper care of the sores. The home was short of staff and was falsifying the books. Staff would not respond to the resident’s buzzer; resident was often found sitting in urine and feces; a week before he died, he complained of an upset stomach and was vomiting, but staff told the family there was a virus going around and there was nothing to worry about; family was not informed of a change in his condition. Resident was not washed or shaved; his teeth were not brushed and his fingernails were dirty; call lights went unanswered. The certified nursing assistants were not qualified to care for residents; staff failed to follow the care plan that requires two people to move this resident; the resident was left alone in the bathroom, fell down, struck her head, and suffered cracked ribs and various cuts and bruises. Several residents fell out of bed one evening because the side rails were not put up; food was served cold and there was no staff person to help residents eat; the home was very short staffed and on several nights the complainant was the only nonresident adult in the wing; the resident’s roommate was choking but no one responded when the complainant pulled the call light; during a shift change, all the nursing staff was gathered around the nursing station calling in lotto tickets. (continued) Summary of allegation(s) A resident made the following allegations: her telephone was taken away; she did not receive adequate whirlpool baths ordered by her doctor; she did not receive two baths weekly; her food was cold and unpalatable; she was not allowed to attend the church of her choice; her discharge planning was inadequate. The resident had injuries (bruises and swelling) of unknown origin. The home provided conflicting reports as to what may have happened. The food was not palatable; the home was short staffed; physical therapy provided was very limited; money was stolen from the night stand; beds did not raise up and down and the mattresses were very thin. The resident had bed sores on his heels; he was refused readmission to the home following a hospital stay; he was not properly groomed (bathed and shaved); dirty bed linens were not changed; he was not turned; physicians did not visit residents but instead took the word of the nurses concerning residents’ condition; resident was not timely transferred to the hospital for treatment, resulting in his death. A nurse verbally abused the resident. Staff failed to assess and monitor a resident who was later sent to the hospital for treatment of a seizure; they did not take proper precautions for pressure sores; they did not treat the resident with dignity and respect because they forced him to wear diapers. The home did not check the blood sugar level of a diabetic resident for three days following his admission. On the third day he received two units of insulin when he should have received 100 units. When brought to the attention of the nurse, she said they were not supposed to check his blood sugar. The resident’s wife insisted that the doctor be called, and it was determined that the resident’s blood sugar was more than six times the normal amount. On the physician’s order, the home gave him potassium pills to normalize his sugar level, but his heart rate went so high that he was taken to the hospital, where he died. Nursing home staff would not permit the resident to leave the home to visit with his family. Resident fell out of bed and suffered a cut on her head. Staff bandaged the cut but because she had no other marks on her body and could move her arms and legs, X-rays were not taken. Three days later she was taken to the emergency room with elevated heart rate, blood pressure, and sugar level. The doctor in the emergency room ordered an X-ray after noticing that she cried and reached for her hip when he tried to turn her. The X-ray confirmed a hip fracture, necessitating hip surgery. The complaint also alleges that the resident previously had experienced dehydration and a urinary tract infection, had two hearing aids and her dentures lost in the home, and was discovered wearing another resident’s dentures, which resulted in a sore mouth and an inability to eat. A resident walked out of the home and was found a block away by a passerby. He had fallen and suffered a swollen eye, a bruised hand, and a knee abrasion. An employee was verbally abusive to a resident. A resident developed a cut on his foot that became infected. It was left unchecked and spread into the bone. The heel had to be amputated. (continued) Summary of allegation(s) The resident had a condition that, if vomiting takes place, dictates that the resident should be taken immediately to the emergency room. Although the resident was suffering spells of vomiting, the nursing home failed to send her to the hospital until she was found unconscious. Following surgery, she improved, but died about a month later. Although peritonitis was listed as the cause of death, a doctor at the hospital told family members that “if she hadn’t been so dehydrated and malnourished, she would have been better able to fight off the infection.” An employee slapped a resident. The resident had bruises on her chin, her stomach, and her arms and legs; the home did not notify family when resident was hurt or sick; she suffered a head injury of unknown origin; the family had to request that she be hospitalized after she was ill for several weeks; she was so over-medicated that the doctor was unable to perform needed gall bladder surgery; she suffered a stroke but was not sent to the hospital until the family observed the problem and insisted on hospitalization. The home failed to provide proper dental care. The dental progress notes were inconsistent and of dubious accuracy. Despite the home’s assurance to the complainant that its dentist was capable of providing care, the resident had to visit an oral surgeon to resolve the problem that had lasted for 15 months. The resident was found on the floor bleeding from an injury to her head that required 17 stitches. In addition to the head injury, the resident had bruises on her face by her mouth and under her ear and her eyes were black and blue. The complainant feels she did not get a satisfactory answer from the home about the reason for the injury. This complaint included 28 separate allegations about the care provided to 17 residents. The allegations include: the administrator would not order needed equipment (such as recliners and geri-chairs) which forced the residents to stay in their beds; 90 percent of the home’s beds are old and faulty (big gaps in the side rails); a resident got her head caught in the side rails, was sent to the hospital, and later died; side rail pads are not put on the beds; the nurses are not passing the medications; the administrator told staff to call EMS (the community emergency medical service) instead of 911 when a resident was nonresponsive, possibly to save money; one resident was gritting her teeth in the dining room and the director of nurses shoved her and her chair out of the dining room because she couldn’t stand the sound; a resident was sent to the hospital due to malnutrition and dehydration and died two weeks later; a resident who entered the home with both legs is now a bilateral amputee because he developed pressure sores when staff failed to turn and reposition him or provide heel protection or foot elevation; a resident frequently complained of leg pains but his complaints were not addressed. It was later determined that he had deep vein thrombosis; a resident was frequently sleeping but no assessment or lab tests were performed to determine the problem; residents are restrained for convenience; as a result of understaffing, residents are not cleaned, changed, or provided oral care; a resident was admitted with no pressure sores, but developed sores on her heels and legs, became septic, and died; a resident with very bad teeth and gums has received no dental care; residents complain that their food trays are removed before they are finished eating. (continued) Summary of allegation(s) The complainant alleges that this home does not care for its residents. His father, a cancer patient, has a radiation machine in his room. Although this machine generates a great deal of heat, the thermostat in his father’s room has not been adjusted accordingly and the room is very hot. The complainant also indicated that the home cannot accommodate its residents and make them comfortable as it would have people believe. The home is not clean and no one seems to care. Complaints are made to the home’s staff, but nothing improves. Staff told complainant that her husband had fallen and that the fall was likely due to his medication. When complainant went to the resident’s room, she found that he was shaking, hot, gasping for air, that his respirations were only 30-38, and that his hands were blue. Complainant indicates that the physician assistant had been in her husband’s room only two minutes earlier and had only ordered a chest X-ray. The resident was taken to the emergency room where it was determined that he had a temperature of 103 degrees and was placed on life support. The emergency room doctor determined the resident had pneumonia. The resident receives cold showers and once went for two weeks without a shower; she lays in urine and feces; staff lost her address book and she cannot contact any of her friends; she has been denied seeing a doctor to explain her pain; no one helps her with her meals; the facility is short staffed. A nurse aide, thought to be but later determined not to be certified as a nurse aide, was verbally and physically abusive to a resident. Nurse aide was seen striking a resident with a towel. A resident’s personal belongings (clothes and shoes) were missing and the resident had to wear another resident’s shoes to a doctor’s appointment; when she returned from the late-afternoon appointment, she was given cold leftovers as her evening meal; she suffered facial cuts of unknown origin; she was constantly falling but the home failed to notify the legal guardian; the home failed to coordinate transportation for a medical appointment; during visiting hours, residents were being changed in their rooms with the doors left wide open. An employee slapped a resident across the face. The resident was hospitalized for a blood infection and pressure sore; she experienced a significant weight loss; another resident was observed eating the resident’s food and using her comforter; her personal property was missing. A former employee said the home fired her after 3 weeks of employment because she refused to falsify documents; the home is understaffed; wound care is put off for two to three days; falls and aspirations (introducing food or liquids into the lungs) are common but are often not documented or reported; supplies are low; the home learned that state officials were coming for an inspection and directed the employee to falsify residents’ charts. The home failed to change the resident’s incontinence products, resulting in a rash and blisters; he was hospitalized for fluid in the lungs because the home failed to provide adequate care; he lost at least 40 pounds because his dentures were lost and the home failed to provide the necessary dental care to ensure that his new dentures fit properly. (continued) Summary of allegation(s) At 10:00 a.m., family members arrived at the home to take the resident to a medical appointment and found her lying in bed, totally soaked in urine, including her hair and pillow. She was lying on top of the made bed, dressed in a hospital gown with her bare feet and legs totally exposed. Complainant believes she was left this way all night because no other beds on the ward were made. A week later, another family member found the resident in a similar condition. This time, she was wearing a sweatshirt, but no underwear or diaper. There were no clothes in her closet for her to be changed into. A week later, the resident was rushed to the hospital with an extremely low sugar level. She has never had diabetes and never had a problem with her blood sugar. Complainant believes it is possible that the resident was accidentally or intentionally injected with insulin (possibly that of her roommate, who is a diabetic). This column represents the number of days from the date the complaint was received to the day GAO visited the agency. Because Michigan measures its time frame in calender days, not in workdays, as do Maryland and Washington, we show only calendar days for Michigan. As of January 6, 1999, there were 40 complaints, received between September 1998 and December 1998, filed against 11 nursing homes in the Seattle metropolitan area that had not been investigated and that exceeded the state’s investigation time frame. The following table summarizes the complaints filed against nine of these homes that received three or more such complaints. Table III.3: Uninvestigated Complaints for Nursing Homes in Seattle With Three or More Such Complaints Summary of allegation(s) Floor of resident’s room was dirty; urine on floor at noon was still there at 4:30 p.m. Staff never asked preference on meals. Staff told resident he could not have bed rails because it was against the law. Resident fell from wheelchair and was cut above eye. Complainant asked staff to call medical aid, but staff said not needed because laceration was not deep. Complainant insisted, and resident was taken to hospital where he received 6 sutures and was observed for pain in right arm. Complainant was removing the resident from this home, but was concerned about the residents who remain. (Same resident and incident as previous complaint; new allegations.) Fell from wheelchair, apparently because staff did not strap in properly. Staff of new nursing home visited home where incident occurred and was allowed to read resident’s chart without a release from the resident. Complainant concerned about confidentiality. Staff did not feed resident and told the complainant to feed resident. Staff ignored resident after they learned family complained to state. Did not maintain cleanliness of urinary catheter. Resident now hospitalized, and home will not take resident back. Insufficient staffing resulted in inadequate hygiene, resident falls. Resident was charged for wheelchair management training, but home never provided training. Resident (same as in above complaint) billed for wheelchair management training, but never received training. Resident sustained two fractures of her leg, which home believed occurred while moving resident. Sent resident to hospital for X-ray, and suspended person who made the transfer. Nurse allowed relative and others to give resident his medication. Nurse did not always administer recommended dosage of morphine, but gave more. Room and facility not always clean and staff did not bathe resident until complaint was made. Nurses changed diet from regular to liquid to keep him from throwing up, and would not restore regular diet because didn’t want to clean up the mess if he threw up again. Doctor never came to see resident. Resident did not receive pain medications ordered by the doctor. Resident’s family was not given proper admission paperwork to sign. Summary of allegation(s) Resident who was generally confined to bed got up, walked down hall, fell, and fractured hip. Was in hospital for surgery. Stolen items. Facility reeks of urine. A resident lies on floor in front of elevator and attacks visitors. Resident was found urine-soaked every visit. Left in nightclothes. Not wearing eyeglasses or hearing aid. Resident fell out of bed in spite of side rails, and suffered head laceration requiring stitches. Staff member slapped resident on leg, which already had nerve damage. Verbal abuse and public humiliation of talkative resident by therapist. Fracture of leg below kneecap of unknown origin. Patient has osteoporosis. Home is billing 12 percent interest on outstanding charges. Home cannot locate lift chair that was owned by deceased resident. Verbal abuse by nursing assistants, including a threat to take away call light because of the resident’s frequent use of it. Alleged neglect--untreated leg wound was bed sore; leg may have to be amputated. Patient showing mental decline, without satisfactory diagnosis. Home trying to force a resident out, into adult home not suitable to needs of wheelchair- bound resident. Resident with history of hitting staff and other residents apparently hit fellow resident on head, causing bruise and abrasion with slight bleeding. Resident with history of aggression hit another resident in jaw. Poor care and service; quality of care in home has declined. Catheter leaked and soaked resident, but aide left resident wet; so resident called 911--taken to hospital. Resident wanted to leave nursing home, as could function on own. Overmedicated to point that could not think and speak clearly. Nothing to do in nursing home. Disagreements among family, resident, and nursing home staff impeded eventual transfer to independent living. Nursing home social worker and state case manager tried to prevent independent living by labeling suicidal. A near-failure of system of rights and protections, requiring ombudsman’s repeated intervention. Resident has had numerous falls--12 within a few weeks--in spite of mats around bed, special alarm, lap tray on wheel chair. Latest fall required emergency room visit and stitches, as did another fall. Resident found covered in blood, feeding tube pulled out, yet resident unable to have pulled out on own due to physical limitations. Hospitalized. (continued) Summary of allegation(s) Resident had burn on leg, which was brought to complainant’s attention by home’s staff. Resident was served cup of coffee so hot that it caused her to drop it and burn her right leg. Resident, who is being treated for mental and other difficulties, receives visits from son who verbally abuses resident. Resident gets upset and stops eating. Complainant fears son contributing to recurrence of mental difficulties. Ongoing problem with theft of resident’s personal items. Difficult to contact nursing home staff by phone to resolve issue. Facility has not resolved issue. Neglect, inadequate staffing, untrained staff: Resident looked like swallowed watermelon due to impacted bowel—a recurrent problem. No bowel movement charted in 10 days. Medications not given, but appears records falsified to show given. Home discontinued ordered medication. Home unresponsive in addressing care problems brought to its attention. Due to reduced staff, administration of medications is erratic. Call lights not answered for 2 hours, so not getting to bathroom timely—now have rash from being urine-soaked. Missed 3 weekly baths. Turnover of temporary staff creates communication problems. Concern over care needs not being met. Staff shortages leading toward burnout. Resident says young man fractured his hand. Staff treated resident roughly and tried to force him to eat. Doctor unable to answer questions about medications or other care questions. Staffing inadequate to meet needs of residents. Call lights not answered, or answered late. Reportable incidents not reported and recorded properly. Medication error—order was changed but missed by staff, so that resident received higher dosage than ordered for a month. Medication error—mix-up of residents, so that resident received own medications and another resident’s on same morning. Doctor and nurses intervened, and close monitoring of vital signs followed. This column represents the number of days from the date the complaint was received to the day GAO visited the state agency. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on how states implement the federal requirement that establishes a process for nursing home complaint investigations, focusing on the: (1) effectiveness of state complaint investigation practices as a component of the system to ensure sustained compliance with federal nursing home quality-of-care standards; and (2) Health Care Financing Administration's (HCFA) role in establishing standards and conducting oversight of states' complaint investigation practices and in using information about the results of complaint investigations to ensure compliance with nursing home standards. GAO noted that: (1) federal and states' practices for investigating complaints about care provided in nursing homes are often not as effective as they should be; (2) among many of the 14 states GAO examined, GAO found numerous problems, including: (a) procedures or practices that may limit the filing of complaints; (b) understatement of the seriousness of complaints; and (c) failure to investigate serious complaints promptly; (3) serious complaints alleging that nursing home residents are being harmed can remain uninvestigated for weeks or months; (4) such delays can prolong situations in which residents may be subject to abuse, neglect resulting in serious care problems like malnutrition and dehydration, preventable accidents, and medication errors; (5) although federal funds finance over 70 percent of complaint investigations nationwide, HCFA plays a minimal role in providing states with direction and oversight regarding these investigations; (6) HCFA has left it largely to the states to decide which complaints potentially place residents in immediate jeopardy and must be investigated within the federally mandated 2 workdays; (7) if a serious complaint that could harm residents is not classified as potentially placing residents in immediate jeopardy, there is no formal requirement for prompt investigation; (8) more generally, HCFA's oversight of state agencies that certify federally qualified nursing homes has not focused on complaint investigations; and (9) GAO found that: (a) a HCFA initiative to strengthen federal requirements for complaint investigations was discontinued in 1995, and resulting guidance developed for states' optional use has not been widely adopted; (b) federal reviews of state nursing home inspections are primarily intended to focus on the annual surveys of nursing homes, and very few reviews are conducted of complaint investigations; (c) since 1998, HCFA has required state agencies to develop their own performance measures and quality improvement plans for their complaint investigations, but for several of the 14 states GAO reviewed, such assessments addressed complaint processes superficially or not at all; and (d) HCFA reporting systems for nursing homes' compliance history and complaint investigations do not collect timely, consistent, and complete information. |
To promote efficient commercial exchange and economic growth, national governments and central banks issue money, including paper notes and coins in various denominations. The federal government experiences a financial gain when it issues notes or coins because both forms of currency usually cost less to produce than their face values. As long as there is a public demand, when the government puts coins into circulation, it creates a value known as “seigniorage.” Seigniorage is traditionally defined as the difference between the face value of coins and their cost of production. In addition, the face value of notes issued, net of their production costs, creates an analogous net value for the federal government. In this report, we use the term “seigniorage” to refer to the value created from the issuance of both coins and notes. Seigniorage reduces the government’s need to raise other revenues, thus reducing the amount of money that the government needs to borrow. When the government has to borrow less, it pays less in interest over time. Although the interest avoided is a benefit to the government, the public effectively finances this benefit by choosing to hold more cash on which it does not earn interest. Two Treasury bureaus, BEP and the Mint, produce notes and coins, respectively, and the Federal Reserve places them in circulation through banks in response to public demand. Under current law, the Federal Reserve determines the amount of $1 notes necessary for commerce. For the circulation of $1 coins, the Secretary of the Treasury decides what is necessary to meet the needs of the United States. In practice, according to officials from the Mint and the Federal Reserve, the Federal Reserve makes this determination by producing a short-term forecast of demand for notes and coins. Based on this forecast, the Federal Reserve orders notes from BEP and the 12 regional Federal Reserve banks order coins from the Mint. The Federal Reserve circulates the notes through the Federal Reserve banks and the Mint distributes coins directly to those banks. The Federal Reserve banks distribute notes and coins to commercial banks to meet the demand of retailers and the public. When notes and coins are returned by commercial banks as deposits to the Federal Reserve banks, each note is processed to determine its quality and authenticity. During processing, worn and counterfeit notes are removed from circulation and the rest are wrapped for storage or re-circulation. While the Federal Reserve re-circulates coins received from banks, it does not have a comparable program to test the authenticity or fitness of coins. The Federal Reserve contracts with private entities such as armored carriers to count, sort, and transport notes and coins for circulation or storage. Figure 1 shows the production and circulation of notes and coins. Currently, there are five different $1 coin designs in circulation—the Eisenhower coin, the Susan B. Anthony coin, the Sacagawea coin, the Presidential $1 coin series, and the Native American $1 coin series. Table 1 shows production figures for the four $1 coin designs produced since 1979. The four recent $1 coin designs are the same size and weight and have the same electromagnetic properties. The Susan B. Anthony $1 coin is silver in color, while the Sacagawea, Presidential, and Native American $1 coins are golden in color. The golden color was introduced in 2000 so that the public could better distinguish the $1 coins from the quarter, which the Susan B. Anthony $1 coin resembles and with which it is often confused. The number of $1 coins shipped from the Mint to Federal Reserve banks peaked at over 1 billion in 2000, when the Sacagawea coin was first minted, and immediately declined to about 100 million coins in 2001. The number of $1 coins shipped averaged less than 50 million annually from 2002 through 2006, until the Presidential coin series was initiated in 2007. (See fig. 2.) About 1.1 billion $1 coins are held in storage by the Federal Reserve banks because, according to senior Federal Reserve officials, of the limited public demand. In recent years, Congress sought to increase the circulation of the $1 coin, but circulation has remained limited. To remove barriers to circulation, the Presidential $1 Coin Act of 2005, among other things (1) mandated the use of $1 coins by federal agencies, the United States Postal Service, all transit agencies receiving federal funds, and all entities operating businesses, including vending machines, on U.S. government premises; (2) required the Mint to promote $1 coins to the public; and (3) required the Secretary of the Treasury, in consultation with the Federal Reserve, to review the co-circulation of the different $1 coin designs and make recommendations to Congress on improving the circulation of $1 coins. Even with efforts taken to implement the legislation, the Federal Reserve banks had an inventory of about 1.1 billion $1 coins as of December 2010, which is sufficient inventory to cover the current level of public demand for the coin for over 13 years. Other countries have introduced coins of similar value into circulation by replacing the corresponding notes, eventually leaving the public with no alternative to the coin of that value. Among the rationales for replacing notes with coins cited by foreign government officials and experts are the cost savings to governments derived from lower production costs and the decline over time of the purchasing power of currency due to inflation. In 1985, for example, the Canadian House of Commons estimated that the conversion to a $1 coin would save the government $175 million (Canadian) in total over 20 years because it would no longer have to regularly replace worn out $1 notes. Canadian officials later determined that the Canadian government saved $450 million (Canadian) between 1987 and 1991. Over the last 47 years, Australia, Canada, France, Japan, the Netherlands, New Zealand, Norway, Russia, Spain, and the UK, among others, have replaced lower-denomination notes with coins. Most of these replacements occurred in the 1980s. (Table 2 indicates when selected countries replaced notes with coins.) In past work we reported that the annual net benefit to the government of replacing the $1 note with a $1 coin would be about $318 million (1990), $395 million (1993), $456 million (1995), and $522 million (2000). Based on the experiences of other countries and the potential financial net benefit to the government, we have twice recommended that Congress provide for the elimination of the $1 note to ensure the success of $1 coin initiatives. We estimate that replacing the $1 note with a $1 coin would provide a net benefit to the government of approximately $5.5 billion over 30 years, amounting to an average yearly discounted net benefit of about $184 million. However, this benefit would not be achieved evenly over the 30 years. In fact, as shown in figure 3, the federal government would incur a net loss during the first 4 years. Yearly net benefits begin to accrue in the fifth year of our analysis, and in the tenth year (2020), the initial start-up costs are paid back and overall net benefits begin to accrue. The early net loss represents the up-front cost of producing a large number of coins during the transition from notes to coins, together with the limited interest expense the government would avoid in the first few years after replacement began. While the estimated benefits in earlier GAO analyses were due to both seigniorage and reduced costs of coins (as compared to notes) over 30 years, our current net benefit estimate is solely due to seigniorage. In fact, the cost of producing coins for a full replacement is never fully recovered during the 30-year analysis, likely due to the longer note life and relatively higher cost of coin production today than was the case when our earlier studies were conducted. Moreover, our estimate, like all estimates, is uncertain, particularly in the later years, and thus the benefits could be greater or smaller than estimated. As a result, we have considered several alternative scenarios that are discussed later in this report and in appendix II. To arrive at our estimate, we developed a model to examine the effects of replacing the $1 note with a $1 coin. We assumed that the replacement would be implemented starting in 2011, and during that year the Mint would invest in new equipment to increase its production capability for $1 coins. We also assumed that it would take 4 years for the Mint to produce enough coins to replace the currently outstanding dollar notes, and that during the transition, production of the paper note would stop. Our model assumptions cover a range of factors including the replacement ratio of coins to notes, the expected rate of growth in the demand for currency over 30 years, the costs of producing and processing both coins and notes, and the differential life span of coins and notes. The cessation of production of $1 notes in our analysis might suggest a possible shortage of dollar currency during the transition. However, because of the existing $1 coins that the Federal Reserve banks hold and the rapid ramp up of production during the first 2 years of the transition, the outstanding dollar currency—both notes and coins—during the years of the transition equals or exceeds the demand we estimate for each of those years. The assumption that contributed the most to the net benefit we estimated was the replacement ratio of coins to notes. Following the example of other countries that have replaced a note with a coin of equal value, we assumed that, because of differences in how people use these two forms of money, the public would need more than one coin for each note that had been in circulation. It is common for people to take coins out of their pockets and store them at the end of each day rather than retain them in their wallets as they do notes, for use the next day. These factors cause coins to circulate with less frequency than notes. Thus, for any given denomination of currency, a larger number of coins would need to be maintained in circulation to meet the public’s demand for cash than would be needed if that denomination were provided in notes. We previously reported that when Canada replaced its $1 note and the UK replaced its £1 note with a coin, both countries used a 1.6-to-1 replacement ratio. However, in both cases, once the transition was complete, coin production was very low or even nil in some years. Therefore, we determined that a 1.5-to-1 replacement rate would be appropriate for our analysis—low enough to avoid an excess of $1 coins without creating an undue risk of producing too few. Our analysis thus assumes that the number of $1 coins issued is 50 percent greater than the number of $1 notes that were in circulation. This assumption of increased production results in substantially increased seigniorage and accounts for our estimate of a net benefit to the government over the 30-year period of the analysis. In 2000, we estimated that the yearly net benefit to the government of replacing the $1 note with a $1 coin would be roughly $522 million per year, after the replacement was complete. Our current estimate of an average yearly discounted net benefit to the government of about $184 million is lower than our previous estimate because of differences in the structure of our analysis and in our assumptions about the replacement ratio of coins to notes and the lifespan of the note. Structure of the analysis. Our 2000 analysis estimated an annual level of net benefit to the government assuming that the transition to coins had already been completed. Hence, that analysis did not fully address the initial production costs of replacing all outstanding notes with coins. For the current analysis, we determined that the Mint would need to make various investments to produce substantially more new coins in relatively few years. We therefore assumed that the minting and distribution of new coins would substantially increase during a 4-year transition period and the production of $1 notes would cease. We included these increased coin production costs in the 30-year analysis. Lower replacement ratio. For our 2000 model, we assumed that, to meet society’s needs, two $1 coins would be needed to replace each $1 note that had been in circulation. We arrived at that 2-to-1 replacement ratio based on the experience of other countries that had replaced their lowest- denomination note with a coin of the same denomination. Some of these countries used replacement ratios as high as 4 to 1. As we noted above, however, based on the experience of Canada and the UK, in our current model we used a replacement ratio of 1.5 to 1 because a higher ratio did not appear to be needed. Because a lower replacement ratio entails a reduced level of seigniorage, the net benefit to the government of switching to a $1 coin is lower in our current analysis than in our 2000 analysis. To examine the extent to which this assumption lowered our estimate, we ran our current model using the same 2-to-1 replacement ratio that we used in 2000 but maintained all other elements of our current model unchanged. This higher replacement ratio had the most impact on the estimated net benefit of the various sensitivity analyses we conducted. The average yearly discounted net benefit to the government would have been about $297 million, and the total net benefit over 30 years would have been about $8.9 billion if this higher replacement ratio had been used. The expanded lifespan of the note. Ten years ago, a $1 note lasted about 1.5 years on average. Because of improvements in the processing of paper notes, the life of the $1 note has grown considerably—to as high as 40 months on average, according to a BEP analysis. This longer note life reduces the differential between the lives of the note and the coin, which is expected to have an average life of at least 30 years, according to senior Federal Reserve officials. To ascertain the extent to which the current longer life of a paper note led to a lower estimated net benefit to the government in our current analysis, we ran our model using the same 1.5- year average note life we used in the 2000 model, but retained all other elements of our current model. We found that if we had used the shorter note life in our current analysis, we would have estimated that the discounted net benefit to the government of a replacement would have been about $7.7 billion over the entire 30 years and the average yearly discounted net benefit would have been just over $256 million. Besides analyzing how differences in assumptions from our 2000 report affected our current estimate (our base case analysis) we analyzed alternative scenarios using the same model as we did for our base case analysis but altered certain assumptions. We compared our base case analysis to two alternative scenarios that relate to possible changes in how society uses money. In the first case, we assumed that the growing use of electronic payment mechanisms would erode society’s use of cash over the period of our analysis. In the second case, we assumed that, rather than transferring all demand for the $1 note to the $1 coin, the public would prefer, and therefore demand, increased circulation of the $2 note as production of the $1 note ceased. Reduced growth in demand for cash. In our base case, we assumed that the demand for cash would continue to grow with the growth in economic activity, as it has over many years. Even in the last several years, as the use of electronic means of payment has grown substantially, according to the Federal Reserve, the demand for cash has continued to grow with the gross domestic product. However, further changes in the way Americans pay for goods at retail could lead to greater reliance on electronic payment methods. For example, some U.S. companies are planning to develop ways to make payments with a cell phone, a method that is already in use in some countries. If Americans come to rely more heavily on electronic payments, the demand for cash could grow more slowly in the future than we assume in our base case. For example, one possibility is that if the government replaces the $1 note with a $1 coin, electronic payments may increase as the public chooses to avoid the $1 coin. In this scenario, we assumed that the public would respond to the replacement of $1 notes with $1 coins by increasing its use of electronic payments, thereby reducing its demand for $1 currency by 20 percent. In this scenario, we found that the net benefit to the government would be nearly $4.5 billion over 30 years and the average annual discounted net benefit would be nearly $149 million. Replacement-induced demand for the $2 note. If the $1 coin replaced the $1 note, the use of the $2 note could increase because people and businesses might limit how many coins they kept in their pockets and cash trays, and using the $2 note would help them do this. In Canada, demand for the $2 bill did increase when the $1 note was replaced with the $1 coin. However, Canada already had a readily circulating $2 note at the time, whereas the United States does not; therefore, we did not assume an increase in demand for the $2 note in our base case. In an alternative scenario, we assumed that 25 percent of the demand for cash that had been met with $1 notes would transfer to $2 notes and the remainder to $1 coins. Thus, the government would increase its production of $2 notes accordingly. This scenario reduced the net benefit of the replacement because fewer new coins were produced and less seigniorage was generated. We found that the discounted net benefit to the government of replacement in this scenario would be slightly lower than our base case— about $5 billion over 30 years, for an average annual discounted net benefit of about $168 million. Our estimate of the discounted net benefit to the government of replacing the $1 note with a $1 coin differs from the method that the Congressional Budget Office (CBO) would use to calculate the impact on the budget of the same replacement. In the mid-1990s, CBO made such an estimate and noted that its findings for government savings were lower than our estimates at that time because of key differences in the two analyses. Most important, budget scorekeeping conventions do not factor in gains in seigniorage in calculating budget deficits. Thus, the interest expense avoided in future years by reducing borrowing needs, which accounts for our estimate of net benefit to the government, would not be part of a CBO budget scoring analysis. Additionally, CBO’s time horizon for analyzing the budget impact is up to 10 years—a much shorter time horizon than we use in our current analysis. Replacing the $1 note with a $1 coin could increase the risk of counterfeiting of the coin, which could increase the government’s costs to deter counterfeiting if the risk were deemed large enough to warrant countermeasures. We did not include such costs in our estimate because counterfeiting of U.S. coins is currently minimal, both domestically and internationally, according to the U.S. Secret Service. Moreover, counterfeit $1 notes accounted for less than 1 percent of all counterfeit U.S. notes detected in fiscal year 2009 (about 24,000 out of about 3 million). Nevertheless, senior officials at the Federal Reserve and Mint told us the increased circulation of $1 coins could increase the risk of counterfeiting, and senior Secret Service officials told us that counterfeiting of coins is an ongoing problem in the UK. A report by the UK’s Royal Mint indicated a counterfeit rate of about 3 percent for £1 coins. In Canada, however, counterfeiting is minimal. Canadian officials told us that the total face value of the counterfeit Canadian $1 and $2 coins detected since the coins were introduced in 1987 and 1996, respectively, is about $10,000 (Canadian). Whether replacing the $1 note with a $1 coin in the United States would increase the risk of counterfeiting, as it apparently did in the UK, or whether it would remain low, as it has done in Canada, is unknown. Both Canada and the UK created validation programs to maintain the integrity and quality of circulating coins after introducing the $1 coin and £1 coins, respectively. In both countries, when coins are returned from circulation as bank deposits, they are tested for authenticity, and heavily worn, bent, or otherwise unfit coins are identified and removed from circulation. Canada created its validation program when it introduced its $1 coin, while the UK created its program in response to a sharp increase in the counterfeiting of £1 coins. According to Canadian officials, the validation program was introduced to enable better management of Canada’s coin inventories. The program provides information on the number of coins in circulation and allows for removing unfit coins from circulation, as well as for detecting counterfeit coins. The Federal Reserve banks circulate coins they receive from commercial banks, but do not have a comparable validation program. Coin processing companies run the coins through counting machines that, according to a processing company we interviewed, verify the denomination and genuineness of each coin. This process removes coins that the machines detect as unfit but does not represent a systematic application of criteria and standards of operation such as could be applied through a validation program managed by the Federal Reserve. Our estimate of the net benefit to the government of replacing the $1 note with a $1 coin assumes that the $1 coin would be widely accepted and used by the public. In past work, we reported that the coin was not widely accepted and used. In 2002, we conducted a nationwide public opinion survey and found that the public was not using the $1 coin because people were familiar with the $1 note, the $1 coin was not widely available, and people did not want to carry around more coins. In addition, 64 percent of the respondents to that survey were opposed to eliminating the $1 note. However, when respondents were told that such a replacement would save the government about half a billion dollars a year (our 2000 estimate), the proportion who said they opposed elimination of the note dropped to 37 percent. Two more recent national survey results suggest that opposition to eliminating the $1 note persists. For example, according to a Gallup poll conducted in 2006, 79 percent of respondents were opposed to replacing $1 notes with $1 coins, and their opposition decreased only slightly, to 64 percent, when they were asked to assume that a replacement would result in half a billion dollars in government savings each year. Efforts by the Mint to increase public acceptance and use of the $1 coin as it co-circulates with the $1 note have shown moderate success. To increase public acceptance and circulation of the $1 coin, the Presidential $1 Coin Act of 2005 requires the Mint to promote $1 coins to the public. In response to the legislation, in 2008, the Mint conducted a pilot program in Austin, Texas; Portland, Oregon; Grand Rapids, Michigan; and Charlotte, North Carolina, to increase public acceptance of the $1 coin. Enlisting the support of national and local retailers, the Mint carried out advertising and public relations campaigns in which it promoted the $1 coin as recyclable, lasting for decades, and saving the nation money. As figure 4 shows, data collected as part of the pilot program show modest increases in the public’s use of $1 coins in three of the four target markets as measured in public opinion surveys. Pilot program data also show that nationwide usage of the $1 coin declined during the period that the pilot study was conducted. In past reports, we have noted that Congress and the executive branch would have to lead rather than follow public opinion for a transition from the $1 note to the $1 coin to succeed. Furthermore, we have noted in those reports that past $1 coin initiatives—such as changes to the color of the $1 coin and new coin designs—have not led to widespread public acceptance and use, in part because the $1 note was not simultaneously eliminated. This point was reiterated by Canadian and UK officials we spoke with, who said that the only way to transition from note to coin is to stop producing the note. While observing that the public was resistant at first, they said that, with no alternative to the note, public dissatisfaction dissipated within a few years. Stakeholders representing a variety of retail and manufacturing industries and organizations that would be affected by a replacement identified two kinds of associated challenges and costs: (1) those that would result in the near term from the transition and (2) those that would result in the longer term from structural changes to the cost of doing business. Most stakeholders we interviewed said, however, that they could not easily quantify the magnitude of these costs, and the majority noted that they would need 1 to 2 years to make the transition from $1 notes to $1 coins. Most stakeholders identified some likely benefits from replacing the $1 note with a $1 coin, including a financial benefit to the government. According to 13 of the 15 stakeholders we spoke with, replacing the $1 note with a $1 coin would involve various up-front, short-term costs during the transition period. Depending on the nature of their businesses, these stakeholders identified transition costs relating to their equipment, armored transportation, vault storage, and staff training. For example, all nine of the stakeholders we interviewed involved in retail sales, banking, and currency transport and processing identified equipment-related actions they would need to take, such as modifying vending and self-checkout machines, cash register drawers, and upgrading armored trucks to carry the additional weight; acquiring hand trucks for moving coins within a business; and obtaining processing equipment such as coin counting and wrapping machines. In addition, to accommodate higher volumes of $1 coins, five of the nine retail, banking, and armored carriers we interviewed said they would likely need to increase vault storage capacity. Some of the transitional costs and challenges may be more formidable than others. For example, increasing storage and transport capacity could entail additional investment, while modifying cash register drawers may involve primarily retooling the drawers. Ten of the 15 stakeholders we spoke with also identified three areas in which the replacement of $1 notes with $1 coins might entail longer-term or ongoing costs: transportation, processing, and labor. For example, since coins are heavier than notes, 7 of 15 stakeholders said that their costs would likely increase because of higher transportation costs incurred by armored carriers from making additional trips or using more fuel with the heavier cargo. Moreover, two stakeholders noted that making additional trips to transport coins could increase security risks for staff. In addition, replacing the $1 note with a $1 coin might increase the number and types of personnel needed to physically handle coins and process them. Some stakeholders anticipated that any additional costs associated with $1 coins would be passed on to customers. In contrast to the stakeholders who, as noted above, said that a replacement would mean higher short- and long-term costs for their businesses, two stakeholders we interviewed said that it might have only a minimal impact, particularly if the metal content of the $1 coin remained the same. According to officials from the National Automatic Merchandising Association, an organization representing the food and refreshment vending industry, many of its members have already modified their vending machines to accept all forms of payment, including coins, notes, and electronic transactions. Further, according to an association official, increased use of the $1 coin could be beneficial for the vending industry because it may reduce rejected sales due to old or damaged notes. He further noted that while the acceptance rate of notes has improved dramatically in vending, wider use of a $1 coin could improve consumer satisfaction. In addition, since transit agencies that receive federal funds were required under the Presidential $1 Coin Act of 2005 to accept and distribute $1 coins, many of the larger transit agencies have already modified their equipment to accept these coins, according to industry officials. For example, industry officials stated that New York City’s Metropolitan Transportation Authority, which operates buses, subways, commuter trains, bridges, and tunnels in New York City and the surrounding area, is the largest user of $1 coins, with over 1,200 ticket vending machines that accept or dispense them. As in the past, our analysis indicates that replacing the $1 note with a $1 coin would provide a financial benefit to the government if production of the $1 note ceased. However, the public continues to favor the $1 note over the $1 coin. In Canada and the UK, the public also preferred low- denomination notes to coins, but the governments nevertheless switched from notes to coins to achieve financial benefits. While the public initially resisted these transitions, opposition dissipated over time with no alternative to the note. We have previously recommended to the Congress replacement of the $1 note with a $1 coin and, in view of the ongoing significant estimated federal financial benefit, continue to support this prior recommendation. We provided a draft of this report to the Federal Reserve, Treasury, and the Department of Homeland Security for their review and comment. The Federal Reserve and Treasury provided written comments, which are reproduced in appendix III and appendix IV, respectively, and technical comments, which we incorporated into the report as appropriate. The Department of Homeland Security had no comments. Both the Federal Reserve and Treasury maintained that an assessment of the benefits and costs to the U.S. economy––that included the net benefits to the government as we reported as well as the benefits and costs to the private sector––is important in any evaluation of whether to replace the $1 note with a $1 coin. We agree that the benefits and costs to the private sector are important considerations. However, we found no quantitative estimates that could be evaluated or modeled. As a result, we addressed the potential effect on the private sector through interviews with industries and organizations that might be affected by changes to currency. We obtained their views on the benefits and costs that might result from the replacement. In addition, the Federal Reserve commented that if seignorage is not considered, the replacement of the $1 note with a $1 coin would result in a net cost to the government over 30 years, rather than a net benefit, as we reported. We agree with this statement––and point out in the report that the entire benefit of replacing the $1 note with a $1 coin would result from the seignorage. However, we believe that seignorage cannot be set aside since it is a result of issuing currency. The Federal Reserve also noted that the discounted net cost or benefit resulting from such a replacement would be influenced by assumptions about the length and cost of the initial transition and suggested that the report include sensitivity analyses that varied these assumptions. We included analyses that varied a number of assumptions and showed how our estimate would change. We did not include analyses that varied the length and cost of the transition because, at our request, the Mint provided us several scenarios of varying transition time periods and associated costs, which we assessed and used in our model. We are sending copies of this report to interested congressional committees, the Secretaries of the Treasury and the Department of Homeland Security, and the Chairman of the Federal Reserve. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions or would like to discuss this work, please contact me at (202) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix V. We addressed the following questions: (1) What is the estimated net benefit, if any, to the government of replacing the $1 note with a $1 coin? (2) What other effects did stakeholders suggest such a replacement could have? To estimate the net benefit to the government of replacing the $1 note with a $1 coin, we constructed an economic model, which we based on our analyses of past reports of GAO and the Board of Governors of the Federal Reserve System (Federal Reserve) that used an economic model to develop such an estimate, together with information obtained from reviews of agency documents and interviews with experts in government and academia. More specifically, we interviewed officials from the Federal Reserve, two bureaus of the Department of the Treasury (Treasury)—the Bureau of Engraving and Printing (BEP) and the United States Mint (Mint)—and the Department of Homeland Security’s U.S. Secret Service to develop the structure, inputs, and assumptions for the model. Based on our document reviews and these interviews, we determined that the data used as inputs to our model for the production of notes and coins were sufficiently reliable for our analysis. We also interviewed officials from Canada and the United Kingdom (UK), both of which have replaced notes with coins, to gain information useful in determining certain key assumptions in our model. These included officials from the Bank of Canada, the Canadian Department of Finance, the Royal Canadian Mint, and the Royal Canadian Mounted Police’s National Anti-Counterfeiting Bureau, as well as officials from the Royal Bank of England, the Royal Mint, and the Serious Organized Crime Agency. In addition, we interviewed four experts at federal agencies or academic institutions to obtain their views on our economic model. More detailed information on the structure, assumptions, and inputs of the economic model are found in appendix II. To determine the various effects replacement could have on stakeholders, we identified industries and organizations that might be affected by changes to notes and coins. Through a literature review and interviews with agency officials, we identified private companies involved in the production of materials for $1 notes and $1 coins. Because these entities would be affected by any increase or decrease in production, we interviewed the entities that produce the paper and ink for the $1 note (Crane Paper and SICPA Securink Corporation) and process metal for coins (Olin Brass and PMX Industries). Furthermore, through a review of literature and congressional testimonies, as well as interviews with agency officials, experts, and Canadian government officials, we identified other industries and interest groups that are intensive users of currency and might be affected by the replacement of the $1 note with the $1 coin. These entities included banks and financial institutions; grocery stores; convenience stores; fast food establishments; vending machine companies, including those that make the note and coin acceptors used in vending machines; armored carriers that process and transport currency; transit agencies; retailers, including companies that make cash register drawers; coin laundry establishments; and consumer and public advocacy groups. To ensure broad representation among these groups, we interviewed officials from the following organizations: American Public Transit Association, National Association of Convenience Stores, National Armored Car Association, National Automatic Merchandising Association, National Cash Register Company, National Federation of the Blind, $1 Coin Coalition. Finally, to better understand the production, processing, and circulation of currency, we visited the BEP production facility in Washington, D.C.; the Mint production facility in Philadelphia, Pennsylvania; and an armored carrier note and coin processing facility in Baltimore, Maryland. We conducted this performance audit from June 2010 to March 2011 in accordance with generally accepted government auditing standards. These standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix summarizes information about the model we developed to estimate the net benefit to the government of replacing the $1 note with a $1 coin. Specifically, this appendix (1) describes the design of the model, including the assumptions used in it and their sources, and (2) presents detailed results of the model’s analysis for our base case, in which we compare a replacement scenario with the status quo, and for two alternative scenarios. To estimate the net benefit to the government of replacing the $1 note with a $1 coin, we created a model that analyzes the benefits and costs to the government of issuing currency—including both notes and coins—under different scenarios and assumptions over 30 years. The government derives a benefit from issuing coins, known as seigniorage—a term we also apply to notes to mean, for both, the difference between the face value of currency and its production costs. Seigniorage reduces the government’s need to borrow, allowing it to avoid interest on debt that it would otherwise incur. To estimate the net benefit to the government of replacing the $1 note with a $1 coin, we designed our model to calculate the difference between the baseline and a replacement scenario. Specifically, because the government receives a net benefit from issuing both notes and coins, we calculated the net benefits under the status quo, in which most demand for $1 currency is provided by notes (as is currently the case), and a replacement scenario, in which notes cease to be produced and are replaced by $1 coins. The difference between the net benefits under these two scenarios is the net benefit to the government. For the status quo, we assume that notes remain the dominant form of currency at the $1 denomination. The Mint continues to produce $1 coins at current levels, but not all of them enter circulation. Currently, about 1 billion of the approximately 4 billion $1 coins that the Mint has produced since it started minting the Susan B. Anthony $1 coin in 1979 are stored with the Federal Reserve. We do not count these coins as contributing toward the net benefit to the government because these coins are not being held by the public, and therefore, governmentwide, there has not been a financial gain. We assume that the remaining 3 billion $1 coins are held by the public. We also assume that some of these remaining $1 coins are lost or not in active circulation. Based on current projections, which incorporate the legislative requirements for producing Presidential and Native American $1 coins, we assume that the Mint will continue to manufacture more coins than the public demands until it completes its production of Presidential $1 coins, currently scheduled through part of 2016. In our baseline scenario we assume that production of the $1 coin essentially ceases after 2016. BEP officials commented that it is unrealistic to assume the Mint will cease $1 coin production after 2016. However, we have no basis on which to make an assumption about the level of $1 coin production after the completion of the Presidential series. As such, we assume that coins stop being produced after the series is complete. The small level of demand for $1 coins will be able to be satisfied by coins on hand at Federal Reserve banks for many years after that time. For our replacement scenario, we assume a 4-year transition period during which the production of $1 notes stops immediately; no $1 notes are withdrawn from circulation, but due to their short life, they would naturally fall out of circulation within a few years; the 1 billion coins currently stored with the Federal Reserve are released into circulation in the first year; 1 billion $1 coins that were inactive and held by the public enter active circulation in the first year; and the Mint expands its production of $1 coins during the first 4 years. During the transition period, we assume the Mint’s coin production and the government’s associated costs both increase. In the first year, the Mint not only increases its production to its current maximum capacity, but also modifies other coin production lines to produce more $1 coins. By the second year, the Mint is able to produce at a new maximum capacity and does so throughout the 4-year transition period until it has produced enough $1 coins to replace all $1 notes in circulation. These efforts by the Mint to expand its production of $1 coins increase its costs during the transition period. In addition, we assume that the government incurs costs to publicize the shift from $1 notes to $1 coins and that the variable costs of producing higher-denomination notes increase after the BEP loses some degree of economies of scale that it currently derives from producing $1 notes. For example, if BEP is unable to purchase certain supplies such as ink and paper in quantities as large as it does now, it may cause the vendors to raise their prices. After the 4-year transition period, we assume that the Mint reduces its production of $1 coins to an amount sufficient to offset attrition and meet the growth in demand for currency. As a result, the Mint’s coin production costs decline. To calculate our estimate, we relied on data from several sources, including the Mint, BEP, and the Federal Reserve. We also interviewed relevant officials from international governments and outside experts. All assumptions used in the model are projections of future conditions, hypothetical actions, or both. Therefore, some uncertainty is inevitable, particularly for elements of the assumptions that occur farther in the future. Moreover, some assumptions reflect our analysis of data. We discussed our assumptions with relevant stakeholders and experts to verify that our analysis is reasonable. Table 3 lists the values, sources, and rationales for some key assumptions. Compared to continuing the status quo, replacing the $1 note with a $1 coin would increase the government’s net benefit by approximately $5.5 billion over 30 years, or about $184 million annually, on average, in net present value terms. This average masks significant variation over the 30- year period of our analysis. In the first few years, a replacement would cause a net loss because the cost of producing so many coins would be large. This early net loss represents the up-front cost of producing a large number of coins during the transition from notes to coins together with the limited interest expense the government would avoid in the first few years after replacement began. While the estimated benefits in earlier GAO analyses were due to both seigniorage and reduced costs of coins (as compared to notes) over 30 years, our current net benefit estimate is solely due to seigniorage. In fact, the cost of producing coins for a full replacement is never fully recovered during the 30-year analysis, likely due to the longer note life and relatively higher cost of coin production today than was the case when our earlier studies were conducted. Moreover, our estimate, like all estimates, is uncertain, particularly in the later years, and thus the benefits could be greater or smaller than estimated. (See fig. 3 in the body of our report and table 4 at the end of this appendix.) Under alternative assumptions, our estimate of the net benefit to the government of a replacement would change. Table 4 shows how changes in two assumptions—the demand for currency and the replacement ratio of coins to notes—would affect our estimate. We conducted several additional alternative analyses, and are presenting these two, which provide the greatest range of benefits. In each of the alternative scenarios, we changed one assumption and held all other values constant. In the first alternative scenario, the replacement of notes with coins causes a decrease in the demand for currency as people switch to electronic means of payment. Specifically, the demand for currency grows at a rate equal to 80 percent of the growth of demand for notes in the baseline scenario. Using this assumption, our estimate of the net benefit to the government decreases to $4.5 billion over 30 years, which is a decrease of about $1 billion from our base case. In the second alternative scenario, we changed the number of coins needed to replace each note in circulation. Changing our estimate of the replacement ratio of coins to notes from our current estimate of 1.5 to 1 to our 2000 estimate of 2.0 to 1 increases the net benefit to the government to about $8.9 billion over 30 years, or about $3.4 billion more than our base case estimate. Table 4 provides detailed results of our model’s analysis using our base case and these two alternative assumptions. In addition to the contact named above, Teresa Spisak (Assistant Director), Amy Abramowitz, Lindsay Bach, Jenna Beveridge, Patrick Dudley, Elizabeth Eisenstadt, and David Hooper made key contributions to this report. U.S. Coins: Public Views on Changing Coin Design. GAO-03-206. Washington, D.C.: December 17, 2002. New Dollar Coin: Marketing Campaign Raised Public Awareness but not Widespread Use. GAO-02-896. Washington, D.C.: September 13, 2002. Financial Impact of Issuing the New $1 Coin. GGD-00-111R. Washington, D.C.: April 7, 2000. New Dollar Coin: Public Perception of Advertising. GGD-00-92. Washington, D.C.: April 7, 2000. New Dollar Coin: Public Prefers Statue of Liberty over Sacagawea. GGD- 99-24. Washington, D.C.: January 22, 1999. A Dollar Coin Could Save Millions. T-GGD-95-203. Washington, D.C.: July 13, 1995. 1-Dollar Coin: Reintroduction Could Save Millions If It Replaced the 1- Dollar Note. T-GGD-95-146. Washington, D.C.: May 3, 1995. One-Dollar Coin: Reintroduction Could Save Millions if Properly Managed. GGD-93-56. Washington, D.C.: March 11, 1993. A New Dollar Coin Has Budgetary Savings Potential but Questionable Acceptability. T-GGD-90-50. Washington, D.C.: June 20, 1990. Limited Public Demand for New Dollar Coin or Elimination of Penny. T-GGD-90-43. Washington, D.C.: May 23, 1990. National Coinage Proposals: Limited Public Demand for New Dollar Coin or Elimination of Pennies. GGD-90-88. Washington, D.C.: May 23, 1990. | Since coins are more durable than notes and do not need replacement as often, many nations have replaced lower-denomination notes with coins to obtain a financial benefit. GAO has estimated the annual net benefit to the U.S. government of replacing the $1 note with a $1 coin four times over the past 20 years, most recently in April 2000. Asked to update its estimate, GAO (1) estimated the net benefit to the government of replacing the $1 note with a $1 coin and (2) examined other effects stakeholders suggested such a replacement could have. To perform its work, GAO constructed an economic model and interviewed officials from the Federal Reserve, the Treasury Department, the U.S. Secret Service, outside experts, and officials from Canada and the United Kingdom. To determine the effects on stakeholders, GAO interviewed officials from industries and organizations that might be affected by changes to currency. According to GAO's analysis, replacing the $1 note with a $1 coin could save the government approximately $5.5 billion over 30 years. This would amount to an average yearly discounted net benefit--that is, the present value of future net benefits--of about $184 million. However, GAO's analysis, which assumes a 4-year transition period beginning in 2011, indicates that the benefit would vary over the 30 years. The government would incur a net loss in the first 4 years and then realize a net benefit in the remaining years. The early net loss is due in part to the up-front costs to the U.S. Mint of increasing its coin production during the transition. GAO's current estimate is lower than its 2000 estimate, which indicated an annual net benefit to the government of $522 million. This is because some information has changed over time and GAO incorporated some different assumptions in its economic model. For example, the lifespan of the note has increased over the past decade, and GAO assumed a lower ratio of coins to notes needed for replacement. GAO has noted in past reports that efforts to increase the circulation and public acceptance of the $1 coin have not succeeded, in part, because the $1 note has remained in circulation. Other countries that have replaced a low-denomination note with a coin, such as Canada and the United Kingdom, stopped producing the note. Officials from both countries told GAO that this step was essential to the success of their transition and that, with no alternative to the note, public resistance dissipated within a few years. Stakeholders representing a variety of cash-intensive entities in the private sector identified potential shorter- and longer-term effects of a replacement. For example, some stakeholders said that they would initially incur costs to modify equipment and add storage and that later their costs to process and transport coins would go up. Others, however, such as some transit agencies, have already made the transition and would not incur such initial costs. As in the past, GAO's analysis indicates that replacing the $1 note with a $1 coin would provide a financial benefit to the government if production of the $1 note ceased. GAO previously recommended replacement of the $1 note and continues to support this recommendation. The Federal Reserve and Treasury reviewed a draft of this report and both noted the importance of societal effects in deciding on such a replacement and offered technical comments. |
Through the budget system, the President and Congress determine the allocation of resources among the agencies of the federal government. OMB, as part of the Executive Office of the President, guides the annual budget process, makes decisions on executive agencies’ budgets, aggregates submissions for departmental components, and submits the consolidated document for the executive branch as the President’s Budget Request to Congress. OMB issues guidance to federal agencies through OMB Circular A-11, which provides instructions for submitting budget data and materials, as well as criteria for developing budget justifications. Within DOJ, the Justice Management Division issues additional annual budget development guidance to DOJ’s components, including BOP, usually about 1.5 years before the fiscal year begins for the budget cycle. JMD budget staff (1) collect and analyze all of the components’ budget requests, taking into consideration department-wide policy priorities and OMB guidance; (2) coordinate with DOJ policy offices; and (3) secure approval and submit the Attorney General’s budget submission to OMB. Key steps in this process are shown in figure 1. When developing its budget justification, BOP estimates costs for budget accounts using three steps, as described below. First, BOP estimates cost increases for maintaining the current level of services for operations as provided in the prior year’s enacted budget. These include costs to address mandatory staff pay raises and benefit increases, inmate medical care, and utilities. BOP analyzes historical obligations from the past 5 years to identify average annual operating cost increases. BOP records its obligations in FMIS—one of DOJ’s financial accounting and reporting systems. According to BOP officials, FMIS is BOP’s primary tool for cost reporting and budget execution. BOP also considers economic indicator information to estimate general inflationary cost increases using data from the Bureau of Labor Statistics’ Consumer Price Index, among other sources. Second, BOP projects inmate population changes for the budget year For example, for the fiscal year 2014 and for 9 years into the future. budget justification, BOP projected a net growth in its inmate population of 5,400 (2.4 percent) for fiscal years 2013 and 2014. Third, BOP estimates costs to house the projected number of new inmates, including building and facility requirements. According to BOP, the increasing inmate population is the primary driver of new service costs. BOP also identifies and estimates costs for new initiatives, such as the opening of a new BOP facility, by reviewing the proposals submitted by its divisions and regional offices, as well as historical data on costs for implementing such initiatives. In November 2009, we found that BOP’s methods for cost estimation largely reflected best practices outlined in the GAO Cost Estimating and Assessment Guide. We concluded that for fiscal year 2008, BOP followed a well-defined process for developing a mostly comprehensive, well-documented, accurate, and credible cost estimate, and we made recommendations to further improve BOP’s process. Specifically, we recommended that BOP (1) analyze the extent to which operations costs could vary because of changes in key cost assumptions and (2) improve documentation of calculations used to estimate its costs. BOP concurred with the recommendations and took appropriate actions to address them as noted above. In November 2009, we also reported on various challenges that BOP faced, including prison crowding levels. For example, we found that from fiscal years 2000 through 2009, BOP’s total inmate population level increased by 44 percent—from 145,125 to 209,027. In November 2009, we also reported that BOP estimated its total inmate population would continue to increase by about 4,500 inmates per year over the next decade. In September 2012, we reviewed the growth in BOP’s population and found that the 9.5 percent population growth from fiscal years 2006 through 2011 exceeded the 7 percent increase in its inmate capacity, and reported that BOP projects continued population growth. In our work related to budget reviews across the federal government, we have reported that an agency’s budget justification may be the single most important policy document because it depicts and reconciles policy objectives, and we have identified the potential to enhance the transparency of agencies’ budget justifications by providing additional details and information. the U.S. Department of Veterans Affairs’ (VA) health care budget, we concluded that federal agencies’ congressional budget justifications should be transparent—that is, they should be clear and easy to understand—in part because Congress relies on this information to make resource allocation decisions and conduct oversight. GAO-10-687R. concluded that in order to facilitate decision making, information needs to be clear and organized in a way that is meaningful to decision makers. We recommended, among other things, that VA further consult with congressional decision makers to determine what detailed information related to its appropriations accounts should be included—and how—in its congressional budget justification. VA concurred with the recommendations and has begun taking actions to address them. BOP’s largest account—its S&E account— is composed mainly of costs associated with Inmate Care and Programs and Institution Security and Administration, both of which have grown steadily since 2008, predominantly because of increases in prison populations, which are the primary cost driver of BOP’s budget. The other two PPAs in the S&E account are associated with the care and custody of federal offenders in contract facilities and maintenance and administration. BOP’s budget justification for fiscal year 2014 reflected the President’s budget request of a total of $6.9 billion, including $6.8 billion for its S&E account. Figure 2 shows that the President’s budget request for BOP’s S&E account has increased from fiscal years 2008 through 2014. BOP’s budget justification includes its proposed use of funds for each account by PPA. BOP’s budget for S&E costs consists of four PPAs, and as shown in figure 3, the Inmate Care and Programs PPA, and Institution Security and Administration PPA, and Contract Confinement PPA accounted for about 97 percent of the President’s 2014 budget request for BOP’s S&E account, according to BOP’s budget justification. Below is a description of the four PPAs that compose BOP’s S&E account. The Inmate Care and Programs PPA covers the operational costs of functions directly related to providing inmate care, including inmate food, medical care, drug treatment, and psychological services; education and vocational training; institutional and release clothing; welfare service; and transportation. For example, the budget justification for fiscal year 2014 proposes the use of funds to help address increases in chronic medical care for inmates. Additionally, the budget justification for fiscal year 2014 proposes the use of funds to expand evidence-based treatment practices to treat drug offenders and reduce recidivism. The Institution Security and Administration PPA covers costs associated with institution security, administration, maintenance, and staff training. These costs include salaries for correctional officers assigned to every BOP institution and expenses for facility maintenance and utilities. The Contract Confinement PPA covers costs associated with BOP inmates in contract care and costs associated with management and oversight of contract facilities and residential reentry centers as well as the National Institute of Corrections. The Management and Administration PPA covers costs associated with general administration and provides funding for the executive staff as well as headquarters and regional office program managers in the areas of budget development and execution, financial management, procurement and property management, human resource management, inmate systems management, safety, legal counsel, research and evaluation, and systems support. As shown in figure 4, while the amounts reflected for BOP’s Management and Administration PPA have remained relatively constant, the Inmate Care and Programs and Institution Security and Administration PPAs, and to a lesser extent the Contract Confinement PPA, have grown steadily since 2008, predominantly because of increases in prison populations which are the primary cost driver of BOP’s budget. In addition to the budget justification broken down by PPA dollar amounts, the budget justification provides a summary of increases (i.e., improvements) and decreases (i.e., offsets) to the current year’s appropriation.2014, BOP described the $35.1 million net increase (1.2 percent) in the Institution Security and Administration PPA from fiscal year 2013 in terms of three increases and two decreases, as shown in table 1. Further, BOP described the dollar amounts associated with the $1.7 million (0.07 percent) net increase in the Inmate Care and Programs PPA from fiscal year 2013 in terms of five increases and two decreases. We found that BOP is collecting more detailed quantitative cost data on the components that constitute each PPA, which could be useful to congressional decision makers when reviewing BOP’s budget justification. In accordance with departmental and OMB guidance, BOP’s budget justifications summarize amounts by PPA, so BOP is not required to provide additional funding data below the PPA level in its budget justification. Providing more comprehensive information could help clarify BOP’s proposed spending on specific categories and subcategories reflected in its budget justification. For example, BOP’s budget justification for fiscal year 2014 included $2.5 billion for the Inmate Care and Programs PPA element and included narrative information for categories such as Medical Services, Food Service, Education and Occupational Training, Psychology Services, and Religious Services, as well as narrative summaries for various subcategories, but did not include proposed funding amounts for these categories. Our analysis shows that this additional information can be useful in identifying trends and cost drivers that may affect future costs, which could be particularly helpful given the 33 percent growth in BOP’s budget request from fiscal years 2008 through 2014. Our prior work has identified factors driving BOP’s cost increases in specific categories that constitute each PPA. For example, in July 2013, we found that per capita mental health services costs have increased in BOP-operated institutions since fiscal year 2008 and are expected to continue to increase. Further, we found that these increases were generally due to three factors—inmate population increases, general inflationary increases, and increased inmate participation rates in psychology treatment programs. As we reported in July 2013, BOP’s expanded inmate participation in its Residential Drug Abuse Program, which helped reduce waiting lists for the program, had increased overall program costs. In addition, the Congressional Research Service (CRS) reported in January 2013 that BOP’s expenditures on utilities, food, and medical care have generally increased each fiscal year since 2000, although the per capita increase in the cost of food and utilities has not been as pronounced as the increase in the per capita cost of inmate medical care.diabetes, hypertension, and infectious diseases have a slightly higher rate of incidence in the incarcerated population. Thus, understanding the differences in costs for medical care, food services, and drug programs— three of the cost components within the Inmate Care PPA—could help congressional decision makers evaluate how these trends may affect future costs. Pub. L. No. 111-117, 123 Stat. 3034 (2009). FMIS to inform their budget development process, the FMIS cost component data fields are not always directly linked to specific narrative categories in the budget justification for BOP because they use their judgment to identify categories that they consider to be of specific interest to congressional decision makers (e.g., dollar amounts, trends, or policy concerns) rather than standardized cost components. For example, BOP includes narrative in the budget justification to describe costs related to categories such as Medical Services and Food Service, among others. As figure 6 shows, there are similarities in the FMIS data fields for which BOP captures detailed cost information and those categories BOP uses to describe its budget justifications. This additional information could provide congressional decision makers with additional insights into factors driving BOP’s budget. While BOP does not provide in its budget justifications information on the cost components composing each PPA, BOP officials already capture this information, using data from FMIS, as part of their annual budget development process. We requested specific, quantitative information below the PPA level and BOP provided us with dollar amounts associated with the data fields in FMIS that constitute Inmate Care and Programs, Institution Security and Administration, and Contract Confinement PPAs for fiscal years 2008 through 2014. Using the additional detailed information from DOJ’s FMIS provided by BOP budget officials, we were able to identify changes over time in the cost components composing each PPA, which is information congressional decision makers could use when reviewing BOP’s budget justification. For example, we analyzed changes in the dollar amounts associated with FMIS cost component data fields that make up the Inmate Care and Programs PPA element over time. The results of our analysis show that BOP’s proposed spending for the Inmate Care and Programs PPA has continually increased from fiscal years 2008 through 2013; however, BOP’s FMIS data showed variations in the dollar amounts associated with the cost components that constitute the PPA. For example, changes in dollar amounts for medical services have increased by about 50 percent from fiscal years 2008 to 2014, and decreased slightly for the 2 most recent fiscal years—2013 and 2014. According to officials, the changes in dollar amounts reflect changes in the prison population and implementation of policy initiatives intended to lower costs. The results of our analysis are presented in figure 7. The specific dollar amounts by fiscal year for the cost components composing the Inmate Care and Program PPA element are provided in appendix I. In addition, using the additional cost component information, our analysis of BOP’s FMIS data fields showed that changes in dollars associated with the budget justification for drug abuse treatment have increased by over 70 percent from fiscal years 2008 to 2014, and from fiscal years 2010 through 2012 increased by more than 15 percent each year—which reflects BOP’s efforts to expand its drug treatment services. While trends in the dollar amounts associated with medical care and drug treatment reflect a relatively significant increase from fiscal years 2008 to 2014, changes in the dollar amounts associated with food and religious services remained relatively constant for this same time frame. Our analysis of BOP’s FMIS data also showed the proportion of dollars associated with the FMIS data fields that compose each PPA element. For example, we found that for fiscal year 2014, institution security constituted over 50 percent of the funding based on cost components that compose the Institution Security and Administration PPA element. (See fig. 8.) In addition, we found that for this same time frame, medical program composed 40 percent of the funding for the Inmate Care and Programs PPA element, and private prison contracts made up over 60 percent of funding for the Contract Confinement PPA element. (See figs. 9 and 10) For additional details on each of the narrative categories, see appendix II. In an era of scarce federal resources and given BOP’s projected growth in inmate population and substantial increased costs in recent years, this additional detail could be helpful to congressional decision makers when reviewing BOP’s budget justification and making determinations about where to increase or decrease BOP funding. According to DOJ’s Fiscal Years 2012-2016 Strategic Plan, one of the department’s guiding principles is to promote transparency, performance, and accountability, including budget transparency. According to the plan, the department and its components will continue to promote budget transparency, performance, and accessibility by coordinating with leadership and regularly reporting accomplishments, among other actions. Further, according to federal financial accounting standards, cost information can be used by Congress in making policy decisions about allocating federal resources among programs, authorizing and modifying programs, evaluating program performance, and making program authorization decisions by assessing costs and benefits. BOP officials stated that they use historical cost information that BOP maintains in DOJ’s FMIS for budget execution and monitoring as an input to inform the annual budget development process. Specifically, budget development staff use data from the previous 3-year period for cost components in FMIS and adjust the funding levels based on projected changes in prison population and other factors to help them estimate the total funding needs for the future fiscal year by PPA. BOP officials further stated that they regularly provide additional information upon request on the budget justification to staff from congressional appropriations and congressional authorizing committees. For example, they said that JMD officials provide appropriators with funding information in response to requests for various congressional reports and hearings, as well as written responses to congressional inquiries related to the budget justification. To further clarify their budget justification to Congress and OMB, they said they have taken other steps, such as conducting tours of prison facilities with congressional and OMB stakeholders to demonstrate conditions and the basis for the President’s budget request. BOP’s efforts to provide information upon request may meet some congressional committee needs; however, the additional information on projected costs would provide more detail on the cost drivers affecting the President’s request for BOP and therefore facilitate congressional decision making. BOP officials reported spending a total of 40 staff hours to compile and analyze the quantitative information below the PPA level in order to recreate the historical quantitative information for the prior fiscal years. Thus, given that BOP already captures and has readily available this quantitative information below the PPA level as part of its annual budget development process, providing this more detailed information to congressional decision makers could facilitate congressional decision making by providing a more comprehensive understanding of the factors affecting BOP’s budget and driving budget increases below the PPA elements. Consulting with congressional decision makers to determine if it would be helpful to include this information in its annual budget justification would help provide reasonable assurance that BOP is fully meeting congressional stakeholders’ needs. According to BOP officials, BOP’s biggest challenges are managing the continually increasing federal inmate population while providing for inmates’ care and safety, as well as the safety of BOP staff and surrounding communities, within budgeted levels. BOP officials project continuing inmate population growth and estimate increases in funding needs for the foreseeable future. Consultation with congressional decision makers could help BOP identify what additional information, if any, is needed, such as providing more comprehensive detailed information on projected costs using data already gathered by BOP. This could enhance the transparency of BOP’s budget justification and the President’s budget request and better inform congressional decision making. To enhance the transparency of BOP’s cost information as presented in DOJ’s annual congressional budget justifications, we recommend that the Attorney General consult with congressional decision makers on providing additional BOP funding detail below the PPA level in future budget justifications, and in conjunction with BOP, provide the data as appropriate. We provided a draft of the report to DOJ for comment. The department did not provide official written comments to include in our report. However, in an e-mail on November 21, the DOJ liaison stated that DOJ concurred with our recommendation. DOJ and BOP also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the selected congressional committees, the Attorney General, and the Director of BOP, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any further questions about this report, please contact me 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. Key contributors to this report are listed in appendix III. BOP officials stated that they maintain funding data for laundry services using the Inmate Services FMIS data field. Narrative summaries Each inmate is tracked through BOP’s Sentry Information System. Offenders are assigned a security and custody status, which relates to the degree of supervision needed and ensures that offenders are placed in the least restrictive and least costly correctional environment appropriate to their custody and security-level needs. The result is a grouping of offenders with similar custodial needs in an institution, and a relative reduction in the mixing of aggressive and nonaggressive offenders. Within each institution, correctional officers are assigned to security posts that are primarily established on the basis of structural/visual considerations. The two basic categories of security are external security and internal security. External security consists of a walled or fenced perimeter supplemented by staffed security towers and armed mobile perimeter patrols. There is also razor wire strung between a double fence with high mast lighting to illuminate the perimeter and highly technical equipment such as alarm systems and video surveillance. Entrances through the perimeter are controlled by a series of gates, both electrical and manual, supplemented by metal detection systems and search procedures for weapon and contraband control. BOP has fully incorporated closed circuit television technology in its higher-security facilities, which has enhanced supervision and provides valuable intelligence in the management of federal inmates. For practical purposes, all other security measures, processes, and activities can be called internal security, commencing when an inmate is admitted and terminating upon his or her release. Staff supervise inmates in living units, work areas, visiting areas, dining halls, and any other area where inmates may be located or have access. Regularly scheduled counts are conducted several times a day (five on weekdays, six on weekends) in all institutions to monitor the whereabouts of inmates. Work supervisors and program personnel are held strictly accountable for all inmates under their supervision. Violations of institution regulations are dealt with through the Inmate Disciplinary Process. Correctional staff members conduct investigations of the alleged misconduct and forward the findings to the Unit Discipline Committee. Depending on the seriousness of the charge, the Unit Discipline Committee will make a finding, or refer the report to the Discipline Hearing Officer for disposition. When practical, inmates are afforded the opportunity to participate in, and present evidence at a due process hearing before findings are made. Inmates may appeal these decisions utilizing the administrative remedy process. The Administrative Segregation program provides for the separation of inmates who require closer supervision and monitoring from those in the general population. Such cases include, but are not limited to, protective custody, serious escape risks, threats to the security and orderly running of the institution. The Disciplinary Segregation program provides for segregation of offenders who have been found guilty of violations of rules through the Inmate Disciplinary Process. The Facility Maintenance program is designed to adequately maintain and continue to safely operate the physical plants of BOP institutions. Facilities vary in age from those recently constructed to those 100 or more years old. Thirty-four of the BOP facilities are over 50 years old. As of January 2013, BOP facilities are situated on 46,030 acres of land and contain approximately 63.4 million square feet of floor area, all of which must be maintained and furnished with utility services. Each institution maintains communication systems including complete private automatic branch exchange telephone systems, radio systems including base station and mobile units, and several electronic detection and control systems. Complex heating and air conditioning systems, high-pressure steam power plants, sophisticated hospital equipment, emergency electrical power systems and fire protection, and life safety systems all require regular maintenance. Despite energy-saving initiatives, discussed earlier in the budget, the growing inmate population and inflationary factors have significantly increased utility costs. Narrative summaries Physical plant requirements are identified through regular inspections conducted in the ongoing preventive maintenance program, formal semiannual inspections, and requests for specific needs identified by institution staff members. This program finances maintenance and minor improvement projects that normally cost $10,000 or less. However, there are policy guidelines that allow funding of maintenance projects (work requests) costing more than $10,000 in certain circumstances. Some exceptions would include emergencies or security threats such as hurricanes or disturbances. Maintenance and repair requirements in excess of $10,000 are normally included in the Modernization and Repair program of the Buildings and Facilities budget. The work within the maintenance program is accomplished almost entirely by inmate crews under staff supervision. Each work crew consists of a staff foreman and 10 to 20 inmates. Each institution must have highly skilled staff with experience and training in every phase of construction and maintenance work including steam fitting, air conditioning, mechanics, or electronics repair. A few specific jobs are contracted out because special skills or equipment items are required, or because the work may be extremely dangerous. Examples of these jobs include elevator inspection and repair, radio frequency alignment, and water tower painting. The Staff Training Academy (STA) at the Federal Law Enforcement Training Center (FLETC) in Glynco, Georgia, provides introductory and advanced correctional training for BOP law enforcement staff. The Introduction to Correctional Techniques (ICT) program is a 5-week program for a total of 159 hours of instruction that is taught in two phases. Phase I consists of 2-weeks of training at the institution, and Phase II consists of a 3-week training program at the STA. The STA oversees the curriculum development and administration of the 2-week (56-hour) ICT Phase I course provided at all institutions for new employees prior to attending the ICT Phase II course at the STA. The ICT Phase II is a 3-week (103-hour) program of instruction that covers hostage situations, ethics, interpersonal communication skills, special offenders, diversity, inmate discipline, legal procedures, and so forth. Successful completion of this program (academics, firearms, and the Physical Ability Test) is required for continued employment of newly hired staff entering into law enforcement positions. In fiscal year 2012, 2,279 new employees participated in 60 classes of the ICT program. The STA provided advanced correctional skills training for trainers in disturbance control, firearms, bus operations, self-defense, and side-handle baton in fiscal year 2012. The STA also provides advanced correctional training for Marksman/Observer and Witness Security Escort. The majority of the advanced training programs are conducted at BOP institutions, resulting in substantial cost avoidance in training costs. All BOP institutions operate outpatient ambulatory care clinics. These clinics provide a range of outpatient services to inmates similar to those provided by ambulatory clinics found in most communities, that is, primary health care. The clinics serve as the first level of diagnostic and treatment services to sentenced and presentenced inmates. New institutions are typically given 2 years after activation to obtain accreditation from the Joint Commission. Care Level I institutions are not required to achieve or maintain this accreditation because they predominantly house healthy inmate populations. All Health Services programs and operations are subject to internal review (Program Review) and must maintain accreditation by the American Correctional Association. Each institution is also required to provide data to the Health Services Division (HSD) in the form of outcome measures for a variety of clinical conditions (HIV, hypertension, diabetes, and so forth). These evaluative and accreditation activities provide HSD with valuable data regarding the quality and appropriateness of health care in BOP. The majority of BOP medical staff are civil service clinical and support professionals, and the remaining staff are U.S. Public Health Service (USPHS) Commissions Corps Officers serving in a wide variety of clinical and specialty professions. USPHS provides these clinicians and administrators via an interagency agreement. Narrative summaries BOP provides daily meals with consideration to the Dietary Reference Intakes (DRI) for groups published by the Food and Nutrition Board of the National Academy of Sciences, for identified macro- and micronutrients. Meal preparation is accomplished primarily by inmate workers (about 12 percent of the population) under the supervision of staff. Food preparation and recipe and menu management are maintained by the use of a standardized national menu and a computerized Food Service management software system. United States Penitentiary Lompoc, California, and Federal Correction Institution El Reno, Oklahoma, utilize available land resources in limited production of beef and milk. Farm products are consumed at the producing institutions and are also shipped to nearby institutions to offset their need to purchase some products on the open market. During fiscal year 2014, BOP estimates serving over 206 million meals, which is nearly 566,000 meals per day and over 3.9 million meals per week. Despite cost containment measures, the annual costs have risen because of the growing inmate population and inflationary factors. Inmate education programs include literacy, English as a Second Language (ESL), occupational education, advanced occupational education (AOE), parenting, release preparation courses, and a wide range of adult continuing, wellness, and structured and unstructured leisure time activities. Education programming provides inmates with an opportunity to learn the functional skills that support their reintegration into the community. At the end of fiscal year 2012, 35 percent of the designated inmate population was enrolled in one of more education/recreation program. BOP’s Office of Research has found that participation in education programs leads to a 16 percent reduction in recidivism by inmates who participate in these programs. Psychology Services staff are an integral part of correctional treatment, as they administer programs of group and individual psychotherapy, crisis intervention, prosocial skill building, and staff consultation and training. BOP policy requires that every inmate admitted to a BOP facility be given an initial psychological screening, which consists of psychological interviews, social history reviews, and behavioral observation. The purposes of the screening are to identify special treatment or referral needs, provide information useful in future crisis counseling situations, identify strengths as well as potential adjustment problems to imprisonment, and discuss possible program needs with the inmates and provide information about these programs. In addition, BOP psychologists have traditionally provided the courts, parole officials, and prison administrators with comprehensive psychological evaluations of offenders. Inmates with mental health needs are offered a range of services, including crisis counseling, individual and group psychotherapy, clinical case management, psychiatric treatment, and specialized residential treatment programs. Acutely mentally ill inmates may receive these services within BOP’s Psychiatric Referral Centers. However, most mental health treatment is provided in regular institutions. In addition to the treatment of mental illnesses, Psychology Services provides specialized drug abuse treatment and sex offender treatment programs. BOP psychologists also offer treatment services designed to develop inmates’ life skills, such as anger management, problem solving, social skills training, and stress management. In response to the rapid growth of federal inmates with a diagnosis of a drug disorder (40 percent of inmates entering BOP), BOP continues to develop evidence-based treatment practices to manage and treat drug-using offenders. BOP’s strategy includes early identification through a psychology screening, drug education, nonresidential drug abuse treatment, intensive residential drug abuse treatment, and community transition treatment. The Violent Crime Control and Law Enforcement Act (VCCLEA) of 1994 requires BOP, subject to the availability of appropriations, to provide appropriate substance abuse treatment for 100 percent of inmates who have a diagnosis of substance abuse or dependence and who volunteer for treatment. In fiscal year 2012, BOP was able to provide appropriate substance abuse treatment for 100 percent of eligible inmates. Narrative summaries BOP employs full-time chaplains in all institutions to accommodate the constitutional right to the free exercise of religion, manage religious programs, and provide pastoral care to inmates. Chaplains routinely evaluate the needs of inmates in the institution and facilitate programs that address those needs. Religious Services departments offer programs directly related to spiritual development, community reentry, family relationships, personal responsibility, and basic religious instruction. Chaplains provide spiritual programs across the spectrum of faiths represented in the inmate population. Chaplains also train and familiarize staff regarding diverse religious beliefs and practices of inmates while providing guidance for institution compliance with the First Amendment and legal standard established by the Religious Freedom Restoration Act and the Second Chance Act of 2007. The passage of the Second Chance Act of 2007 ushered in the opportunity to utilize mentors in the delivery of pastoral care. Policy is being developed to expand the use of mentors; 23 mentor coordinator positions have been approved at Life Connections and Threshold Program sites. Responsible for the general program and policy development for BOP’s network of approximately 250 contract residential reentry centers. Community Corrections and Detention (CCD) also works with community corrections contracting (CCC) to offer technical assistance in the acquisition process for Residential Reentry Centers services. CCD provides technical assistance to BOP’s 22 community corrections offices in the areas of contract oversight, case management, inmate systems management, and financial management. Responsibility for BOP’s network of contract confinement facilities for federal juvenile offenders and short-term detention facilities also rests with CCD. Responsible for coordinating BOP’s efforts in managing a growing population of nearly 29,000 inmates located in contractor-operated secure correctional facilities. Staff from this branch oversee the management and operation of facilities, develop new requirements, establish policy and procedures, develop and manage contract budgets, and serve as liaisons among the contractors and BOP and other members of the federal family. National Institute of Corrections Also included in this decision unit is the National Institute of Corrections (NIC), a federal entity that is authorized by statute 18 U.S.C. §4351 to provide training, technical assistance, and information services to federal, state, and local correctional agencies, including BOP. NIC provides technical assistance by sending a technical resource provider or staff to the requesting agency, or an individual or team of individuals from the requesting system visits another agency to gain expertise and experience in the specific area of concern. In fiscal year 2012, NIC delivered 244 technical assistance training events to federal, state, and local justice agencies. NIC is also responsible for the National Corrections Academy (NCA), which serves as the training division that provides training and related services for federal, state, and local correctional practitioners. By developing and delivering training to prisons, jails and community corrections practitioners, the academy enhances interaction among correctional agencies, other components of the criminal justice system, public policymakers, and public and private stakeholder organizations, thus improving correctional programming throughout the country. David C. Maurer, (202) 512-9627 or MaurerD@gao.gov. In addition to the contact named above, Chris Keisling (Assistant Director), Carol Henn (Assistant Director), Melissa Wolfe (Assistant Director), Kristen Kociolek (Assistant Director), Vanessa D. Dillard, John Vocino, Billy Commons, Pedro Almoguera, Lara Miklozek, Linda Miller, Mary Catherine Hult, and Eric Hauswirth made key contributions to this report. | BOP, a component of DOJ, is responsible for the custody and care of over 219,000 federal inmates--a population that has grown by 27 percent over the past decade. BOP had a fiscal year 2013 operating budget of about $6.5 billion, and BOP projects that its costs will increase as the federal prison population grows. According to officials, BOP's biggest challenge is managing the increasing federal inmate population, and related responsibilities, within budgeted levels. Generally, BOP is appropriated funds through two accounts: S&E and B&F. To prepare its annual congressional budget justification for DOJ, BOP estimates its costs and resource requirements and sends its requested amounts to DOJ. GAO was asked to review BOP's budget justifications. This report (1) identifies the types of costs that compose BOP's budget accounts as presented in its budget justifications, and (2) assesses the extent to which opportunities exist to enhance the transparency of information in BOP's budget justifications for congressional stakeholders and decision makers. GAO analyzed DOJ and BOP budget justification documents for fiscal years 2008 through 2014 and interviewed officials to determine how they develop budget justifications. The largest account in the Department of Justice's (DOJ) Bureau of Prisons (BOP) budget justification--its Salaries and Expenses (S&E) account-- is composed mainly of costs associated with Inmate Care and Programs and Institution Security and Administration, both of which have grown steadily since 2008. This growth is due predominantly to increases in prison populations, which are the primary cost driver of BOP's budget. The other two program, project and activity (PPA) elements in the S&E account are associated with the care and custody of federal offenders in contract facilities and maintenance and administration. BOP's Buildings and Facilities (B&F) account, which makes up on average less than 3 percent of its budget, pays for costs associated with site planning; acquisition; and construction of new facilities and costs of remodeling and renovating existing facilities, and related costs. In fiscal year 2014, the budget justification reflected a total of $6.9 billion; of which over 95 percent ($6.8 billion) was for BOP's S&E account. GAO found that BOP is collecting more detailed quantitative cost data on the components that constitute each PPA, which could be useful to congressional decision makers when reviewing BOP's budget justification. In accordance with departmental and Office of Management and Budget guidance, BOP's budget justifications summarize amounts by PPA, so BOP is not required to provide additional funding data below the PPA level in its budget justification. Providing this information to Congress could help clarify what BOP proposes to spend on specific categories and subcategories reflected in its budget justification. For example, BOP's budget justification for fiscal year 2014 included $2.5 billion for the Inmate Care and Programs PPA element and included narrative information for categories such as Medical Services, Food Service, Education and Vocational Training, Psychology Services, and Religious Services, as well as narrative summaries for various subcategories. However the budget justification did not include proposed funding amounts for each of these categories. GAO's analysis shows that this additional information can be useful in identifying trends and cost drivers that may affect future costs. For example, GAO's analysis identified variations in the dollar amounts associated with the cost components that constitute the PPA, such as drug abuse treatment and education, which could affect decision making for that PPA. However, BOP's current budget justification does not include this detail. Congressional decision makers have previously requested additional information about BOP's budget presentations and data below the PPA level. BOP's budget requests for its S&E account have increased 33 percent since fiscal year 2008, which makes transparency in its budget justifications even more crucial. Consulting with congressional decision makers to determine if it would be helpful to include in its budget justifications the additional cost information that DOJ already collects would help provide reasonable assurance that BOP is fully meeting congressional decision makers' needs and would enhance the transparency of its budget justifications. BOP also provides narrative summaries of its initiatives, services, and organizational units in categories and subcategories under each PPA. BOP officials said that they include these narrative descriptions to provide additional information to congressional decision makers. GAO recommends that the Attorney General consult with congressional decision makers on providing additional BOP funding detail in future budget justifications, and in conjunction with BOP, take action as appropriate. DOJ concurred. |
The Department of Defense (DOD) spends close to $100 billion annually to research, develop, and acquire weapon systems, and this investment is expected to grow substantially. Over the next 5 years, starting in fiscal year 2003, DOD’s request for weapon system development and acquisition funds is estimated to be $700 billion (see fig. 1). How effectively DOD manages these funds will determine whether it receives a good return on its investment. Our reviews over the past 20 years have consistently found that DOD’s weapon system acquisitions take much longer and cost much more than originally anticipated, causing disruptions to the department’s overall investment strategy and significantly reducing its buying power. Because such disruptions can limit DOD’s ability to effectively execute war-fighting operations, it is critical to find better ways of doing business. In view of the importance of DOD’s investment in weapon systems, we have undertaken an extensive body of work that examines DOD’s acquisition issues from a different, more cross-cutting perspective—one that draws lessons learned from the best commercial product development efforts to see if they apply to weapon system acquisitions. This report looks at the core of the acquisition process, specifically product development and ways to successfully design and manufacture the product. Our previous reports looked at such issues as how companies matched customer needs and resources, tested products, assured quality, and managed suppliers and are listed in related GAO products at the end of the report. Leading commercial companies expect their program managers to deliver high-quality products on time and within budget. Doing otherwise could result in the customer walking away. Thus, the companies have created an environment and adopted practices that put their program managers in a good position to succeed in meeting these expectations. Collectively, these practices ensure that a high level of knowledge exists about critical facets of the product at key junctures during development. Such a knowledge- based process enables decision makers to be reasonably certain about critical facets of the product under development when they need this knowledge. To ensure the right level of knowledge at each key decision point in product development, leading commercial companies separate technology from product development and take steps to ensure the product design is stabilized early so product performance and producibility can be demonstrated before production. The process followed by leading companies, illustrated in figure 2, can be broken down into the following three knowledge points. Knowledge point 1 occurs when a match is made between the customer’s needs and the available resources—technology, design, time, and funding. To achieve this match, technologies needed to meet essential product requirements must be demonstrated to work in their intended environment. In addition, the product developer must complete a preliminary product design using systems engineering to balance customer desires with available resources. Knowledge point 2 occurs when the product’s design demonstrates its ability to meet performance requirements. Program officials are confident that the design is stable and will perform acceptably when at least 90 percent of engineering drawings are complete. Engineering drawings reflect the results of testing and simulation and describe how the product should be built. Knowledge point 3 occurs when the product can be manufactured within cost, schedule, and quality targets and is reliable. An important indicator of this is when critical manufacturing processes are in control and consistently producing items within quality standards and tolerances. Another indicator is when a product’s reliability is demonstrated through iterative testing that identifies and corrects design problems. This report focuses on best practices for achieving knowledge points 2 and 3, particularly at how successful companies design and manufacture a product within established cost, schedule, and quality targets. The concepts discussed build on our previous reports, which looked at the earlier phases of an acquisition, including matching customer needs and available resources. A key success factor evident in all our work is the ability to obtain the right knowledge at the right time and to build knowledge to the point that decision makers can make informed decisions about moving ahead to the next phase. Programs that do this typically have successful cost and schedule outcomes. Programs that do not typically encounter problems that eventually cascade and become magnified through the product development and production phases. As shown in figure 3, the effects of not following a knowledge-based process can be debilitating. DOD has historically developed new weapon systems in a highly concurrent environment that usually forces acquisition programs to manage technology, design, and manufacturing risk at the same time. This environment has made it difficult for either DOD or congressional decision makers to make informed decisions because appropriate knowledge has not been available at key decision points in product development. DOD’s common practice for managing this environment has been to create aggressive risk reduction efforts in its programs. Cost reduction initiatives that typically arise after a program is experiencing problems are common tools used to manage these risks. Figure 4 shows the overlapping and concurrent approach that DOD uses to develop its weapon systems. This figure shows that DOD continues to capture technology, design, and manufacturing knowledge long after a program passes through each of the three knowledge points when this knowledge should have been available for program decisions. More important, the problems created by this concurrent approach on individual programs can profoundly affect DOD’s overall modernization plans. It is difficult to prioritize and allocate limited budgets among needed requirements when acquisition programs’ cost and schedule are always in question. Programs that are managed without the knowledge-based process are more likely to have surprises in the form of cost and schedule increases that are accommodated by disrupting the funding of other programs. Because of these disruptions, decision makers are not able to focus on a balanced investment strategy. DOD is taking steps to change the culture of the acquisition community with actions aimed at reducing product development cycle times and improving the predictability of cost and schedule outcomes. DOD recently made constructive changes to its acquisition policy that embrace best practices. These changes focused primarily on (1) ensuring technologies are demonstrated to a high level of maturity before beginning a weapon system program and (2) taking an evolutionary, or phased, approach to developing new weapon systems. Because these changes occurred in 2000 and 2001, it is too early to determine how effectively they will be put into practice. While these are good first steps, further use of best practices in product development would provide a greater opportunity to improve weapon system cost and schedule outcomes. Our overall objective was to determine whether best practices offer methods to improve the way DOD ensures that the design is stable early in the development process and whether having manufacturing processes in control before production results in better cost, schedule, and quality outcomes in DOD major acquisition programs. Specifically, we identified best practices that have led to more successful product development and production outcomes, compared the best practices to those used in DOD programs, and analyzed current weapon system acquisition guidance for applicability of best practices. To determine the best practices for ensuring product design and manufacturing maturity from the commercial sector, we conducted general literature searches. On the basis of our literature searches and discussions with experts, we identified a number of commercial companies as having innovative development processes and practices that resulted in successful product development. We visited the following commercial companies: Caterpillar designs and manufactures construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. In 2001, it reported sales and revenues totaling $20.45 billion. We visited its offices in Peoria, Illinois. Cummins Inc. (Engine Business group) designs and manufactures diesel and natural gas engines ranging in size from 60 to 3,500 horsepower for mining, construction, agriculture, rail, oil and gas, heavy and medium- duty trucks, buses, and motor homes. In 2001, the Engine Business Group reported sales of $3.1 billion. We visited its offices in Columbus, Indiana. General Electric Aircraft Engines designs and manufactures jet engines for civil and military aircraft and gas turbines, derived from its successful jet engine programs, for marine and industrial applications. In 2001, it reported earnings totaling $11.4 billion. We visited its offices in Evendale, Ohio. Hewlett Packard designs and manufactures computing systems and imaging and printing systems for individual and business use. In 2001, it reported revenues totaling $45.2 billion. We visited its offices involved in the design and manufacturing of complex ink jet imaging equipment in Corvallis, Oregon. Xerox Corporation designs and manufactures office equipment, including color and black and white printers, digital presses, multifunction devices, and digital copiers designed for offices and production-printing environments. In 2001, it reported revenues totaling $16.5 billion. We visited its offices in Rochester, New York. At each of the five companies, we conducted structured interviews with representatives to gather uniform and consistent information about each company’s new product development processes and best practices. During meetings with these representatives, we obtained a detailed description of the processes and practices they believed necessary and vital to mature a product design and get manufacturing processes under control. We met with design engineers, program managers, manufacturing and quality engineers, and developers of the knowledge-based processes and policies. During the past 5 years, we have gathered information on product development practices from such companies as 3M, Boeing Commercial Airplane Group, Chrysler Corporation, Bombardier Aerospace, Ford Motor Company, Hughes Space and Communications, and Motorola Corporation. This information enabled us to develop an overall model to describe the general approach leading commercial companies take to develop new products. Our report highlights several best practices in product development based on our fieldwork. As such, they are not intended to describe all practices or suggest that commercial companies are without flaws. Representatives from the commercial companies visited told us that the development of their best practices has evolved over many years and that the practices continue to be improved based on lessons learned and new ideas and information. They admit that the application and use of these have not always been consistent or without error. However, they strongly suggested that the probability of success in developing new products is greatly enhanced by the use of these practices. Further, because of the sensitivity to how data that would show the actual outcomes of new product development efforts might affect their competitive standing, we did not obtain specific cost, schedule, and performance data. Most examples provided by these companies were anecdotal. However, the continued success of these companies over time in a competitive marketplace indicated that their practices were important and key to their operations. Furthermore, based on our observations during meetings at these companies, it was apparent that because of the level of detailed process tools developed for their managers and executive leadership these best practices were a centerpiece of their operations. Next, we compared and contrasted the best practices with product development practices used in five DOD major acquisition programs. Below is a brief description of each program we examined: The F-22 fighter aircraft program. This aircraft is designed with advanced features to allow it to be less detectable to adversaries, capable of high speeds for long ranges, and able to provide the pilot with improved awareness of the surrounding situation through the use of integrated avionics. The F-22 program began in 1986 and entered limited production in 2001. The Air Force expects to buy 341 at a total acquisition cost (development and procurement) estimated at $69.7 billion. The Patriot Advanced Capability (PAC-3) missile program. This program is intended to enhance the Patriot system, an air-defense, guided missile system. PAC-3 is designed to enhance the Patriot radar’s ability to detect and identify targets, increase system computer capabilities, improve communications, increase the number of missiles in each launcher, and incorporate a new “hit-to-kill” missile. The “hit-to-kill” missile capabilities represent a major part of the development program, as these are not capabilities included in prior versions of the Patriot system. The missile program began in 1994 and entered limited production in 1999. The Army plans to buy 1,159 missiles at a total acquisition cost estimated at $8.5 billion. The Advanced Threat Infrared Countermeasures/Common Missile Warning System (ATIRCM/CMWS) program. ATIRCM/CMWS is a defensive countermeasure system for protection against infrared guided missiles. The common missile warning system detects missiles in flight, and the advanced threat infrared countermeasure defeats the missile with the use of a laser. The combined system is designed for helicopter aircraft. The common missile warning system is also designed for tactical aircraft such as fighters. The program began in 1995 and is expected to start limited production in 2002. The Army and the Special Operations Command plan to buy 1,078 systems at a total acquisition cost estimated at $2.9 billion. The AIM-9X missile program. AIM-9X is an infrared, short range, air-to- air missile carried by Navy and Air Force fighter aircraft. The AIM-9X is an extensive upgrade of the AIM-9M. The AIM-9X is planned to have increased resistance to countermeasures and improved target acquisition capability. A key feature is that it will have the ability to acquire, track, and fire on targets over a wider area than the AIM-9M. The AIM-9X program began in 1994 and entered limited production in 2000. DOD plans to buy 10,142 missiles at a total acquisition cost estimated at $3 billion. The F/A-18 E/F fighter aircraft program. This aircraft is intended to complement and eventually replace the current F/A-18 C/D aircraft and perform Navy fighter escort, strike, fleet air defense, and close air support missions. It is the second major model upgrade since the F/A-18 inception. The development program began in 1992. The program entered limited production in 1997 and full rate production in 2000. The Navy plans to buy 548 aircraft at a total acquisition cost estimated at $48.8 billion. We selected these programs for review based on cost, schedule, and performance data presented in the Selected Acquisition Reports for each program. We also selected these programs because we considered them to be in two basic categories—successful and unsuccessful cost and schedule performance outcomes. This basis for selection was to compare and contrast the development practices used on each with best practices used by the commercial companies. For each program, we interviewed key managers and design and manufacturing engineering representatives. In some cases, we discussed design and manufacturing issues with representatives of the primary contractor for the specific program to obtain information on the practices and procedures used by the program to ready the product design for initial manufacturing and testing as well as for production. We also discussed the use and potential application of best practices that we identified. In addition to discussions, we analyzed significant amounts of data on engineering drawings, design changes, labor efficiencies, manufacturing processes, quality indicators, testing, and schedules. We did not verify the accuracy of the data but did correlate it to other program indicators for reasonableness. Our analysis of the data was used as a basis to develop indicators of each program’s development efficiencies and detailed questions to discuss product design and manufacturing practices. We conducted our review between May 2001 and April 2002 in accordance with generally accepted government auditing standards. The success of any effort to develop a new product hinges on having the right knowledge at the right time. Every program eventually achieves this knowledge; however, leading commercial companies we visited have found that there is a much better opportunity to meet predicted cost, schedule, and quality targets when it is captured early, in preparation for critical decisions. Specifically, knowledge that a product’s design is stable early in the program facilitates informed decisions about whether to significantly increase investments and reduces the risk of costly design changes that can result from unknowns after initial manufacturing begins. This knowledge comes in the form of completed engineering drawings before transitioning from the system integration phase to the system demonstration phase of product development. Best practices suggest that at least 90 percent of the drawings for a product’s design be completed before a decision to commit additional resources is made. Likewise, later knowledge that the design can be manufactured affordably and with consistent high quality prior to making a production decision ensures that cost and schedule targets will be met. This knowledge comes in the form of evidence from data that shows manufacturing processes are in control and system reliability is achievable. Leading commercial companies rely on knowledge obtained about critical manufacturing processes and product reliability to make their production decisions. The Department of Defense (DOD) programs we reviewed captured varying amounts of design and manufacturing knowledge in the form of completed engineering drawings and statistical process control data. We found a correlation between the amount of knowledge each captured and their cost and schedule outcomes. Programs that were able to complete more engineering drawings and control their critical manufacturing processes had more success in meeting cost and schedule targets established when they began. Conceptually, the product development process has two phases: a system integration phase to stabilize the product’s design and a system demonstration phase to demonstrate the product can be manufactured affordably and work reliably. The system integration phase is used to stabilize the overall system design by integrating components and subsystems into a product and by showing that the design can meet product requirements. When this knowledge is captured, knowledge point 2 has been achieved. It should be demonstrated by the completion of at least 90 percent of engineering drawings, which both DOD and leading commercial companies consider to be the point when a product’s design is essentially complete. In the DOD process, this knowledge point should happen by the critical design review, before system demonstration and the initial manufacturing of production representative products begins. The system demonstration phase is then used to demonstrate that the product will work as required and can be manufactured within targets. When this knowledge is captured, knowledge point 3 has been achieved. Critical manufacturing processes are in control and consistently producing items within quality standards and tolerances for the overall product. Also, product reliability has been demonstrated. In the DOD process, like with the commercial process, this knowledge point should happen by the production commitment milestone. Bypassing critical knowledge at either knowledge point will usually result in cost, schedule, and performance problems later in product development and production. We found that the most successful programs had taken steps to gather knowledge that confirmed the product’s design was stable before the design was released to manufacturing organizations to build products for demonstration. They had most of the detailed design complete, supported by the completion of a large percentage of engineering drawings to manufacturing. Again, engineering drawings are critical because they include details on the parts and work instructions needed to make the product and reflect the results of testing. These drawings allowed manufacturing personnel to effectively plan the fabrication process and efficiently build production representative prototypes in the factory so manufacturing processes and the product’s performance could be validated before committing to production. The most successful DOD programs also captured the knowledge that manufacturing processes needed to build the product would consistently produce a reliable product by the end of system demonstration, before making a production decision. On these programs, the initial phase of production—sometimes known as low-rate initial production—was able to focus on building operational test articles and improving the production processes, instead of continuing the product’s design and development. Problematic programs moved forward into system demonstration without the same knowledge from engineering drawings that successful cases had captured. They increased investments in tooling, people, and materials before the design was stable. In these programs, only a small percentage of the drawings needed to make the products had been completed at the time the designs were released to manufacturing organizations for building production representative prototypes. In doing so, these programs undertook the difficult challenge of stabilizing the designs at the same time they were trying to build and test the products. This design immaturity caused costly design changes and parts shortages that, in turn, caused labor inefficiencies, schedule delays, and quality problems. Consequently, these programs required significant increases in resources––time and money—over what was estimated at the point each program began the system demonstration phase. The most problematic programs also started production before design and manufacturing development work was concluded. In these cases, programs were producing items for the customers while making major product design and tooling changes, still establishing manufacturing processes, and conducting development testing. These programs encountered significant cost increases, schedule delays, and performance problems during production. Table 2 shows the relationship between design stability and manufacturing knowledge at key junctures and the outcomes for the DOD programs we reviewed. To measure design stability at the start of the system demonstration phase, knowledge point 2, we determined the percentage of the product’s engineering drawings that had been completed by the critical design review. In DOD programs, after the critical design review, the system design is released to manufacturing to begin building the production representative prototypes for the system demonstration phase. To measure producibility at the production decision, knowledge point 3, we determined whether the critical manufacturing processes were in statistical control at that time. We compared this information with best practices. The cost and schedule experiences of the program since the start of system demonstration are also shown. As shown in the table, the AIM-9X and FA-18 E/F programs had captured a significant amount of design knowledge at the start of system demonstration and manufacturing knowledge by the start of production. In each of those programs, product developers had the advantage of prior versions of the systems. These programs came very close to meeting their original cost and schedule estimates for product development. The other three programs, F-22, PAC-3, and ATIRCM/CMWS, had less knowledge at each key junctures. Their development cost and schedule results significantly exceeded estimates. Specific details on the AIM-9X, F-22, and ATIRCM/CMWS program experiences follow. The AIM-9X program began in 1994, continuing the long-term evolution of the AIM-9 series of short-range air-to-air missiles. In 1999, after developing and testing a number of engineering prototype missiles, the program held a critical design review to determine if the program was ready to begin initial manufacturing of a production representative prototype for system demonstration. At this review, about 95 percent of the eventual engineering drawings were completed—a stable design by best practices. Because AIM-9X was the next generation in this family of missiles, the program had significant knowledge on how to produce the missile. At the 1999 critical design review, the estimated development and production costs totaled $2.82 billion. As of December 2001, the estimate was $2.96 billion, less than a 5 percent increase. The F-22 program began detailed design efforts in 1991 when it entered a planned 8-year product development phase. In 1995, about the expected midpoint of the phase, the program held its critical design review to determine if the design was stable and complete. Despite having only about a quarter of the eventual design drawings completed for the system, the program declared the design to be stable and ready to begin initial manufacturing. At that time, the program office had estimated the cost to complete the development program at $19.5 billion. However, the program did not complete 90 percent of its drawings for the aircraft until 1998, 3 years into the system demonstration phase. During the building of the initial aircraft, several design and manufacturing problems surfaced that affected the deliveries of major sections of the aircraft. Large sections were delivered incomplete to final assembly and had to be built out of the planned assembly sequence. In 1997, an independent review team examined the program and determined the product development effort was underestimated. The team found that building the first three aircraft was taking substantially more labor hours than planned. Between 1995 and 1998, the development estimate for the F-22 increased by over $3.3 billion and the schedule slipped by a year. Achieving design stability late has contributed to further cost increases. As of December 2001, the estimated development cost was $26.1 billion, a 34 percent increase since the critical design review was held in 1995. While the program attributes some production cost increases to a reduction in F-22 quantities, it has been significantly affected by design and manufacturing problems that started during development. The independent review team evaluated the cost impact on the production aircraft that would likely occur because of cost and schedule problems in development and found that production aircraft would have to begin later, at a slower pace, and cost more than expected. The team estimated that production costs could increase by as much as $13 billion if savings were not found. The Air Force subsequently increased the estimate to more than $19 billion in cost savings required to avoid cost increases. In 2001, when the F-22 limited production decision was made, the program had less knowledge about the aircraft’s reliability and manufacturing processes than more successful cases. For example, at its limited production decision, it had only 44 percent of its critical manufacturing processes in control. In September 2001, the program reported that overall production cost would likely increase by more than $5.4 billion. This estimate was based on the effort needed so far to build the aircraft during product development. Since it began in 1995, the ATIRCM/CMWS program has had significant cost growth and schedule delays during product development. The product developer held a major design review in 1997. Like the F-22, the review demanded less proof about the product’s design in the form of engineering drawings before deciding to begin initial manufacturing. At that time, only 21 percent of the engineering drawings had been completed, and it was still unknown whether the design would meet the requirements. In fact, the program knew that a major redesign of a critical component was needed. Despite this, the program office deemed the risk acceptable for moving the program forward to begin manufacturing prototypes. Over the next 2 years, the program encountered numerous design and manufacturing problems. It was not until 1999, about 2 years after the critical design review, that program officials felt that the design had stabilized; however, by this time, the product development cost had increased 160 percent and production had been delayed by almost 3 years. ATIRCM/CMWS is scheduled to begin limited production in early 2002, but without the same degree of assurance as the more successful programs that the product can be manufactured within cost, schedule, and quality targets. The program has not yet determined if manufacturing processes needed to build the product are in control. Many of the development units were built by hand, in different facilities, and with different processes and personnel. Program officials stated that because they did not stabilize the design until late in development, manufacturing issues were not adequately addressed. Since 1997, the estimated unit cost for the system has increased by 182 percent. Leading commercial companies have been successful in achieving product development goals because they have found ways to enable the capture of design and manufacturing knowledge about the products they are developing in a timely way. We found two practices that allowed leading commercial companies to capture necessary knowledge for product development. First, they established a framework of evolutionary product development that limited the amount of design and manufacturing knowledge that had to be captured. This framework limited the design challenge for any one new product development by requiring risky technology, design, or manufacturing requirements to be deferred until a future generation of the product. Second, each company (1) employed a disciplined product development process that brought together and integrated all of the technologies, components, and subsystems required for the product to ensure the design was stable before entering product demonstration and (2) demonstrated the product was reliable and producible using proven manufacturing processes before entering production. The product development process includes tools that both capture knowledge and tie this knowledge to decisions about the product’s design and manufacturing processes before making commitments that would significantly affect company resources. For example, during system integration, each leading commercial company used various forms of prototypes and information from predecessor products to stabilize the product’s design and identify critical processes, then used a decision review that required agreements from key stakeholders that the requisite design knowledge was captured in making a decision to move into system demonstration. During system demonstration, each company used statistical process control and reliability testing to ensure the product could be produced affordably and would be reliable, then used a similar decision review that required agreements from key stakeholders that the requisite knowledge was captured when deciding to move into production. The Department of Defense (DOD) programs that we reviewed used some of these practices to varying degrees and experienced predictable outcomes. For example, the AIM-9X and F/A-18 E/F programs were evolutionary in nature, modifications of existing products with a manageable amount of new technological or design challenges. They also gathered design and manufacturing knowledge, although not to the extent we found at commercial companies. Finally, they held program reviews and ensured that the design and manufacturing knowledge was captured before moving forward. They had relatively successful outcomes. The other DOD programs—the F-22, ATIRCMS, and PAC-3—did not closely approximate best practices in capturing design or manufacturing knowledge during product development. They took on greater design challenges, had program reviews that were not supported by critical design and manufacturing knowledge, and made decisions to advance to the next phases of development without sufficient design and manufacturing knowledge. A key to the success of commercial companies was using an evolutionary approach to develop a product. This approach permitted companies to focus more on design and development with a limited array of new content and technologies in a program. It also ensured that each company had the requisite knowledge for a product’s design before investing in the development of manufacturing processes and facilities. Companies have found that trying to capture the knowledge required to stabilize the design of a product that requires significant amounts of new content is an unmanageable task, especially if the goal is to reduce cycle times and get the product into the marketplace as quickly as possible. Design elements not achievable in the initial development were planned for subsequent development efforts in future generations of the product, but only when technologies were proven to be mature and other resources were available. Commercial companies have implemented the evolutionary approach by establishing time-phased plans to develop new products in increments based on technologies and resources achievable now and later. This approach reduces the amount of risk in the development of each increment, facilitating greater success in meeting cost, schedule, and performance requirements. In effect, these companies evolve products, continuously improving their performance as new technologies and methods allow. These evolutionary improvements to products eventually result in the full desired capability, but in multiple steps, delivering a series of enhanced interim capabilities to the customer more quickly. Historically, DOD’s approach has been to develop new weapon systems that often attempt to satisfy the full requirement in a single step, regardless of the design challenge or the maturity of technologies necessary to achieve the full capability. Under this single-step approach, a war fighter can wait over 15 years to receive any improved capability. Figure 5 shows a notional comparison between the single-step and evolutionary approaches. Each commercial company we visited used the evolutionary approach as the primary method of product development. General Electric builds on the basic capability of a fielded product by introducing proven improvements in capability from its advanced engineering development team. General Electric considers the introduction of immature technologies into fielded products or new engine development programs as a significant cost and schedule risk. Its new product development process is primarily focused on reducing and managing risk for design changes and product introductions. Cummins and Hewlett Packard managers indicated that, in the past, their companies learned the hard way by trying to make quantum leaps in product performance and by including immature technologies. Now, both companies have new product development processes that actively manage the amount of new content that can be placed on a new product development effort. Caterpillar also limits new content on its new products as a way to more successfully and cost-effectively develop new, but evolutionary, products. Even during the development of its 797 mining truck, which it considered a major design challenge, it did not require the truck to achieve capabilities—such as prognostics for better maintenance—that it could not demonstrate or validate in the design in a timely manner. Of the five DOD programs we reviewed, two—the F/A-18-E/F and the AIM-9X—were variations of existing products—the F/A-18-C/D and the AIM-9M—and the programs made a commitment to use existing technologies and processes as much as possible. These two programs had relatively successful cost and schedule outcomes. They represented an exception to the usual practice in DOD. The overwhelming majority of DOD’s major acquisitions today require major leaps in capability over their predecessors or any other competing weapon systems, with little knowledge about the resources that will be required to design and manufacture the systems. Decisions are continually made throughout product development without knowing the cost and schedule ramifications. Leading commercial companies we visited had spent significant amounts of time and resources to develop and evolve new product development processes that ensured design and manufacturing knowledge was captured at the two critical decision points in product development: when the product’s design was demonstrated to be stable—knowledge point 2—and when the product was demonstrated to be producible at an affordable cost—knowledge point 3. The process established a disciplined framework to capture specific design and manufacturing knowledge about new products. Companies then used that knowledge to make informed decisions about moving forward in a new product development program. Commercial companies tied this knowledge to decisions about the products’ design and manufacturing processes before making commitments that would significantly impact company resources. Each commercial firm we visited had a new product development process that was prominent and central to the firm’s successes. It included three aspects: (1) activities that led to the capture of specific design knowledge, (2) activities that led to the capture of specific manufacturing and product reliability knowledge, and (3) decision reviews to determine if the appropriate knowledge was captured to move to the next phase. To ensure that the product’s design was stable before deciding to commit additional resources to product demonstration, commercial companies demanded knowledge, either from existing product information or by building engineering prototypes. They also used a disciplined design review process to examine and verify the knowledge that had culminated at the end of product integration, This design review process required agreement from stakeholders that the product design could be produced and would satisfy the customer’s requirements. Stakeholders included design engineers, manufacturing or production personnel, and key supplier representatives who used engineering drawings, supported by test results and engineering data, as a key indicator of the design’s stability. Once the program achieved a stable design, the certainty of their cost and schedule estimates was substantially increased, allowing them to plan the balance of the product development program with high confidence. Table 3 shows the activities required to capture design knowledge that leads to executive decisions about whether to transition to the next phase of development. A key tool used by each company to ensure that a product’s design was stable by the end of the product integration phase was a demonstration that the design would meet requirements. The companies visited indicated that prototypes at various system levels were the best way to demonstrate that the product’s design would work. If the product under development was an incremental improvement to existing products, such as the next generation of a printer or engine, these companies used virtual prototypes for any components that were being used for the first time. If the product included more new content or invention, fully integrated prototypes were frequently used to demonstrate that the design met requirements. Prototypes at this stage in development were typically not built in a manufacturing facility. This allowed demonstrations of the design before the companies made more costly investments in manufacturing equipment and tooling to build production representative prototypes for the demonstration phase. Table 4 shows an example of the types and purposes for various kinds of prototypes used by Cummins Inc. depending on the amount of knowledge it needed to capture and the point it was in the development process. Prototypes were used by commercial companies throughout the product development process and not just during product integration. Cummins, the world sales leader in diesel engines over 200 horsepower, effectively uses prototypes to ensure that a design is stable and believes in the value of prototyping throughout product development. A Cummins representative stated that not using prototypes becomes a matter of “pay me now or pay me later,” meaning that it is far less costly to demonstrate a product’s design early in development with prototypes, concepts, and analyses than to incur the cost of significant design changes after a product has entered production—a much more costly environment to make changes. Cummins built and tested 12 engineering concept prototype engines for its Signature 600 engine, a new concept, 600 horsepower, overhead cam diesel engine that represented a quantum leap in performance beyond Cummins’ existing products. These prototypes were built using production-like tooling and methods using production workers. In addition to using engineering prototypes during the product integration phase of product development, Cummins and other companies we visited used other prototypes—such as production representative prototypes—in the remaining product development phases before production, as shown in table 4, to demonstrate product reliability and process control. Prior to reaching production for its Signature 600 engine, Cummins used many prototypes to complete hundreds of thousands of test hours, accumulating millions of test miles. Caterpillar, a major manufacturer of heavy equipment, has a continuous product improvement philosophy. That is, it tries to develop new products that increase the capabilities of existing product lines, but it limits the amount of new content on any one product development because new content inherently increases design risk. In evolving its products this way, Caterpillar is able to use modeling and simulation prior to initial manufacturing because it has existing products to provide a baseline of knowledge and a good benchmark for assessing the simulated performance. In addition, with knowledge of existing components, it can focus attention on maturing the new content, the higher risk element of the new product. When Caterpillar developed the 797 mining truck, a new 360- ton payload truck design, it demonstrated design stability by identifying the critical components and building engineering prototypes of them for reliability testing and demonstration of the design before beginning initial manufacturing. This knowledge, coupled with vast experience in manufacturing trucks, ensured the stability of the 797-truck design before initial manufacturing started. Caterpillar was able to deliver this design in 18 months after the product development was started. The commercial companies we visited understood the importance of having disciplined design reviews and getting agreement from the stakeholders that the product’s design had been demonstrated to meet requirements before beginning initial manufacturing. Each company had a design review process that began at the component level, continued through the subsystem level, and culminated with a critical design review of the integrated system to determine if the product was ready to progress to the next phase of development. In addition to design engineers, a cross- functional team of stakeholders in the process included key suppliers, manufacturing representatives, and service and maintenance representatives. From past experience, commercial companies have discovered that cross-functional teams provide a complete perspective of the product. While design engineers bring important skills and experience to creating a product design, they may not be aware of manufacturing issues, available technologies, or manufacturing processes, and they may design a product that the company cannot afford to produce or maintain. The product’s design is stable when all stakeholders agree that engineering drawings are complete and that the design will work and can be built. A commercial company considers engineering drawings to be a good measure of the demonstrated stability of the product’s design because they represent the language used by engineers to communicate to the manufacturers the details of a new product design—what it looks like, how its components interface, how it functions, how to build it, and what critical materials and processes are required to fabricate and test it. The engineering drawing package released to manufacturing includes items such as the schematic of the product’s components, interface control documents, a listing of materials, notations of critical manufacturing processes, and testing requirements. It is this package that allows a manufacturer to build the product in the manufacturing facility. In developing the Signature 600, Cummins used cross-functional design teams that included stakeholders from suppliers, machine tool manufacturers, foundry and pattern makers, purchasing, finance, manufacturing engineering, design engineering, and other technical disciplines. Signature 600 components were designed with the key suppliers co-located at the Cummins design facility. Likewise, Caterpillar said that early supplier and manufacturing involvement was critical to success and that engineering drawings were signed by design and manufacturing stakeholders. Caterpillar representatives said that signing the drawings was a certification that the design could be manufactured the next day, if necessary. Each commercial company, after capturing specific design knowledge, had an executive level review at the decision point to determine if the product design had sufficiently progressed to permit a transition from product integration to product demonstration. This decision point used the knowledge captured as exit criteria for moving to the next phase of development. For example, to demonstrate the product design was stable and ready to move from integration to demonstration, the design had to be demonstrated, at least 90 percent of the engineering drawings had to be completed, design reviews had to be completed, and stakeholders had to agree the design was complete and producible. If the design team could not satisfy the exit criteria, then other options had to be considered. Options included canceling the development program, delaying the decision until all criteria were met, or moving ahead with a detailed plan to achieve criteria not met by a specific time when leadership would revisit the other options. One company emphasized that if a major milestone is delayed, an appropriate adjustment should be made to the end date of the program, thereby avoiding compressing the time allotted for the rest of product development and managing the risks that subsequent milestones will be missed. This decision point coincides with the companies’ need to increase investments in the product development and continue to the next phase. For this reason, the decision point was considered critical to achieving success in product development and could not be taken lightly. For example, transitioning from the integration to the demonstration phase requires a significant investment to start building and testing production representative prototypes in a manufacturing environment. This requires establishing a supplier base and purchasing materials. In addition, establishing tooling and manufacturing capability is also required. After a product passes this decision point and added investments are made, the cost of making changes to the product design also increases significantly. Therefore, commercial companies strive to firm the design as early in the process as possible when it is significantly cheaper to make changes. We found that leading commercial companies used two tools to capture knowledge that a product’s design was reliable and producible within cost, schedule, and quality targets before making a production decision. These tools are (1) a quality concept that uses statistical process control to bring critical manufacturing processes under control so they are repeatable, sustainable, and consistently producing parts within the quality tolerances and standards of the product and (2) product tests in operational conditions that ensure the system would meet reliability goals–the ability to work without failure or need of maintenance for predictable intervals. Company officials told us that these two tools enabled a smooth transition from product development to production, resulting in better program outcomes. Companies employed these tools on production representative prototypes, making the prototypes a key ingredient to successful outcomes. Table 5 shows the activities required to capture manufacturing knowledge that leads to executive decisions about whether to transition from product development into production. Commercial companies rely on statistical process control data to track, control, and improve critical manufacturing processes before production begins. Bringing processes under statistical control reduces variations in parts manufactured, thus reducing the potential for defects. Product variation has been called the “silent killer” on the manufacturing floor because it can result in defects that require additional resources to either rework or scrap the product. Products fielded with defects may have degraded performance, lower reliability, or increased support costs. Experience has taught commercial companies that it is less costly—in terms of time and money—to eliminate product variation by controlling manufacturing processes than to perform extensive inspection after a product is built. Because thousands of manufacturing processes can be required to build a product, companies focus on the critical processes— those that build parts that influence the product’s performance, service life, or manufacturability. Therefore, when design engineers are designing the new product, they must identify its key characteristics so that manufacturing engineers can identify and control critical manufacturing processes. Key product characteristics and critical manufacturing processes are noted on the engineering drawings and work instructions that are released to manufacturing. Once critical processes are identified, companies perform capability studies to ensure that a process will produce parts that meet specifications. These studies yield a process capability index (Cpk), a measure of the process’s ability to build a part within specified limits. The index can be translated into an expected product defect rate. The industry standard is to have a Cpk of 1.33 or higher, which equates to a probability that 99.99 percent of the parts built on that process will be within the specified limits. Four of the five companies we visited wanted their critical processes at a minimum of a 1.33 Cpk and many had goals of achieving higher Cpks. Table 6 shows various Cpk values and the defect rate associated with each value. The table also shows the higher the Cpk, the lower the defect rate. Cpk values also have an additive effect on various individual parts when each part is integrated into the final product. For example, a product composed of 25 parts, where each part is produced on a manufacturing process with a Cpk of 0.67, has a 95.5 percent probability that each part will be defect free. However, when all 25 parts are assembled into the final product, the probability that the final product will be defect free is only 32 percent. In comparison, if the same parts are produced with manufacturing processes at a Cpk of 1.33, the probability of each part being defect free is 99.99 percent. When these same 25 parts are assembled into the final product, the probability that the final product will be defect free is 99.8 percent. This comparison illustrates the impact that having manufacturing processes in control has on the amount of rework and repair that would be needed to correct defects and make the product meet its specifications. Cummins uses statistical process control data to measure a product’s readiness for production. In developing the new Signature 600 diesel engine, Cummins included manufacturing engineers and machine tool and fixture suppliers in the design decision process as the engine concept was first being defined. Cummins built production representative prototypes of its engines to demonstrate that the design and the engine hardware would perform to requirements. These prototypes represented the first attempt to build the product solely using manufacturing personnel, production tooling, and production processes. Cummins used the knowledge captured from these and subsequent prototypes to refine and eventually validate the manufacturing processes for the engine. This process of employing statistical process control techniques on prototype engines verified that the manufacturing processes were capable of manufacturing the product to high quality standards within established cost and schedule targets. Other companies we visited emphasized the importance of controlling manufacturing processes before committing to production. For example, Xerox captures knowledge about the producibility of its product early in the design phase. By production, it strives to have all critical manufacturing processes for the product—including key suppliers’ processes—in control with a Cpk index of at least 1.33. Xerox achieves this by building production representative prototypes and by requiring suppliers of key components and subassemblies to produce an adequate sample of parts to demonstrate the suppliers’ processes can be controlled, usually before the parts are incorporated into the prototypes. General Electric Aircraft Engines has digitally captured, and made available to design engineers, Cpk data on almost all of its manufacturing processes and it strives to have critical processes in control to a point where they will yield no more than 1 defect in 500 million parts, a Cpk of 2.0. Other companies, such as Caterpillar and Hewlett Packard, told us that getting manufacturing processes in control prior to production is key to meeting cost, schedule, and quality targets. Each of the companies visited used this as an indicator of the product’s readiness for production and emphasized the importance of having critical manufacturing processes under control by the start of production. A product is reliable when it can perform over a specified period of time without failure, degradation, or need of repair. Reliability is a function of the specific elements of a product’s design. Making design changes to achieve reliability requirements after production begins is inefficient and costly. Reliability growth testing provides visibility over how reliability is improving and uncovers design problems so fixes can be incorporated before production begins. In general, reliability growth is the result of an iterative design, build, test, analyze, and fix process. Prototype hardware is key to testing for reliability growth. Initial prototypes for a complex product with major technological advances have inherent deficiencies. As the prototypes are tested, failures occur and, in fact, are desired so that the product’s design can be made more reliable. Reliability improves over time with design changes or manufacturing process improvements. The earlier this takes place, the less impact it will have on the development and production program. Companies we visited matured a product’s reliability through these tests and demanded proof that the product would meet the customer’s reliability expectations prior to making a production decision. Improvements in the reliability of a product’s design can be measured by tracking a key reliability metric over time. This metric compares the product’s actual reliability to a growth plan and ultimately to the overall reliability goal. Several commercial companies we visited began gathering this data very early in development and tracked it throughout development. The goal was to demonstrate the product would meet reliability requirements before starting full rate production. Caterpillar establishes a plan to grow and demonstrate the product’s reliability before fabrication of a production representative prototype begins. Before Caterpillar starts making parts, it estimates the product’s reliability in its current stage of development based on knowledge captured from failure modes and effects analysis, component prototype testing, and past product experience. This information marks the starting point for the product’s reliability growth plan and is the basis for assessing whether the plan is achievable by production. If Caterpillar believes the risks are too high and the goal cannot be achieved on time, decision makers assess trade-offs between new and existing components to reduce the risks to a more manageable level. Trade-offs might be made if the product’s performance still fails to meet requirements. If trade-offs are not possible, decision makers may decide not to go forward with the development. Once Caterpillar has established this plan, it tracks demonstrated reliability against it as a management tool to measure progress. It sets an interim reliability milestone and expects to be at least halfway toward the expected goal by the time it begins to build production units. Caterpillar has learned from experience that it will achieve the full reliability goal by full production if it meets the interim goal by the time it produces pilot production units. If the reliability is not growing as expected, then decisions about changing or improving the design must be addressed. Caterpillar improves the product’s reliability during development by testing prototypes, uncovering failures, and incorporating design changes. According to Caterpillar officials, the production decision will be delayed if they are not on track to meeting their reliability goal. These officials told us that Caterpillar maintains the philosophy of first getting the design right, then producing it as quickly and efficiently as possible. They emphasized that demonstrating reliability before production minimized the potential for costly design changes once the product is fielded. The commercial companies, after capturing specific manufacturing knowledge, had executive level reviews to determine if the product development had sufficiently progressed to permit a transition into production. Executives used the knowledge captured as exit criteria for the transition. For example, to demonstrate the product was ready for production, critical processes had to be in control and testing should have demonstrated the product reliability. If the design team could not satisfy the exit criteria, then other options had to be considered. The production decision led to increased investments for materials and resources such as additional tooling to build the product at a planned rate, facilities, people, training and support. Our analysis of DOD programs showed that those more closely approximating best practices had better outcomes. The F/A-18 E/F fighter and the AIM-9X missile were based extensively on predecessor programs and employed similar tools to capture design and manufacturing knowledge at critical program junctures. These programs had demonstrated a significantly higher degree of design stability prior to entering system demonstration and committing to initial manufacturing when compared to other DOD weapon programs in our review. They also gained control of most of their manufacturing processes and demonstrated that the products were reliable before entering production. The success of these programs is best demonstrated by the fact that they have been close to meeting cost, schedule, and performance objectives. On the other hand, the PAC-3 missile, F-22 fighter, and ATIRCM/CMWS programs did not use these best practices. These programs were not based on predecessor products or evolutionary in nature, and each product’s full capability was expected in one step, with the first product off the production line. With this daunting task, these programs failed to demonstrate a stable design before committing to initial manufacturing, causing quality and labor problems. These programs also had much less knowledge about the manufacturability of their design when they entered production. As a result, they experienced significant increases in development costs and production delays usually at the expense of other DOD programs. Details on the five DOD programs follow. The AIM-9X development practices closely paralleled best practices used by the commercial companies we visited. The program achieved design stability before moving into system demonstration by incorporating mature technologies and components from other missiles and munitions, using engineering prototypes to demonstrate the design, holding a series of design reviews prior to the system level critical design review, and completing and releasing 95 percent of the engineering drawings at that time. Figure 6 shows the building of knowledge required to achieve a stable design on the AIM-9X. The AIM-9X program made extensive use of engineering prototypes to stabilize the missile’s design before building production representative prototypes. Program officials stated that testing of engineering prototypes uncovered problems with missile design and manufacturing tooling early in the development, during system integration, allowing time to re-design and re-test in follow-on configurations. According to program officials, this not only helped stabilize the design before entering initial manufacturing but grew system reliability and reduced total ownership costs. The program also held design reviews for each of the major subsystems, allowing the program to achieve and demonstrate a stable design in July 1999, before beginning initial manufacturing of production representative prototypes. While the AIM-9X used statistical process control only to a limited extent, other factors have allowed it to have a more successful production outcome to date. Program officials took steps to ensure that manufacturing aspects of the product were included in the design, including empowering a product leader with a manufacturing background, identifying the key characteristics and critical manufacturing processes early, making design trade-offs to enhance manufacturing capability, and demonstrating a robust design to make the product less vulnerable to variations in manufacturing process. In addition, the ability to achieve design stability at the critical design review allowed program officials to focus the system demonstration phase on maturing the manufacturing processes. Prior to committing to production, the program demonstrated that the product could be efficiently built using production processes, people, tools, and facilities to build prototypes. According to the former program manager, these steps gave the officials knowledge that a reliable product could be produced within cost and schedule targets prior to entering production. To date, the AIM-9X program has largely met its production targets. The F/A-18 E/F aircraft development program was able to take advantage of knowledge captured in developing and manufacturing prior versions of the aircraft. This evolutionary approach significantly contributed to the cost and schedule successes of this program. Because the F/A-18 E/F was a variant of the older F/A-18 aircraft, the developer had prior knowledge of design and manufacturing problems. This knowledge, coupled with the use of modeling and computer-aided design software, helped create a design that was easier to manufacture. While the program did not fully use each of the best practices, it did embrace the concepts of capturing design and manufacturing knowledge early in the program. During the program’s critical design review, about 56 percent of the drawings were completed and, while the program did not meet the best practice of 90 percent complete, it did have additional drawing data of the F/A-18 E/F assemblies available for review at the critical design review. The Navy used early versions of the F/A-18 aircraft to demonstrate new component designs and new materials. In addition, the aircraft was designed to have 42 percent fewer parts than its predecessor, making its design more robust. The program also identified the critical manufacturing processes and collected statistical process control data early in product development. At the start of production, 78 percent of these critical processes were in control. Unit costs for the F/A-18 E/F program have not grown since the critical design review and its schedule has been delayed by only 3 months. The F-22 program is structured to provide the product’s full capability with the first product off the production line—an extreme design challenge. This required the product design to include many new and unproven technologies, designs, and manufacturing processes. It did not demonstrate design stability until about 3 years after it held its critical design review. The program completed 3,070 initial engineering drawings at its critical design review in 1995, about 26 percent of the eventual drawings needed. It did not complete 90 percent of the necessary engineering drawings until 1998, after the first two development aircraft were delivered. Figure 7 shows the drawing completion history for the program. After its critical design review, the F-22 program encountered several design and manufacturing problems that resulted in design changes, labor inefficiencies, cost increases, and schedule delays. For example, delivery of the aft fuselage—the rear aircraft body section—was late for several of the test aircraft and two ground test articles because of late parts and difficulties with the welding process. According to the F-22 program office, design maturity and manufacturing problems caused a “rolling wave” effect throughout system integration and final assembly. Late engineering drawing releases to the factory floor resulted in parts shortages and work performed out of sequence. These events contributed to significant cost overruns and delays to aircraft deliveries to the flight test program. The F-22 program initially had taken steps to use statistical process control data during development and gain control of critical manufacturing processes by the full rate production decision. In 1998, we reported that the program had identified 926 critical manufacturing processes and had almost 40 percent in control 2 years before production was scheduled to begin. Although this did not match the standard set by commercial companies, it offered major improvements over what other DOD programs had attempted or achieved. Unfortunately, citing budgetary constraints and specific hardware quality problems that demanded attention, the program abandoned this best practices approach in 2000 with less than 50 percent of it critical manufacturing processes in control. Currently, the program is using post-assembly inspection to identify and fix defects rather than statistical process control techniques to prevent them. In March 2002, we recommended that the F-22 program office monitor the status of critical manufacturing processes as the program proceeds toward high rate production. The program stated that it would assess the processes status as the program moves forward. The program entered limited production despite being substantially behind its plan to achieve reliability goals. A key reliability requirement for the F-22 is mean time between maintenance, defined as the number of operating hours for the aircraft divided by the number of maintenance actions. The reliability goal for the F-22 is a 3-hour mean time between maintenance. The Air Force estimated that in late 2001, when the F-22 entered limited production, it should have been able to demonstrate almost 2 flying hours between maintenance actions. However, when it actually began limited production it could only fly an average of 0.44 hours between maintenance actions. In other words, the F-22 is requiring significantly more maintenance actions than planned. Additionally, the program has been slow to fix and correct problems that have affected reliability. To date, the program has identified about 260 different types of failures, such as main landing gear tires wearing out more quickly than planned, fasteners being damaged, and canopy delaminating. It has identified fixes for less than 50 percent of these failures. Ideally, the design fixes for the failures should be corrected prior to manufacturing production units. The PAC-3 missile did not achieve design stability until after the building of production representative prototypes for system demonstration began. At the program’s critical design review, the PAC-3 program had completed 980 engineering drawings—21 percent of the eventual drawings needed for the missile. Since then, almost 3,700 more drawings have been completed. The total number of drawings expected to represent the completed design grew from about 2,900 at the critical design review to almost 4,700 as of July 2001. This uncertainty in the expected drawings not only indicates that the design was not stable when initial manufacturing began but also shows that there was a significant lack of knowledge about the design. Figure 8 shows the design knowledge at the critical design review, when the decision was made to commit to initial manufacturing of the missile. Prototypes of the product design were not built before the critical design review or before initial manufacturing started to show that the design would work. Therefore, because of the immature design, initially manufactured development missiles were hand-made, took longer to build than planned, and suffered from poor quality. As a result, many design and manufacturing problems surfaced during system demonstration. Subsystems did not fit together properly, and many failed ground and environmental tests the first time. The contractor attributed $100 million of additional cost to first time manufacturing problems. Prior to entering limited production in 1999, the program had less than 40 percent of the critical manufacturing processes in control for assembling the missile and the seeker. According to program officials, there was little emphasis during development or initial production on using statistical control on critical manufacturing processes. Most of the development missiles were built in specialty shops rather than in a manufacturing environment. The result was a lack of knowledge about whether the critical manufacturing processes could produce the product to established cost, schedule, and quality targets. This uncertainty is reflected in contractor estimates that more than 50 percent of the time charged to build the initial production missiles will be for engineering activities. Actual production labor is expected to account for about 30 percent of the charged time. To further understand the problems on the PAC-3 program, we focused on its seeker subsystem, which is key to acquiring and tracking targets and represents a large percentage of the missile’s cost. Currently, despite being in production, it is unclear whether the supplier of the seeker can produce it within cost, schedule, and quality targets. During development, the supplier had difficulty in designing and manufacturing this subsystem. It was not uncommon for seekers to be built, tested, and reworked seven or eight times before they were acceptable. The program entered production, despite these producibility issues. Now, even with 2 years of production experience, the supplier continues to have difficulty producing the seeker with acceptable quality. Data provided by the supplier in October 2001 showed that less than 25 percent of the seekers were being manufactured properly the first time and the rest had to be reworked, on average, four times. According to program officials, ATIRCM/CMWS did not have a stable design until about 2 years after the critical design review. A contributing factor to this was a lack of understanding about the full requirements for the new system at the critical design review in 1997. This led to a major redesign of the common missile warning system’s sensor. At the critical design review, only 21 percent of a product’s engineering drawings had been completed. It did not complete 90 percent drawings—the best practice—until 1999. The immature design caused inefficiencies in manufacturing, rework, and delayed deliveries. In addition, between 1995 and 1999, the development contract target price increased by 165 percent. The ATIRCM/CMWS program did not begin reliability growth testing until 4 years after its critical design review, leaving only 1 year to test the system prior to scheduled production. Program officials said that an immature design limited their ability to begin reliability testing earlier in development. About one-third of the way through the reliability growth test program, testing was halted because too many failures occurred in components such as the power supply, the high voltage electrical system, and the cooling system. According to a program official, the inability to demonstrate system reliability contributed to a production delay of about 1 year. The program plans to build, develop, and test six additional development units during 2002 and 2003 that will incorporate design changes to fix the system failures. ATIRCM/CMWS plans to enter limited production in the early part of 2002 with significantly less knowledge about the design’s producibility than commercial companies. The contractor does not use statistical process control and has not identified critical manufacturing processes. A production readiness review identified the lack of statistical process control as a major weakness that needs to be corrected. The Department of Defense’s (DOD) acquisition policy establishes a good framework for developing weapon systems; however, disciplined adherence, more specific criteria, and stronger acquisition incentives are needed to ensure the timely capture and use of knowledge in decision making. DOD changed its acquisition policy to emphasize evolutionary acquisition and establish separate integration and demonstration phases in the product development process. Its goal was to develop higher quality systems in less time and for less cost. However, DOD’s acquisition policy lacks detailed criteria for capturing and using design and manufacturing knowledge to facilitate better decisions and more successful acquisition program outcomes. As demonstrated by successful companies, using these criteria can help ensure that the right knowledge is collected at the right time and that it will provide the basis for key decisions to commit to significant increases in investment as product development moves forward. While the right policy and criteria are necessary to ensure a disciplined, knowledge-based product development process, the incentives that influence the key players in the acquisition process will ultimately determine whether they will be used effectively. In DOD, current incentives are geared toward delaying knowledge so as not to jeopardize program funding. These incentives undermine a knowledge-based process for making product development decisions. Instead, program managers and contractors push the capture of design and manufacturing knowledge to later in the development program to avoid the identification of problems that might stop or limit its funding. They focus more on meeting schedules than capturing and having the knowledge necessary to make the right decisions at those milestones. Such an approach invariably leads to added costs because programs are forced to fix problems late in development. By contrast, commercial companies must develop high-quality products quickly or they may not survive in the marketplace. Because of this, they encourage their managers to capture product design and manufacturing knowledge to identify and resolve problems early in development, before making significant increases in their investment. Instead of a schedule- driven process, their process is driven by events that bring them knowledge: critical design reviews that are supported by completed engineering drawings and production decisions that are supported by reliability testing and statistical process control data. They do not move forward without the design and manufacturing knowledge needed to make informed decisions. Greater emphasis on evolutionary acquisitions and structuring the product development process into two phases—system integration and system demonstration—were good first steps for DOD to achieve its goals of buying higher quality systems in less time and for lower costs. However, DOD policy still lacks criteria to be used to capture specific design and manufacturing knowledge and does not require the use of that knowledge as exit criteria at key decision points to transition from system integration to system demonstration and then into production. In three of the five DOD program examples in chapter 3, managers decided to move forward in development, even when developers had failed to capture design and manufacturing knowledge to support increased investments. As a result, these programs encountered significant increases in acquisition costs as well as delays in delivering capabilities to the war fighter. Table 7 illustrates key criteria used by commercial companies that are currently lacking in DOD’s policy. The table shows the design and manufacturing knowledge needed to make more informed decisions. The capture of some of the important manufacturing and reliability knowledge should begin in the integration phase in order to have the full knowledge needed to make decisions at the end of the demonstration phase for transitioning into production. According to DOD’s current acquisition policy, the system integration phase of an acquisition normally begins with the decision to launch a program. The policy states that, during this phase, a system’s configuration should be documented and the system should be demonstrated using prototypes in a relevant environment. While these are noteworthy activities and resemble best practices, the policy does not provide criteria for what constitutes the level of knowledge required for completing this stage, nor does it require a decision—based on those criteria—as to whether a significant, additional investment should be made. Commercial companies demand knowledge from virtual or engineering prototypes, 90 percent of required engineering drawings for the product supported by test results, demonstration that the product meets customer requirements, a series of disciplined design reviews, and stakeholder agreement that the design is stable and ready for product demonstration before a commitment is made to move forward and invest in product demonstration. Under DOD’s revised policy, it is still difficult to determine if a product should enter product demonstration with a stable design. DOD’s current acquisition policy also states that the system demonstration phase begins after prototypes have been built and demonstrated in a relevant environment during system integration. According to the policy, a system must be demonstrated before the department will commit to production. The low-rate initial production decision occurs after this phase of product development. Like the end of system integration, the policy fails to provide specific criteria for what constitutes the knowledge required to support the decision to move into production. For example, the policy states there should be “no significant manufacturing risks” but does not define what this means or how it is measured. Without criteria for building knowledge during the demonstration phase, the production decision is often based on insufficient knowledge, creating a higher probability of inconsistent results and cost and schedule problems. On the other hand, commercial companies demand proof that manufacturing processes are in control and product reliability goals are attained before committing to production. With more specific knowledge in hand at the end of development, decision makers can make a more informed decision to move into production with assurances that the product will achieve its cost, schedule, and quality outcomes. Finally, while DOD’s policy separates product development into a two-stage process—integration and demonstration—it does not require a decision milestone to move from one stage to the next. The policy states that an interim progress review should be held between the two stages, but the review has no established agenda and no required outputs of information unless specifically requested by the decision maker. Its purpose is to confirm that the program is progressing as planned. On the other hand, commercial companies consider this review a critical decision point in their product development process because it precedes a commitment to significantly increase their investment. Therefore, they use specific, knowledge-based standards and criteria to determine if the product is ready to enter the next phase and they hold decision makers accountable for their actions. These decision reviews are mandatory and are typically held at the executive level of the commercial firm. Figure 9 illustrates the commercial model for knowledge to be captured and delivered during product integration and product demonstration and the possible application of that model to DOD’s acquisition process. Without a similar decision review to bring accountability to the DOD process, acquisition programs can—and do—continue to advance into system demonstration without a stable design. As shown in our case studies, this provides for a high probability of cost growth and schedule delays to occur. The incentives for program managers and product developers to gather knowledge and reduce risk are also critical to DOD’s ability to adopt best practices for product development. In DOD, incentives are centered on obtaining scarce funding on an annual basis in a competitive environment to meet predetermined and typically optimistic program schedules. These incentives actually work against the timely capture of knowledge, pushing it off until late in the process to avoid problems that might keep a program from being funded. Because design and manufacturing knowledge is not captured, key decision points intended to measure and ensure that a weapon system has sufficiently matured to move forward in the process risk becoming unsupported by critical knowledge. In leading commercial companies, the opposite is true. Because companies know they have to deliver high-quality products quickly and affordably, they limit the challenge for their program managers and provide strong incentives to capture design and manufacturing knowledge early in the process. Program managers are empowered to make informed decisions before big investments in manufacturing capability are required. DOD’s current acquisition environment is driven by incentives to make decisions while significant unknowns about the system’s design and manufacturability persist. This environment results in higher risks and a greater reliance on cost-reimbursement contracts for longer periods of time during product development. Because events that should drive key decisions, such as critical design reviews, interim progress reviews, and production decision reviews, are based on inadequate design and manufacturing knowledge, they do not support decisions to invest more and move to the next phase of the acquisition process. Nevertheless, this approach has proven effective in securing funds year to year. For example, the F-22, PAC-3, and ATIRCMS/CMWS programs had less than one-third of their engineering drawings completed at their critical design review, but each obtained the funding necessary to move onto the initial manufacturing of production representative prototypes. That funding allowed a significant increase in investment to develop a manufacturing capability before critical knowledge had been captured. The incentive to capture funding for the program was greater than the incentive to wait, capture knowledge, and reduce the risk of moving forward. Each of these programs encountered significant cost increases and schedule delays. The incentives are quite different for leading commercial companies. For them, the business case centers on the ability to produce a product that the customer will buy and that will provide an acceptable return on investment. If the firm has not made a sound business case, or has been unable to deliver on one or more of the business case factors, it faces a very real prospect of failure—the customer may walk away. Also, if one product development takes more time and money to complete than expected, it denies the firm opportunities to invest those resources in other products. For these reasons, commercial companies have strong incentives to capture product knowledge early in the process to assess the chances of making the business case and the need for further investments. Production is a dominant concern in commercial companies throughout the product development process and forces discipline and trade-offs in the design process. This environment encourages realistic assessments of risks and costs since doing otherwise would threaten the business case and invite failure. For the same reasons, the environment places a high value on knowledge for making decisions. Program managers have good reasons to identify risks early, be intolerant of unknowns, and not rely on testing late in the process as the main vehicle for discovering the performance characteristics of the product. By adhering to the business case as the key to success, program managers in leading commercial companies are conservative in their estimates and aggressive in risk reduction. Ultimately, adherence to the business case strengthens the ability to say “no” to pressures to accept high risks and unknowns. Practices such as prototyping, early manufacturing and supplier involvement, completing 90 percent of engineering drawings by critical design review, demonstrating product reliability, and achieving statistical control of critical manufacturing processes by production are adopted because they help ensure success. In DOD’s current acquisition environment, the customer is willing to trade time and money for the highest performing weapon system possible. That willingness drives the business case. This creates strong incentives for the program office to take significant risks with technologies and designs to ensure it can offer the customer a weapon system that is a quantum leap above the competition. In addition, because funding is secured on an annual basis in DOD, strong incentives exist for the program office to make optimistic assumptions about development cost and schedule. Because the customer is willing to wait and funding is never certain, an environment exists where program managers have good reasons to avoid the capture of knowledge and delay testing. Since the business case in DOD places very little premium on meeting cost and schedule targets, but a very high premium on performance, programs succeed at the point where sunk costs make it difficult—if not prohibitive—for decision makers to cancel them. The practices commercial companies use to capture knowledge are not currently used in this environment because the business case does not favor them. Instead, DOD’s product development environment relies on cost-type contracting throughout the entire product development process. Once in production, programs will cut quantities to maintain funding or once fielded, they rely on the operations and maintenance budget to pay for reliability problems not solved in development. The Department of Defense’s (DOD) planned $700 billion investment in weapon systems over the next 5 years requires an approach that keeps cost, schedule, and performance risks to a minimum. This approach means adopting and implementing an evolutionary approach to developing new weapon systems, improving policy to more closely approximate a knowledge-based product development process, and creating incentives for capturing and using knowledge for decision making. Without an evolutionary approach as its foundation, the ability to capture design and manufacturing knowledge early in the development process is significantly reduced. Programs, in turn, take on too much new unproven content to meet their objectives and risks invariably increase. DOD has made improvements in its acquisition policy by incorporating guidance for evolutionary acquisition, creating guidelines for the development of a basic product that can be upgraded with additional capabilities as technologies present themselves. However, evolutionary acquisition has yet to be consistently implemented with success on individual weapon system acquisitions. Regardless of whether DOD emphasized greater use of evolutionary acquisition, acquisition programs are not capturing sufficient design and manufacturing knowledge to make good decisions at key investment points. The current policy establishes a good framework to develop a product, but the policy still lacks specific criteria required to move a program forward and does not tie knowledge to decisions for increasing investments in the program as it moves from system integration to system demonstration. As a result, programs often pass through each development phase and into production with an unstable design and insufficient knowledge about critical manufacturing processes and product reliability. This results in greater likelihood for inconsistent and poor results and cost and schedule problems later in the program. Additionally, DOD does not provide the proper incentives to encourage the use of best practices in capturing knowledge early in its development programs. Currently, managers are focused more on the annual exercise of obtaining funding needed to keep their programs viable and alive. The importance of capturing design and manufacturing knowledge early gives way to the pressures of maintaining funding, often resulting in the acceptance of greater risks. Raising problems on a program early because design and manufacturing knowledge is discovered can cause extra oversight and questions that threaten a system’s survival. The prevailing culture is to accept greater risks upfront and then fix problems later in the development program. We found that leading commercial companies over the years had found ways to overcome these problems and had identified best practices that resulted in the early capture of and use of design and manufacturing knowledge. This was done by a combination of four key elements. First, they established and used an evolutionary approach to develop products that made the capture of design and manufacturing knowledge a more manageable task. This framework limited the design challenge for any one new product development by allowing risky technology, design, or manufacturing requirements to be deferred until a future generation of the product. DOD’s current policy addresses this; however, it has not had sufficient time to show how this will be implemented. Second, each company we visited used the same basic product development process and criteria for bringing together and integrating all of the technologies, components, and subsystems required for the product to ensure the design was stable and then demonstrating that the product was producible and reliable using proven manufacturing processes. DOD’s policy lacks the criteria to measure design stability and process controls. Third, successful companies used tools to capture design and manufacturing knowledge about the product and decide about whether to invest further based on that knowledge. Their new product development process included key, high-level decision points before moving into product demonstration, and again before making the production decision that required specific, knowledge-based exit criteria. DOD’s policy does not require a decision to move from system integration to system demonstration. Finally, leading companies created an environment for their managers that emphasized capturing design and manufacturing knowledge early, before committing substantial investments in a product development that made cancellation a more difficult decision to make. DOD’s environment encourages meeting schedule milestones instead of capturing design and manufacturing knowledge to make decisions. DOD should take steps to close the gaps between its current acquisition environment and best practices. To do this, it should ensure that its acquisition process captures specific design and manufacturing knowledge, includes decisions at key junctures in the development program, and provides incentives to use a knowledge-based process. Such changes are necessary to obtain greater predictability in weapon system programs’ cost and schedule, to improve the quality of weapon systems once fielded, and to deliver new capability to the war fighter faster. More specifically, we recommend that the Secretary of Defense: Require the capture of specific knowledge to be used as exit criteria for decision making at two key points—when transitioning from system integration to system demonstration and from system demonstration into production. The knowledge to be captured when moving from system integration into system demonstration should include the following: Completed subsystem and system design reviews. Ninety percent of drawings completed. Demonstration that design meets requirements—prototype or variant testing. Stakeholders’ (cross functional design team that includes design engineers, manufacturing, key supplier) assurance that drawings are complete. Completed failure modes and effects analysis. Identification of key system characteristics. Identification of critical manufacturing processes. Set reliability targets and growth plan. The knowledge to be captured when moving from system demonstration into production should include the following: Demonstrated manufacturing processes. Built production representative prototypes. Tested prototypes to achieve reliability goal. Tested prototypes to demonstrate product in operational environment. Collected statistical process control data. Demonstration that critical processes are capable and in control. Require that the interim progress review, currently identified in DOD’s policy as that point in the process between system integration and system demonstration, be a mandatory decision review. At this point, the design should be demonstrated to be stable so that during the next phase of development attention can be focused on demonstrating manufacturing processes and product reliability. The program manager should have proof—based on the exit criteria for moving out of system integration in the above recommendation—that the product design is stable. The exit criteria should be demonstrated and verified by the program manager before the program can make the substantial investments needed to begin manufacturing production representative prototypes in the next phase of development—system demonstration. To ensure visibility of demonstrated exit criteria to decision makers, the criteria and the program’s status in achieving them should be included in each program’s Defense Acquisition Executive Summary and Selected Acquisition Reports. If the program does not meet the exit criteria, investments should be delayed until such time as the criteria are satisfied. To proceed without completing the required demonstrations should require approval by the decision authority. Expand exit criteria for the Milestone C decision to include the knowledge to be captured during the system demonstration phase as identified in recommendation one. This will require that the program office demonstrate that the critical manufacturing processes are under statistical control and that product reliability has been demonstrated before entering production of the new weapon system. These are best practices and indicate that the product design is mature and the program is ready to begin production of units for operational use that will meet the cost, schedule, and quality goals of the program. To ensure that contracts support a knowledge-based process, we further recommend that DOD structure its contracts for major weapon system acquisitions so that (a) the capture and use of knowledge described in recommendation one for beginning system demonstration is a basis for DOD’s decision to invest in the manufacturing capability to build initial prototypes and (b) the capture and use of manufacturing and reliability knowledge discussed in recommendation one for moving from system demonstration to production is a basis for DOD’s decision to invest in production. DOD concurred with a draft of this report and agreed with the benefits of using design and manufacturing knowledge to make informed decisions at key points in a system acquisition program. DOD had some comments with regard to the details contained in the recommendations, which are summarized below. DOD concurred with our recommendation to add exit criteria at two key points in the acquisition process—when transitioning from system integration to system demonstration and from system demonstration into production. DOD believes, however, that the milestone decision authority needs to retain flexibility in applying the knowledge requirement for drawings. Flexibility and judgment are management prerogatives that should exist in any decision process. We agree there may be circumstances, such as in the development of software, when it makes good sense to progress with less than the best practice standard for drawings, but the DOD policy should maintain the requirement to achieve 90 percent drawings by the completion of the system integration phase. DOD also concurred that critical manufacturing processes must be demonstrated using statistical process control techniques before production, but believes that achieving this at Milestone C, the low rate production decision, is unlikely. It believes the criteria would be better applied to the full rate production decision or when low rate production quantities extend beyond 10 percent of the planned weapon system buy. This is a reasonable approach when processes are new or unique. However, not all critical processes will be new or unique to a specific weapon system. Some will have been used to manufacture parts or components for other systems or products. At a minimum, it should be possible to demonstrate these by Milestone C. For other critical processes that may require additional production experience to bring under statistical process control, a program manager should have a reasonable plan at the Milestone C decision review to bring those processes into control by the full rate production decision, but no later than completion of 10 percent of the planned buy. | This report examines how best practices offer improvements to the way the Department of Defense (DOD) develops new weapons systems, primarily the design and manufacturing aspects of the acquisition process. Knowledge about a product's design and producibility facilitates informed decisions about whether to significantly increase investments and reduces the risk of costly design changes later in the program. Leading commercial companies employ practices to capture design and manufacturing knowledge in time to make key decisions during product development. First, the companies kept the degree of the design challenge manageable before starting a new product development program by using an evolutionary approach. Second, the companies captured design and manufacturing knowledge before the two critical decision points in product development: when the design was demonstrated to be stable--the second knowledge point--and when the product was demonstrated to be producible at an affordable cost--the third knowledge point. DOD has made changes to its acquisition policy in an attempt to improve its framework for developing weapons systems, but the policy does not require the capture of design or manufacturing knowledge or sufficient criteria to enter the system demonstration and production phases. In addition, it does not require a decision review to enter the demonstration phase of product development. |
Grants, along with contracts and cooperative agreements, are tools used by the federal government to achieve national priorities via nonfederal parties, including state and local governments, educational institutions, and nonprofit organizations. Diverse in structure and purpose, grants can be generally classified as either categorical or block, with categorical grants allowing less recipient discretion than block grants. For example, the Community Services Block Grant provides funds to states and is sometimes passed to local agencies to support a variety of efforts that reduce poverty, revitalize low-income communities, and lead to self- sufficiency among low-income families and individuals, while giving the agencies broad discretion in how the funds can be spent. In practice, the “categorical” and “block” grant labels represent the ends of a continuum and overlap considerably in its middle range. Grant funds may also be grouped by their method of allocating funds. Formula grants allocate funds based on distribution formulas prescribed by legislation or administrative regulation and often narrowly define the eligible recipients as state agencies. On the other hand, categorical grants are generally awarded on a competitive basis to applicants meeting broader eligibility requirements. Despite substantial variation among grants, grants generally follow a similar life cycle and include announcement, application, award, postaward, and closeout phases. Once established through legislation, which may specify particular objectives and eligibility and other requirements, a grant program may be further defined by grantor agency requirements. For competitive grant programs, the public is notified of the grant opportunity announcement, and potential grantees must submit their applications for agency review. In the awards stage, the agency identifies successful applicants or legislatively defined grant recipients and awards funding. The postaward stage includes payment processing, agency monitoring, and grantee reporting, which may include financial and performance information. The closeout phase includes preparation of final reports, financial reconciliation, and any required accounting for property. Traditionally, grant accountability has referred to legal or financial compliance. The Single Audit Act, for example, requires grantees to conduct an overall financial compliance audit to promote accountability. As such, at a minimum all grantees are held accountable for sound financial management and use of federal funds to support allowable activities. Beyond that, however, accountability for performance varies from grant to grant. As discussed earlier, this historical focus on financial accountability has expanded in response to increasing expectations of demonstrable performance and performance accountability for all government programs. For example, the Comptroller General’s Domestic Working Group issued its Guide to Opportunities for Improving Grant Accountability, highlighting innovative approaches and promising practices in grants management—focused both on ensuring grant funds are spent properly as well as achieving their desired results. While performance accountability in grants is a relatively new pursuit, it has been used in contracts for a number of years. To illustrate performance accountability mechanisms and the strategies that contribute to their successful design and implementation, we examined four cases: (1) the federal CSE program, (2) the federal Perkins III Career and Technical Education Program, (3) a performance-based contract between the Massachusetts DMA and MBHP, and (4) a performance-based contract between the Canadian Ontario Realty Corporation (ORC) and ProFac. The CSE program was established in 1975 by Title IV-D of the Social Security Act (Pub. L. No. 93-647). CSE functions in all states and territories through state or local social services departments, attorneys general offices, or departments of revenue in order to ensure that children are financially supported by both of their parents. State programs work toward establishing paternity, locating parents, establishing and enforcing support orders, and collecting and distributing child support payments. The federal Office of Child Support Enforcement (OCSE), an office of the Department of Health and Human Services’ Administration for Children and Families, oversees the development, management, and operation of state CSE programs and provides financial support (66 percent of total operating costs) to states. In fiscal year 2005 federal expenditures on CSE were $3.5 billion, with states spending $1.8 billion. Total collections in fiscal year 2005 were more than $23 billion. The total legally owed support for fiscal year 2005 was $29 billion, with $17.4 billion of that collected. Total arrears (past due payments) for all previous years combined was $107 billion. Over $7 billion of those past due payments were collected and distributed in fiscal year 2005. The Child Support Performance and Incentive Act of 1998 (Pub. L. No. 105- 200) linked incentive payments to performance, and in fiscal year 2005, OCSE made over $450 million in incentive payments to states. This act changed the original CSE incentive program from awarding incentives based solely on cost-effectiveness to awards based on meeting specific performance targets in five outcome areas: paternity establishment, order establishment, current collections, past due collections, and cost- effectiveness. The performance measures and targets are defined in the text of the act, which also provides a formula for determining the amount of each incentive payment. Additionally, the act established an alternative penalty system for those states not yet in compliance with the statewide automated data processing system required by Title IV-D Sec. 454(A) of the Social Security Act. The new incentive program was phased in from 2000 through 2002. Effective July 1, 1999, the Carl D. Perkins Vocational and Technical Education Act of 1998 (Perkins III, Pub. L. No. 105-332) amends earlier legislation to evaluate and improve vocational and technical education. Each year under Perkins III, Congress has appropriated more than $1.1 billion in grants to states for career and technical education. The Office of Vocational and Adult Education (OVAE), an office of the Department of Education, administers the grants established in Perkins III, a pass-through grant to states, which administer the distribution of the funds to local school districts. Perkins III defines major roles for OVAE and states in establishing performance accountability systems for vocational and technical education. States are given the responsibility for developing performance measures and data collection systems related to four required core performance indicators: academic and technical skill attainment, completion, placement and retention, and nontraditional participation and completion. OVAE negotiates these performance measures with states to ensure that they are sufficiently rigorous. States not meeting their performance levels for 1 year are required to complete a program improvement plan. States not meeting their performance levels for 2 years are subject to financial sanctions, although no state has failed to meet its overall levels for 2 consecutive years. States have also been eligible to receive incentive funds if they exceeded performance goals for the Perkins III grant as well as targets established by Title I and Title II of WIA. Title I of WIA supports workforce investment programs. Title II, also known as the Adult Education and Family Literacy Act, provides adult education funds to states. Governors have the authority to allocate the incentive funds for use in any of the three program areas. Beginning in 1996, the Massachusetts DMA entered into a 5-year contract, which was renewed in 2001, with MBHP to manage mental health and substance abuse services for roughly 300,000 people covered by the MassHealth Primary Care Clinician Plan—part of the Massachusetts Medicaid program. Of the individuals covered by the plan, more than half are children 18 or younger, including 20,000 children in the custody of the commonwealth’s Departments of Social Services and Youth Services. The structure of the contract between DMA and MBHP involves a base contract, which governs requirements related to administrative and medical operations. These requirements continue through the life of the contract, or until they are modified through amendments. In addition to the base contract, there are performance incentive projects that focus on research and development projects. The majority of earnings available to MBHP come from the organization’s successful completion of these contractually defined incentive projects, which are renegotiated annually. Earnings are achieved only after the successful completion of specified goals and objectives, as documented and reviewed by the state. ProFac, a facilities management company, was awarded a 5-year contract in 1999 (since renewed) by ORC to provide facilities management services for approximately 30 million square feet of space in 2,100 building sites owned by the Ontario government. About 280 ProFac managers, engineers, technicians, and support staff provide these services. The contract between ORC and ProFac links performance to a 10 percent quarterly management fee holdback: on a monthly basis, ORC only reimburses ProFac for 90 percent of its administrative costs, retaining the other 10 percent, a “holdback,” which ORC returns to ProFac on a quarterly basis only if ProFac obtains a sufficient level of performance. This contract also links performance to an annual share-in-savings arrangement: ORC sets a budget each year based on prior years’ actual expenditures and budget projections; if ProFac spends less than the budget, it is able to share the difference, a share in savings, only if it reaches a sufficient operational level. ProFac’s performance on 30 key performance indicators (KPI) determines its operational level. These KPIs are accumulated to determine a score in four performance objectives: management performance, financial performance, asset integrity, and customer service. The performance objectives are scored and then weighted according to ORC’s priorities to determine a total performance rating. The trade-offs and challenges associated with performance accountability in federal grants largely depend on several key aspects of grant design and implementation. As we have previously reported, performance accountability tends to be greater (and grantee flexibility lower) in programs with certain types of design features. Because design features that encourage performance accountability can limit state and local grantee flexibility, achieving these twin goals can be a delicate balancing act and has implications for the accountability relationship between levels of government and the information needed to support accountability. Even in federal grants with designs that favor performance accountability, grant implementation challenges related to developing performance goals and measures as well as collecting and reporting performance data can influence the extent of performance accountability achieved. Although there are various ways to design grants to encourage performance accountability, in general, there are three factors that particularly affect the degree of performance accountability that can be achieved, including whether a grant (1) includes performance-oriented objectives in addition to fiscally oriented objectives, (2) operates as a distinct program or as a funding stream, and (3) supports a limited or diverse array of objectives. As we discussed previously, federal grants have traditionally focused on fiscal or legal accountability, such as holding states accountable for using federal grant funds to supplement rather than to supplant their own spending on a particular activity. However, federal grants that also include performance-oriented objectives—as well as the provisions that implement them—provide the basis for performance measurement and accountability for results, and signal a federal role in managing performance over the grant. Ideally, both types of objectives would be present in federal grants. Performance-related objectives focus on service or production activities and their results. For example, the central objective of the grants for Special Programs for the Aging—Nutrition Services, is to provide nutritious meals to needy older Americans to improve nutrition and reduce social isolation. In contrast, fiscal or financial assistance objectives focus on providing dollars to support or expand activities. Typical fiscal objectives include increasing support for meritorious goods or underfunded services and targeting grant funding to needy jurisdictions. For example, the objective of Title VI Innovative Education grants is to provide funds to support local education reform efforts. When objectives are purely fiscal, accountability to the federal agency tends to focus on fiscal matters, such as holding states accountable for using federal grant funds to supplement rather than to supplant their own spending on a particular activity. Even when performance-oriented objectives are present, whether federal grants operate as distinct programs or as part of a larger funding stream directly affects who can be held accountable and for what. A grant that operates as a program has performance requirements and objectives and carries out specific programwide functions through a distinct delivery system, such that grant-funded activities, clients, and products are clearly identifiable. This type of grant gives the federal agency a role in managing performance and makes it easier to obtain uniform information about performance attributable to the grant funds. It is possible to identify which activities were supported; the amount of federal funds allocated to each; and to various extents, the results grantees achieved with federal funds. In contrast, funds from grants that operate as part of a funding stream are merged with funds from state or local sources (and sometimes from other federal sources) to support state or local activities allowable under the flexible grant. These programs are managed at the state or local level, with the federal role limited accordingly. When grants are part of a funding stream, it is possible to identify which activities federal funds supported and the amount allocated to each, but once the grant funds are combined with the overall budget for a state or local activity, federal dollars lose their identification and their specific results cannot be separated out. This is particularly the case when the federal share is small, with most funding coming from other sources. The program outcome measures available in such programs are likely to be for outcomes of the state or local service delivery program, not the federal program from which the funding originated. Thus, grantees would generally be held accountable for overall outcomes, regardless of the funding source. For example, projects such as Oregon Option and the National Performance Review were designed to promote accountability for federal and/or national priorities, regardless of the funding source. They encourage grantors and grantees to work toward collaboratively developed outcomes. These intergovernmental partnerships can be particularly useful when funds come from a combination of federal, state, local, and private sources, or when the federal funding share is small. Federal grants vary along a continuum, at one end supporting a single major activity common to all grantees (such as categorical grants), and at the other end, allowing unrestricted choice by the recipient among a wide variety of allowable activities, (such as block grants). Flexibility is narrowest, but accountability to the federal level clearest, in programs that focus on a single major activity. Flexibility is broadest in programs designed to support diverse state or local activities, but finding a common performance metric can be extremely challenging since these activities can vary considerably from state to state. That said, we have previously reported on options for building accountability provisions into block grants that help balance states’ flexibility to select a mix of activities and services that will best allow them to achieve a particular national outcome with accountability for achieving that outcome. These options include (1) relying on state processes both to manage block grant funds and to monitor and assess compliance and (2) emphasizing results-based evaluation rather than examining specific program or administrative activities. In addition to these design features, we have previously reported on a number of performance accountability challenges encountered in many grant programs during the grant implementation phase. Lack of consensus on goals and performance measures: The priorities of states, tribes, local communities, and the federal government are not always the same. To ensure that grantees work toward national priorities, they need to be involved in the development of performance goals and measures. Lack of agreement on goals and measures— particularly when the federal funding is a small portion of the funding stream—could lead to grantees making choices that do not necessarily support the achievement of national goals. Reliance on performance data from state and local partners and other third parties: Even if grantees collect data on similar activities, outcomes, and services, absent common data definitions Congress and program managers will lack comparable information, limiting the ability to compare state efforts or draw meaningful conclusions about the relative effectiveness of different strategies. We have previously reported that agencies relying on third parties for performance data also have difficulty ascertaining the accuracy and quality of the data. Further, programs often rely on state administrative systems for performance information. For some programs—such as many of the Administration for Children and Families’ programs—-since final reports are not due until 90 to 120 days after the end of the federal fiscal year, there is a delay in available data. Onerous and inconsistent grant administration processes and requirements: Multiple grants maybe available for the same or similar purposes, meaning that federal grant recipients must navigate through a myriad of federal grant programs in order to find the appropriate source of funds to finance projects that meet local needs and address local issues. Sometimes programs meant to address common problems have potentially conflicting requirements. Variations in performance accountability requirements among these grants can limit the degree of performance accountability achieved. We have recently reported that while this situation is improving because of OMB’s efforts to streamline the grants application process, problems still exist. Prohibition of performance information collection: Because states are principally responsible for implementing block grants at the state level, the block grant statutory prohibitions and requirements, and federal regulations and guidance are generally kept to a minimum. Sometimes federal agencies are prohibited from imposing reporting requirements because they are seen as burdensome. Clearly, this limits the extent to which federal agencies can oversee grantee performance. Nevertheless, even with these trade-offs and challenges, agencies have been able to shift toward increased performance accountability in federal grants and the use of accountability provisions to ensure that grantees achieve real results through the programs, activities, and services financed with federal funds. The accountability provisions described in this report, along with strategies for their effective use, can help address the challenges noted above. We found a number of accountability provisions, specific actions that can be taken—that is, rewards given or penalties imposed when performance exceeds or fails to meet specified performance levels—that Congress, granting agencies, and grantees can use at different points in the grant life cycle to improve both grant performance and performance accountability. These examples demonstrate that accountability provisions can result in significant performance improvement and are flexible enough to accommodate a variety of situations. We found that a wide variety of accountability provisions are being used in both grant and contracting situations. A selection of these provisions is shown in table 1. This list is not intended to be exhaustive; rather, it is meant to illustrate the variety of mechanisms available. Some mechanisms may be more appropriate in certain situations than others, but all of these mechanisms can be used to either encourage improved performance or discourage poor performance. For example, public recognition and increased funding are two different mechanisms that can both be used to encourage and reward good performance. Similarly, mechanisms such as reduced funding or increased oversight can be used to discourage or penalize poor performance. In addition, mechanisms can be either financial or nonfinancial in nature. A financial mechanism would be an increase in funding or a bonus. For example, the CSE program employs a financial incentive in the form of a bonus to encourage states to work toward the program’s five performance goals: states are eligible for a bonus every year based on performance. Nonfinancial mechanisms would include altered oversight or flexibility. For example, as part of the National Environmental Performance Partnership System, the Environmental Protection Agency affords states with high environmental performance levels greater flexibility in spending their grant funds. Financial mechanisms also vary by their degree of risk or risk sharing between the grantor and the grantee. Grantee risk increases as the amount of money tied to performance increases. For example, bonuses—money awarded over and above the base grant amount—represent the least risk, while an outcome-based milestone payment plan where the entire grant award is based on performance represents much higher financial risk to the grantee. Nonfinancial actions, such as altering flexibility or oversight, would be relatively risk neutral. Accountability mechanisms can be used in different phases of the grant life cycle by different actors, including Congress, granting agencies, and grantees themselves, and the lessons learned from one grant cycle can be used to improve a performance accountability mechanism in the next (see fig. 1). For example, when reauthorizing the CSE program, Congress revised the original CSE incentive payments, which were solely based on cost efficiency, to create an incentive program tied to performance measures that reflect CSE’s five key goals: (1) paternity establishment, (2) order establishment, (3) current collections, (4) collection of payments in arrears, and (5) cost-effectiveness (design/redesign phase). In contrast, performance measures and targets for Perkins III are created during the implementation phase. Specifically, each state is required by law to create its own performance measures linked to four core indicators: (1) student attainment of challenging state-established academic and vocational technical skill proficiencies; (2) student attainment of secondary diploma or postsecondary degree or credential; (3) student placement in employment, pursuit of further education, or both; and (4) student participation in and completion of vocational technical education programs that lead to nontraditional training and employment. The Department of Education periodically negotiates the performance targets for each state measure (postaward phase). The use of past performance can inform and improve the recipient selection process (application phase). Specifically, the Florida Department of Children and Families has reported considerable success using past performance in recipient selection—contractors that do not meet their performance measures and standards are ineligible to be awarded future contracts. Other mechanisms, such as altered flexibility or oversight, can be used by the granting agency—or even the grantee—to encourage improved performance during the term of the award (postaward phase). For example, according to the literature we reviewed, Minnesota’s Department of Human Services Refugee Services Section increases its oversight of local agencies if their performance drops below 80 percent on their key performance measures, including job placement rates, which nearly doubled over 5 fiscal years. Importantly, grantees can also use these provisions to extend accountability to subgrantees and contractors. This is significant because many federal grants are ultimately passed through states to subgrantees. Some accountability provisions, such as public award and recognition, can even be employed by stakeholders or interested parties. For example, the National Association for State Directors of Career and Technical Education Consortium annually recognizes high-performing career and technical administrators and teachers and provides opportunities to share lessons learned and best practices. Even when performance accountability provisions are absent from or limited by a grant’s legislation, agencies and grantees may still be able to include these types of provisions in the terms and conditions of the grants or subgrants or in contracts as long as the authorizing legislation does not specifically prohibit their use. OMB Circular A-110 provides that for grants awarded to nonprofits, a number of accountability mechanisms may be used—including withholding payments, termination of award, and “other remedies that may be legally available”—if the grantee materially fails to comply with the terms and conditions of the award. These terms and conditions can be specified in federal statute, regulation, assurance, applications, or the notice of award. For grants to state and local governments, however, OMB Circular A-102 contains no detailed accountability provisions and defers to the requirements specified in the authorizing legislation. Various authorities govern the use of accountability provisions (see table 2). Provisions set by Congress, such as increased flexibility in the form of waivers from statutory restrictions, are generally laid out in authorization or appropriations legislation. As stated earlier, granting agencies can include accountability provisions in regulations, grant announcements, the request for proposal, and the notice of award. Grantees (and subgrantees) can use accountability provisions, such as formal recognition, to improve their performance internally. For example, the CSE program in Montgomery County, Pennsylvania, recognizes performance-improving suggestions from individual employees by publicly praising and inducting them into the office’s “all-star team.” These employees also receive a T- shirt with a picture of a stork—the program’s mascot—with the program’s motto Striving Toward Optimizing our Resources for Kids. Selecting appropriate performance measures and linking them to performance accountability mechanisms is not a one-size-fits-all process; rather, accountability provisions are tailored to reflect the program’s characteristics. In addition to the range of accountability mechanisms available, we found a number of ways mechanisms were tailored and combined to reflect a variety of circumstances. Table 3 describes how measures and mechanisms can be designed and triggered to either reward or penalize performance. For example, to encourage its contractor, ProFac, to cut costs while maintaining a high-level of performance, ORC modified a basic financial incentive to include a share-in-savings feature. ProFac is eligible to share a portion of the savings if it spends less than its yearly budget—often referred to as share in savings. To ensure that ProFac does not cut costs to the detriment of high performance, ORC also requires that ProFac achieve a performance rating of 80 percent or higher to share in these cost savings. The CSE performance measures are an example of a “step up” provision— for each increasing performance percentage interval there is a corresponding increase in the incentive percentage paid. Each time a state moves to the next highest interval, it receives a higher percentage of the incentive for that measure. Conversely, the alternative penalty procedure for failure to implement a statewide child support data processing system acts as a “step down” mechanism. For each year the state fails to implement such a system, but shows a good faith effort to attempt to do so, the state will be penalized at increasing intervals—during the first year of noncompliance, the state will receive a 4 percent penalty, the second year an 8 percent penalty, the third year a 16 percent penalty, and so on. Collectively, five key strategies appear to facilitate the effective selection, design, and implementation of performance accountability mechanisms. These strategies are ensure mechanisms are of sufficient value, periodically renegotiate and revise mechanisms, ensure appropriate measurement selection and usage, ensure grantor and grantee technical capacity, and implement system in stages. In addition to these strategies, we noted extensive use of partnerships and collaborations and regular and effective oversight and feedback, which appeared critical to the success of accountability provisions in a third- party environment. We have previously reported that these practices are often associated with high-performing organizations and organizations that effectively used performance information to manage. There are a number of factors to consider when designing accountability mechanisms that help to ensure the mechanisms are of sufficient value and motivate performance improvement. Ensuring sufficient value requires that both the grantor and grantee are able to determine the value of the rewards and penalties and the cost of improved performance—be they financial or nonfinancial—and provide a meaningful return to both the grantor and the grantee and rewards or penalties should be consistently applied to maintain the value of the mechanisms to both the grantor and grantee. According to the literature we reviewed, both the grantor and grantee should understand what a particular level of performance is worth to them and what it will cost them to achieve that level of performance. When the value of performance is not properly identified, funds could be wasted and grantees may not respond to the mechanism. For example, we found one case where the contracting agency offered and ultimately paid a $250,000 bonus to a contractor for completing a pipeline 2-1/2 months earlier than scheduled. However, because the contracting agency did not actually need the pipeline to be completed for several years after the original contractual deadline, the contractor paid $250,000 for a level of performance it did not need. Although the recipient responded to the incentive, the contracting agency did not properly calculate the value of the performance improvement to the agency, resulting in wasted funds. For a grantor, considering how accountability provisions support its strategic priorities can assist in determining the value of performance. The size of the associated rewards and penalties should be commensurate with the priority. For example, successful pay-for-performance programs reserve large rewards for achieving an organization’s most important priorities, or those that lead to large benefits, and provide smaller incentives for achieving goals that reap smaller benefits or are of lesser importance. For example, in the health care field, for certain conditions such as heart attack or stroke, delays in administering appropriate therapy greatly increase the risk of mortality and disability. Therefore, the incentives to treat these conditions quickly and appropriately should be larger than the incentives for other practices that should be encouraged yet produce fewer direct effects on mortality and illness, such as avoiding the use of ineffective antibiotics to treat the common cold. Based on our literature review, it appears that insufficiently valued incentives are one of the main reasons that accountability provisions fail. When an incentive is of sufficient value, the expected return outweighs the expected risk, and recipients are motivated to pursue the performance improvement. From 1975 through 1997 the CSE program included an incentive program that focused on cost-effectiveness. States were guaranteed an “incentive payment” from 6 to 10 percent of their total collections. In practice, the 4 percentage point difference between the minimum and maximum payment was reportedly not large enough to motivate states to increase collections enough to earn the 10 percent bonus. The new incentive system, established by the Child Support Performance and Incentive Act of 1998 only provides incentive payments to states that meet one or more of the act’s five outcome-based performance goals and associated targets, and penalizes states that fall below threshold levels in certain areas. A review of the new incentive system in a sample of nine states found that the median score on each of the five performance measures increased from fiscal years 2000 to 2002, the time period that the incentive system was implemented. Motivating grantees to work toward federal outcomes is particularly challenging in grants where the federal investment is relatively small. Officials at Arizona’s Department of Adult Education, Career and Technical Education Division, told us that state funds in joint technological education districts outweighed federal funds for career and technical education (CTE) programs by more than four to one, and some districts did not want to accept federal CTE funds because, in their view, complying with the federal performance requirements was not worth the amount of funds they would receive. In order to ensure that the financial value of the Perkins III grants was large enough to motivate districts to meet the Perkins III reporting and performance requirements, the Arizona Career and Technical Division requires districts be in Perkins III compliance in order to receive CTE-related state funds, thereby creating a large incentive for local school districts to comply with the Perkins III requirements. Indeed, one district we spoke with lost Perkins III funding, but it was not until the state linked Perkins III compliance to state funding, and the district lost the rest of its CTE funding from the state, that the district started to make significant improvement toward meeting Perkins III requirements. In addition, the grantor and grantee should understand the trade-off between the financial risk—the possibility performance will not improve sufficiently despite the resource investment—and the potential return— what will be gained if performance goals are met or exceeded—in order to determine whether to pursue any particular performance improvement. Accountability provisions that contain financial incentives and sanctions can shift risk between the grantor and grantee. That is, the more the grant award depends on performance, the greater the financial risk to the grantees: if they invest but do not perform sufficiently, they do not get paid. Conversely, in grants with limited or no performance accountability provisions, the grantor bears the bulk of the financial risk, since the grantee would receive the grant funds regardless of the results achieved. The ability of a performance accountability mechanism to influence performance also depends on the effective distribution of organizational rewards and penalties to individuals within the organization who are directly responsible for the desired performance. For example, Glendale Union School District officials provide significant financial incentives to every school employee with whom a student has contact, including teachers, administrative staff, and other support staff—including the maintenance staff and bus drivers. The district’s philosophy is that all employees influence the school’s atmosphere and academic achievement and therefore contribute to any success it enjoys. Incentive funds are distributed based on a school’s performance on 13 academic, involvement, and satisfaction-related measures. According to a district official, the program, started 5 years ago, has increased camaraderie and collaboration among school employees, which the official said has contributed to academic improvement. In Pennsylvania, the state passes along a portion of the state-earned federal incentive payments to the counties, according to each county’s proportionate share of the aggregate state CSE expenditures and to reflect its relative score for each performance measure, following the performance targets defined in legislation. Pennsylvania codifies the performance expectations and incentive payment procedures through cooperative agreements with each county. The grantor must execute the mechanisms consistently and as designed to preserve the value of the mechanisms and to avoid introducing unnecessary risk. For example, if rewards are not paid as promised the grantee could learn that its additional efforts are not worth the cost—or risk—and may not make the additional effort to improve performance. Similarly, if rewards are paid indiscriminately or if penalties are not levied as expected, the grantee could learn that no additional effort or investment is required in order to benefit. In both cases, the system breaks down and the intended value of the accountability provision is lost. We have reported on an agency with the authority to levy penalties for poor performance that resisted doing so. For example, the Federal Transit Administration (FTA) has several enforcement tools to deal with grantees’ noncompliance, including warning letters, suspension of funds, and grant termination. However, traditionally, FTA had been reluctant to use these tools to enforce compliance, opting instead to work with grantees in an effort to continually promote transit development. Reviews also showed that FTA’s oversight was superficial and inconsistent and that FTA seldom used its enforcement authority to compel grantees to correct weaknesses, even those that were long-standing. Consequently, federal dollars had been placed at risk. However, in response to our 1992 report, FTA established a new enforcement policy, developed detailed guidance on carrying out enforcement actions, and has since demonstrated a greater willingness to use these actions against grantees that do not comply with federal transit requirements. The Department of Defense (DOD), on the other hand, has paid billions in incentive and award fees for only “acceptable, average, expected, good, or satisfactory” performance. Despite paying billions in fees, DOD has little evidence to support its belief that these fees improve contractor performance and acquisition outcomes. The department has not compiled data, conducted analyses, or developed performance measures to evaluate the effectiveness of award and incentive fees. Using accountability mechanisms in this manner undermines their effectiveness as a motivational tool and marginalizes their use in holding grantees and contractors accountable for outcome-based results. Organizations need to allow for and use the flexibility to revise, update, or improve performance accountability mechanisms in order to respond to changing needs. In the literature we reviewed, we found a number of reasons for why accountability provisions may need to be revised. For example, unintended consequences associated with performance measures may be discovered only after full implementation. Organizational priorities may change. Technology may be introduced that substantially alters performance expectations. In addition, expectations that were previously considered stretch goals can become the norm over time—for example, as productivity gains are realized rewarding such performance may no longer make sense. Finally, efforts to reevaluate and revise should consider whether established accountability provisions are still effective at motivating performance improvements. For example, the DMA/MBHP contract demonstrates a situation in which the entire accountability system experienced a revision to adjust to contract progression. Incentives in this contract were initially designed to motivate operational performance, such as processing time for billing, and performance targets were revised upward each year as performance improved. This upward revision helped ensure that performance continued to improve. Once MBHP’s performance reached the highest levels of industry performance in these areas, further improvements were no longer a priority. As a result, DMA and MBHP used the annual review to revise the incentive system from motivating operational improvement to completing projects designed to improve performance in areas that would add value to the services MBHP provides, such as a project on providing behavioral health assistance to the homeless. There are a number of ways to accommodate the need for periodic revision. For example, congressional amendments to or reauthorizations of grant programs allow policymakers the opportunity to revisit and modify existing provisions and to add flexibility for agencies that can lead to improved effectiveness. Agencies can include renegotiation and revision policies in regulations, guidance, and the terms and conditions of a grant award. Providing for periodic revision may be particularly important where performance measures are specified in legislation, because agency flexibility to respond to changing needs is significantly reduced. For example, as we have discussed, the Child Support Performance and Incentive Act of 1998 specifies the five performance measures, the performance targets, and the percentage of incentive payments that states can earn for performance. Initially, states made changes and saw improvement in these areas. Recently, both state and federal program officials have expressed concern about the long-term sustainability of such aggressive targets. For example, program officials said that even states that have in the past met the 90 percent performance target for the paternity measure are concerned because more recent annual rates have dropped back down closer to 80 percent. According to officials, states initially conducted an extensive caseload cleanup to improve performance on the five incentive measures when the incentive program was enacted in 1998, and much of the backlog of cases that could be addressed relatively easily has been. However, since the measures and performance targets are legislatively defined and the CSE program is permanently authorized, the agency does not currently have the flexibility to revise the measures or performance targets. In contrast, state agencies, in negotiation with the Department of Education, can periodically revise their Perkins III CTE performance measures and targets during annual negotiations of their state plans. At program introduction, program targets are set through the negotiation process between states and OVAE. From this process, performance targets negotiated initially reflect a realistic level of what states can actually produce. Next, through annual application updates, the legislation allows renegotiation of performance levels with states. Among other factors, OVAE officials attributed the program’s success to this ongoing ability to renegotiate and revise the program’s measures. Although the Perkins III legislation is similar to the Child Support Performance and Incentive Act of 1998, in that Perkins defines the four core indicators tied to the performance measures used in the incentive program, it provides flexibility that the Child Support Performance and Incentive Act of 1998 lacks. The flexibility to revise or update the performance measures is built into the Perkins III legislation. Accountability systems by their very nature assume that performance can be improved. However, performance improvements depend on adequate time for and ability of participants to learn from prior actions and use what they have learned to improve performance from one period to the next. Depending upon the complexity of the task, this process can take many cycles. Therefore, accountability systems should not be abandoned prematurely; rather, they should be assessed, revised, and improved. Selecting and using appropriate types of performance measures is important to the effective use of accountability mechanisms. We have previously reported on general attributes of good performance measures, noting that measures should be linked to agency goals and missions; be clearly stated; include measurable targets; and be objective, reliable, and balanced. Specifically, we found four of these characteristics that highlight key features of performance measures that can help ensure the successful linking of performance measures and rewards and penalties: the performance being measured should be within the recipient’s sphere of influence, the performance measures should be suitable to the mechanism evaluation cycle, and the performance measures and performance data should be tested. Performance measures tied to rewards and penalties should represent performance that can be sufficiently influenced by the grant recipient’s actions. Absent this linkage, the grantee may have little motivation to change behavior to improve performance, and the granting agency risks wasting funds by either rewarding efforts that cannot reasonably be tied to grantee behavior or penalizing a grantee for outcomes that even its best efforts may not have prevented. For example, the Temporary Assistance to Needy Families (TANF) bonus payments rewarded states for reducing out-of-wedlock births. Several studies report, however, that there does not appear to be a link between the existence of these programs, or increases in efforts to deliver program services, and the TANF bonus payment. Many state officials perceive the outcome measure as inappropriate, relatively difficult to influence, or both, and discourage attempts to do so. According to one study, several states reported that they did not compete or did not continue to compete for the bonus funds because, among other reasons, their actions would not sufficiently affect the out-of-wedlock birth rate; therefore they directed their efforts to activities that were more directly under their influence. In another example, the Perkins III CTE program has a financial incentive system that assesses state performance through performance measures that support its four core indicators—one of which encourages participation in and completion of programs leading to nontraditional employment. State and local officials in Arizona said their ability to affect performance for this indicator is very limited. They told us that although they have tried to address the barriers to nontraditional employment, they found that cultural and demographic influences have limited their ability to improve performance every year. Because performance has not improved as a result of their efforts, they focus most of their energy on efforts to improve performance in the other three core indicator areas, which reflect performance that is more directly under their control. Measures should assess performance that can be observed, achieved, and reported frequently enough to inform the use of awards and penalties on a timely basis. For example, an annual reward or penalty should be tied to a measure that is also assessed annually. ORC uses performance measures that can be assessed in a relatively short period of time and that support program outcomes. ORC holds back 10 percent of ProFac’s management fee each month. Each quarter, ProFac has an opportunity to earn the holdback on the basis of its performance during the prior quarter on 30 KPIs. For example, 1 of the quarterly indicators tied to its overall customer service objective is the “overall customer satisfaction rate with project delivery.” The quarterly assessment is based on performance information gathered through customer satisfaction surveys of local managers and facility management contacts for all alteration projects, capital repairs, or both completed in the previous quarter. Both ORC and ProFac officials credit the frequency of evaluation for motivating ProFac to maintain high performance throughout the year. OVAE uses the timing of its grant funding distribution cycle to its advantage in order to motivate states to meet federal performance accountability requirements. OVAE disburses grant funds in two pieces: a small portion in July and the remainder in October. States that did not provide complete, timely performance data, or missed their performance targets in the prior year, may have “conditions” put on the July portion of the funding; if conditions are not met during that quarter, the October funding is withheld. Performance measures that trigger accountability mechanisms should be well functioning and time tested before they are linked to rewards and penalties to minimize the potential for unintended consequences. Although our literature review did not specify how long this could take, one study in our review noted that many leading companies use and test their measurement systems for years before linking them to accountability provisions. Performance data should also be tested to make sure they are credible, reliable, and valid. Absent these attributes, organizations lack the basis for sound decisions about rewards and penalties. Data quality is so critical to performance accountability and oversight of grants that several organizations use it as the principal performance measure for performance-based funding. Pinellas County, Florida, alters the case funding rates paid to its ambulatory service contractor based on data quality. This “altered funding rate” provision links case reimbursement rates directly to data quality. For example, data that are incomplete, illegible, inaccurate, altered, or lacking evidence of medical necessity— and limit the county’s ability to claim for payment or use its data processing procedures—result in reduced reimbursements to the ambulatory service contractor for the affected cases. Pinellas County reports that as a result, ongoing data quality issues are minimal. In another example, the Child Support Performance and Incentive Act of 1998 prohibits the payment of financial incentives to states for performance in program areas where state data have failed an annual data reliability test. This requirement ensures that incentive payments are based on reliable and complete performance information. Grantor and grantee capacity—specifically, the knowledge about performance accountability mechanisms and the ability to effectively implement them—is critical to the effectiveness of performance accountability systems. For example, when the Air Force implemented its performance-based contracting program, it found that employee training focusing on how the performance-based aspects of the contracts should work were most critical. Specifically, practices such as providing a step- by-step approach to the process that outlined who should be involved at each step, how much of their time and effort would be required at each step, and what their specific roles and responsibilities would be were critical to employees understanding what was needed to create mechanisms to improve performance. In addition, federal CSE staff in Region III provide a “Child Support Enforcement Incentives 101” presentation to state and county CSE staff throughout the region to explain how the performance measures and incentive payments work. This training presentation is tailored to the experience of CSE staff and the demographics of the county, state, or both (large urban, rural, large interstate caseloads, etc.) but strives to provide a clear and consistent message: the everyday activities of CSE staff directly affect the amount of child support available to children and their families, and drive the amount of incentive payments the county specifically, and the state in general, earns. The presentation includes interactive exercises to show how each employee’s casework feeds into outcome-based program results. Organizations go through a number of stages designing, testing, and revising measurement systems before linking them to accountability mechanisms. This longer, phased implementation allows organizations to ensure the system is effectively designed before tying it to rewards and penalties. During these stages, organizations can conduct pilot tests, create financial models, and conduct behavioral modeling to understand and modify a system prior to full implementation. For example, according to one expert, the Tennessee Valley Authority completes a “readiness test,” an assessment of measurement effectiveness and suitability, before allowing pay for performance or similar financial incentive systems to be pinned to that measure. This helps avoid unintended consequences associated with poorly designed measures. Phased implementation also allows organizations to adjust to new demands on their time and resources; set up or modify data collection systems; and ensure the credibility, validity, and reliability of the data before they are used to measure performance. For example, the CSE incentive program was implemented in three stages to allow states to learn about the new incentives and performance measures. The five performance areas attached to incentives were developed and legislatively defined in 1998. In 1999, the new data measures were used by the states and audited for data reliability for the first time. In year one, one-third of the total incentive funds were allocated based on the new formula and the remaining funds were allocated based on the old system. In year two, two-thirds of the funding was allocated using the new system, and the remaining funds were allocated based on the old system. In year three, all incentive funding was allocated according to the new formula. In addition to these strategies described above, we saw extensive use of partnerships and collaborations and regular and effective oversight and feedback. We have previously reported that these practices are often associated with high-performing organizations and organizations that effectively used performance information to manage. Designing and implementing accountability provisions in a collaborative environment can help develop and encourage buy-in and support and lead to improvements. For example, Arizona state and local CTE officials said the state’s focus has shifted from a compliance-focused “audit,” ensuring performance data were properly collected and reported, to a true partnership in which state and local officials work together to identify and replicate successes, find solutions to challenges, and thereby improve performance. State CTE staff spend several days each year meeting with local CTE officials and providing regular assistance through on-site technical assistance teams, phone calls, and e-mails. Oversight and feedback are critical to creating and sustaining effective performance accountability provisions. We have previously reported on oversight practices, noting specifically the value of feedback provided through performance monitoring plans and tools such as site visits, document reviews, and evaluations. For example, OVAE employs a number of tools to provide feedback and assistance to states implementing the Perkins III vocational education program. Among these tools are establishing state guidance that outlines how to meet the Perkins III developing a peer-to-peer mentorship program among states and with OVAE to share experiences and good practices, conducting monthly conference calls with state directors and data specialists to discuss challenges and solutions to data collection and quality, offering data quality “institutes” and conferences to share performance measurement and data quality and collection practices, and providing technical assistance to states. An OVAE official said providing these types of oversight and feedback activities generated ideas and discussion to help states improve their performance; the state CTE officials with whom we spoke agreed. The experiences with and strategies related to federal grant accountability provisions described in this report suggest a number of opportunities for Congress and the executive branch to improve the design and implementation of performance accountability mechanisms. First, a results-focused design can help encourage performance accountability in general and specifically provide for—or at least not prohibit—the use of accountability mechanisms to encourage desired behavior. In addition, the use of national program evaluation studies and research and demonstration grants can provide valuable information to assist in agency and congressional oversight of and knowledge about accountability mechanisms. Because credible performance information and performance measures form the basis for well-functioning accountability provisions, it remains critical for Congress and the executive branch to continue to encourage their development and use. Finally, OMB and agencies can commit to sharing good practices and lessons learned from experiences with performance accountability provisions in federal grants—an efficient and effective way to increase grantor and grantee knowledge, understanding, and use of these provisions. Considering grant design features and their implications for grantee flexibility and accountability can help policymakers provide for appropriate accountability provisions, whatever type of grant design is selected. We have previously reported that policy options reflected in grant design collectively establish (1) the degree of flexibility afforded to states or localities; (2) the relevance of performance objectives for grantee accountability; (3) whether accountability for performance rests at the federal, state, or local level; and (4) prospects for measuring performance through grantee reporting and oversight. Under a results-oriented approach, federal policymakers would specify national goals and objectives in statute, enact a process for establishing them, or adopt some combination of the two. As a result, when designing or reauthorizing grants, it is important to consider questions like the following: Is there a need for national performance objectives in this policy area? If so, grantees may be required to use uniform performance measures—as in the CSE program—to gauge progress. This allows for comparisons across grantees, and the supporting performance data collected from grantees have the advantage of being program specific. However, uniform activities, objectives, and measures may not exist or may not be desirable, especially under flexible grant program designs. In these cases, Congress may instead decide to allow grantees to establish their own program objectives. For example, the Child Care and Development Block Grant requires states to certify that they have requirements in effect to protect the health and safety of children whose child care is subsidized by the block grant. These requirements must cover the areas of preventing and controlling for infectious diseases, physical premise safety, and health and safety training. However, the specificity and stringency of these requirements and the manner in which they are enforced is left to the states. The Perkins III legislation outlines several performance areas and requires states to determine the measures they will use to measures progress in these statutorily defined areas. Performance targets for these measures are negotiated with OVAE. In these cases, the federal role in monitoring the grants is generally limited to collecting information on state and local program efforts and accomplishments as well as evaluating and disseminating information on best practices. Another option is to grant temporary exemptions (waivers) from certain federal program requirements to grantees that demonstrate that the flexibility granted can lead to performance improvements. For example, Oregon Option is an intergovernmental partnership that seeks to improve performance on benchmarks for a broad variety of initiatives, including childhood immunization, employment for the disabled, wild salmon recovery, juvenile justice, welfare reform, and child nutrition, by waiving administrative rules or seeking statutory change. In all cases, what accountability provisions are needed to support attainment of national performance objectives? These might include constraints on activities and funds distribution or operational objectives, standards, and criteria for performance. These can be set for the program as a whole or delegated to the level of government responsible for program management. Additional considerations are as follows: What data are needed for grantee accountability, and is it feasible to collect these data from providers? Is it possible to collect data at the project level? Will the contribution of federal funds be distinguishable from state, local, and private funds? If the answer to several of these questions is no, is additional information needed for program oversight? If so, how will such information be gathered and reported? The answers to questions such as these provide the basis for setting grantee reporting requirements. Congress has a number of opportunities to conduct oversight, such as when it establishes or reauthorizes a new program, during the annual appropriations process, and during hearings focused on program and agency operations. Providing for—or at a minimum, not prohibiting— performance accountability mechanisms can provide timely, targeted performance information and help policymakers ensure that federal grants focus on their goals, providing another basis for congressional oversight. National program evaluations have the potential to answer questions about both overall program performance as well as the effectiveness of performance accountability mechanisms, in terms of their implementation, outcomes, impacts, and cost-effectiveness. However, national programwide evaluations are expensive in terms of dollars and time and frequently require capacities and resources beyond those provided for program management. Also, while evaluations of multiple sites provide valuable information, programwide evaluation data are typically periodic and often cover too few sites to support national estimates of performance. In these cases, research and demonstration projects often can provide better information on the effectiveness of various service delivery methods and approaches. Knowledge to support effective practice is well established in some subject areas and can be incorporated into program provisions (such as service standards) or in companion technical assistance or knowledge dissemination programs. As we discussed earlier, performance accountability provisions rely on a supply of credible, reliable, and valid data and high-quality performance measures. We found organizations that recognizing the importance of data quality, tied incentives to increasing the supply of this type of information. Unfortunately, as our work on PART and GPRA implementation shows, the credibility of performance data has been a long-standing weakness. OMB, through its development and use of PART, has provided agencies with a powerful incentive for improving data quality and availability. However, improving the supply of performance information is in and of itself insufficient to sustain performance management and achieve real improvements in management and program results. Rather, it needs to be accompanied by a demand for and use of that information by decision makers and managers alike. Key stakeholder outreach and involvement is critical to building demand and, therefore, success. Lack of consensus by a community of interested parties on goals and measures and the way that they are presented can detract from the credibility of performance information and, subsequently, its use. While congressional buy-in is critical to sustain any major management initiative, it is especially important for performance accountability given Congress’s constitutional role in setting national priorities and allocating the resources to achieve them. Recognizing this, policymakers could use incentives to encourage program partners to agree on performance measures and targets against which performance will be judged. We and others have frequently reported on the benefits of sharing promising practices and lessons learned to promote performance accountability in general in federal programs and program partners. We believe sharing good practices related to the effective design and implementation of performance accountability mechanisms carries similar benefits. As noted earlier, some state and local agencies’ programs have used this type of information sharing among themselves and their grantees and contractors as a means of performance improvement. OMB, as the focal point for overall management in the executive branch, plays a key role in promoting performance improvement in federal programs and has developed or contributed to a number of tools to share information and encourage improvements to federal grants and program performance. For example, www.grants.gov includes information on grant opportunities, resources to assist in writing grant proposals, and a newsletter highlighting recent grant success stories, and www.results.gov has information on best practices related to the President’s Management Agenda initiatives—one of which is Budget and Performance Integration (BPI). Successful implementation of BPI depends significantly on federal agencies’ ability to ensure federal program partners work toward program goals and are held accountable for results. Expectmore.gov provides information on PART assessments and improvement plans; these assessments consider, among other things, whether the agency regularly collects timely and credible performance information to manage its programs, and whether the performance measurements are used to increase accountability. OMB’s own Web site also contains information on and examples of what it considers to be high-quality PART performance measures; discussion papers on measurement topics, such as how to effectively measure what you are trying to prevent; and strategies to address some of the challenges of measuring research and development programs. OMB hosts a number of standing work groups and committees— comprising agency and OMB staff—to address important grant-related issues, all of which could accommodate a more specific focus on grants accountability provisions. For example, OMB’s Chief Financial Officer’s Council has a standing grants policy committee that focuses on grant application and reporting streamlining. Agency BPI leads meet monthly and recently developed a subgroup to share lessons learned related to efficiency measures that balance effectiveness, quality, and cost. They also discuss strategies to address the challenges of efficiency measures in the grant context and to develop additional guidance for agencies in this area. In addition, OMB hosted a Block and Formula Grant workshop in October 2005 for federal officials aimed at identifying and sharing best practices in grants management and performance measurement. OMB staff agreed that the workshop was a valuable, efficient, and effective way to share information and lessons learned and that collectively the participants increased their knowledge and understanding of ways to enhance grant performance. They also noted that the real difficulty comes in “what to do next,” in other words, implementing the strategies gleaned from these sessions. OMB staff told us that focusing specifically on performance accountability provisions in grants is necessary and useful, but that to date, they have focused their governmentwide efforts primarily on encouraging and enhancing agency capacity to develop high-quality, results-based program performance measures since improving the quality of measures and data necessarily precedes tying them to accountability provisions. The Block and Formula Grant workshop addressed issues of measurement and accountability, and several block grant programs have been working to strengthen grantee accountability. As the challenges of the 21st century grow, it will become increasingly important for Congress, OMB, and executive agencies to consider how the federal government can maximize performance and results. This will be particularly important for federal grant program managers, given the significant amount of federal resources invested in these tools. Because many national objectives can only be achieved through state, local, and nongovernmental organizations, enhancing performance accountability below the federal level is equally important. In this report, we identify a variety of accountability mechanisms as well as key strategies to enhance their use. Collectively, these can help enhance and sustain performance accountability in grants at all levels of government. As the cases we described illustrate, rewards and penalties are fundamental tools to help drive and motivate desired behaviors, but performance accountability mechanisms are not one size fits all; there is no universal transferable mechanism applicable to all programs. The specific mechanisms used by agencies and programs and highlighted throughout this report may not be universally adopted by other federal agencies and programs seeking to improve their own programs. Nevertheless, many can be tailored to specific grant programs, and the key strategies can be adapted to address the specific accountability challenges each agency faces. Like all successful change initiatives, the progress currently under way to move from traditional fiscal accountability in grants to greater accountability for performance will take time; accountability provisions— and the performance measures associated with them—can take many years to mature. Although some federal programs are well on their way to collecting and reporting on reliable, credible, and valid data that support high-quality outcome goals agreed to by all program partners, many others are still struggling with how to define appropriate outcome measures. It will be critical to proceed thoughtfully and implement performance accountability in phases, building in enough opportunities to learn from mistakes and revise measures and mechanisms to reap the benefits of performance management while minimizing perverse incentives and unintended consequences. As with all challenges, starting with small steps is often the best way forward. Accountability provisions can be used to bring program partners together to identify common ground. For example, programs that struggle with defining appropriate outcome goals, measures, and targets may wish to tie incentives to reaching agreement on them. Those that struggle with poor data quality and data definitions could reward grantees for progress in this area. Performance accountability—especially in the early stages— must be constructive, not punitive. Even if penalties are employed to promote performance accountability, there should be a constructive, collaborative approach to performance improvement that precedes them. Tying performance to lower risk, nonfinancial mechanisms may at first be more acceptable until performance measures have been time tested and revised as needed and grantees have had time to collect the necessary data to support the measures. Above all, a collaborative process that includes Congress, the executive branch, and grantees will be critical to developing successful performance accountability systems. Accountability provisions assume that performance can be improved—but this requires information sharing and feedback. OMB has a central role in overseeing the performance and accountability in the federal government, and has used its role to promote general results-oriented performance measurement and management practices in federal grants through Web sites, guidance, work groups, and workshops. Each of these tools and strategies could be expanded on to specifically promote and encourage performance accountability in federal grants, both among related federal grant programs—programs that have a common purpose—and federal grant types—such as categorical grants, block grants, and funding streams. Sharing good practices and lessons learned and providing feedback on performance are valuable practices that can leverage resources to enhance knowledge and further performance accountability. Leading practices can be shared within and among agencies, grant programs, grantees, and even grant types. OMB recognized the value in sharing information on performance accountability mechanisms, but has not yet focused on this issue. We are therefore recommending that the Director of OMB encourage and assist federal agencies in working with the Congress to expand the effective use of performance accountability mechanisms, focusing on the practices in this report, when federal grant programs are being created or reauthorized. We further recommend that OMB offer opportunities for knowledge transfer among federal agencies and encourage agencies to share leading practices and lessons learned in implementing grant accountability mechanisms. Possible vehicles for the collection and dissemination of this information include good practices guides and workshops and Web sites such as results.gov, grants.gov, and expectmore.gov. On August 22, 2006, we provided a draft of this report to the Director of OMB and the Secretaries of Education and Health and Human Services. We also provided relevant sections of a draft of this report to the grantees and contractors highlighted in this report. We received technical comments from all three agencies, which were incorporated as appropriate. In addition, OMB agreed with our recommendation but suggested we broaden it to address the role of federal agencies and Congress in the grant design and reauthorization process. We agree, and have amended our recommendation accordingly. We are sending copies of this report to the Director of the Office of Management and Budget, the Secretaries of Education and Health and Human Services, and other interested parties. We will also make copies available to others upon request. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me on (202) 512-6543 or steinhardtb@gao.gov if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix II. The objectives of this report were to identify (1) the challenges to performance accountability in grants; (2) the kinds of mechanisms that are being used to improve grant performance and how; and (3) given the findings of questions 1 and 2, what strategies the federal government can use to encourage the use of these mechanisms, as appropriate. To meet the first and second objectives, we interviewed experts in grants and performance management, including individuals from the following organizations: the School of Public Policy at the University of Maryland, the University of Central Florida, the John F. Kennedy School of Government at Harvard University, the John C. Stennis Institute of Government at Mississippi State University, the Public and International Affairs Department at George Mason University, the Political Science Department at the University of New Hampshire, Measurement International, and the American Productivity and Quality Center. Based on our literature review, we developed a coding scheme for identifying (1) types of performance accountability mechanisms and (2) strategies used to successfully design and implement these mechanisms. We used these codes in a content analysis we conducted on a subset of the documents we reviewed. We chose the documents for content analysis based on the following criteria: discussed accountability systems, mechanisms, or both, discussed general practices that facilitated to the effective use of accountability mechanisms, or provided case examples; published in 1993 or later; found in major electronic databases; and published in the United States. The content analysis was conducted by two analysts, with the second analyst conducting a dependent review. Discrepancies in coding were discussed and agreement reached between the two analysts. Our analysis produced an inventory of performance accountability mechanism types and five strategies used to facilitate the effective design and implementation of performance accountability mechanisms. See the bibliography for documents included in our review. To illustrate the mechanisms and strategies identified through our content analysis, we used relevant case examples found in the literature. To further illustrate the mechanisms and design and implementation strategies, we also selected four additional case illustrations—two federal grant programs and two nonfederal contract cases. These four cases were selected based on our literature review, interviews with experts, and reviews of prior GAO work because they are good examples of where (1) a performance mechanism was present and (2) there is reason to believe that performance improved at least in part because of the mechanism. To screen and develop the grant case illustrations, we interviewed regional and headquarters federal agency officials and officials at county/local offices. We also reviewed grant legislation, program guidance, and prior studies. To develop contract case illustrations, we interviewed officials both from the contracting agencies and the contractors and reviewed the contract. To address our third objective, we synthesized prior GAO work, and we interviewed officials at the Office of Management and Budget. We conducted our work from December 2005 through August 2006 in accordance with generally accepted government auditing standards. Jackie Nowicki (Assistant Director) and Chelsa Gurkin (Senior Analyst-in- Charge) managed this assignment. David Bobruff, Katie Hamer, and Anne Marie Morillon made significant contributions to all aspects of the work. Kate France significantly contributed to the initial research and design of the assignment. In addition, Tom Beall and Jay Smale provided methodological assistance, Amy Rosewarne provided key assistance with message development, and Donna Miller developed the report’s graphics. American Productivity & Quality Center. Achieving Organizational Excellence Through the Performance Measurement System. Houston: 1999. American Productivity & Quality Center. Measure What Matters: Aligning Performance Measures with Business Strategy. Houston: 1999. Ashworth, Karl, and others. “When Welfare-to-Work Programs Seem to Work Well: Explaining Why Riverside and Portland Shine So Brightly.” Industrial & Labor Relations Review, vol. 59, iss. 1 (2005). Ausink, John, and others. Implementing Performance-Based Services Acquisition (PBSA): Perspectives from an Air Logistics Center and a Product Center. A Documented Briefing prepared by the RAND Corporation for the U.S. Air Force. 2002. Ausink, John, Frank Camm, and Charles Cannon. Performance-Based Contracting in the Air Force: A Report on Experiences in the Field. A Documented Briefing prepared by the RAND Corporation for the U.S. Air Force. 2001. Baker, George. “Distortion and Risk in Optimal Incentive Contracts.” The Journal of Human Resources, vol. 37, no. 4 (2002). Banta, Trudy W., and others. “Performance Finding Comes of Age in Tennessee.” The Journal of Higher Education, vol. 67, no. 1 (1996). Conlon, Timothy. “Grants Management in the 21stCentury: Three Innovative Policy Responses.” IBM Center for the Business of Government: Financial Management Series. Washington, D.C.: October 2005. Courty, Pascal, and Gerald Marschke. “Measuring Government Performance: Lessons from a Federal Job-Training Program.” The American Economic Review, vol. 82, no. 2 (1997). Dodds, Dan R. “Performance Incentives Can Spark Greater Productivity.” School Administrator, vol. 55, iss. 3 (1998). Domestic Working Group: Grant Accountability Project. Guide to Opportunities for Improving Grant Accountability. Washington, D.C.: October 2005. Dye, Jane Lawler, and Harriet B. Presser. “The State Bonus to Reward a Decrease in ‘Illegitimacy’: Flawed Methods and Questionable Effects.” Family Planning Perspectives, vol. 31, no. 3 (1999). Eberts, Randall, Kevin Hollenbeck, and Joe Stone. “Teacher Performance Incentives and Student Outcomes.” The Journal of Human Resources, vol. 37, no. 4 (2002). Garber, Alan M. “Evidence-Based Guidelines as a Foundation for Performance Incentives.” Health Affairs, vol. 24, no. 1 (2005). Gordon, Stephen B. “Performance Incentive Contracting: Using the Purchasing Process to Find Money Rather Than Spend It.” Government Finance Review, August (1998). Hatry, Harry P., and others. How Federal Programs Use Outcome Information: Opportunities for Federal Managers. Washington, D.C.: IBM Center for the Business of Government, May 2003. Hildebrandt, Gregory G. “The Use of Performance Incentives in DOD Contracting.” Acquisition Review Quarterly, Spring (1998). Johnston, Jocelyn M., and Barbara S. Romzek. “State Social Services Contracting: Exploring the Determinants of Effective Contract Accountability.” Public Administration Review, vol. 65, iss. 4 (2005). Kathuria, Sandeep. “An Overview of Share-in Savings Contracting.” Contract Management, vol. 45, no. 11 (2005). King, Donald C., and Paul D. Tolchinsky. “Do Goals Mediate the Effects of Incentives on Performance?” Academy of Management Review, vol. 5, no. 3 (1980). Lane, Nancy E. “Performance Incentives in The Massachusetts Behavioral Health Program.” Administration and Policy in Mental Health, vol. 32, no. 4 (2005). Marcus, Alfred A., Barry M. Mitnick, and Kiran Verma. “Making Incentive Systems Work: Incentive Regulation in the Nuclear Power Industry.” Journal of Public Administration Research and Theory: J-PART, vol. 9, no. 3 (1999). Martin, Lawrence L. “Making Performance-Based Contracting Perform: What the Federal Government Can Learn from State and Local Governments.” IBM Endowment for the Business of Government: New Ways to Manage Series. Washington, D.C.: 2002. Martin, Lawrence L. Performance-Based Contracting (PBC) for Human Services: A Review of the Literature. Orlando: Center for Community Partnerships, University of Central Florida, 2003. Metzenbaum, Shelley H. “Performance Accountability: The Five Building Blocks and Six Essential Practices.” IBM Center for the Business of Government: Managing for Performance and Results Series. Washington, D.C.: 2006. Rand Corporation. Organizational Improvement and Accountability: Lessons for Education from Other Sectors. 1st ed. Santa Monica, Calif.: 2004. Sammer, Joanne. “Making Incentive$ Pay.” Industry Week: Leadership in Manufacturing. (Cleveland: Penton Media Inc., August 2002). http://www.industryweek.com/ReadArticle.aspx?ArticleID=1121 (downloaded Mar. 9, 2006). Tsimbinos, John M. “Are You Willing to Pay for Success?” Bottomline, vol. 7, no. 6 (1990). U.S. Department of Defense, Deputy Under Secretary of Defense for Acquisition Reform. Incentive Strategies for Defense Acquisitions. Washington, D.C.: 2001. U.S. Department of Energy, Office of Inspector General. Inspection of Selected Aspects of the Office of River Protection Performance-Based Incentive Program. Washington, D.C.: 2001. | Maximizing the extent to which grants achieve their long-term performance goals is critical to successfully addressing the challenges of the 21st century. While performance accountability mechanisms are fairly new to federal grants, they have been used in contracts for some time and lessons learned have begun to inform federal grant design. Given this, GAO was asked to examine (1) challenges to performance accountability in federal grants, (2) mechanisms being used to improve grant performance, and (3) strategies the federal government can use to encourage the use of these mechanisms. GAO performed a content analysis of relevant literature and interviewed experts. To illustrate the mechanisms and strategies found in the literature, GAO used examples from the literature and selected additional case illustrations--two federal grant programs (vocational education and child support enforcement) and two nonfederal contracts--for further study. Accountability provisions in federal grants can vary widely. They can be financial (e.g., bonus payments) or nonfinancial (e.g., altered oversight or flexibility), and can be employed by various actors at different stages in the grant life cycle. Mechanisms need to be tailored to specific situations since there is no "one-size-fits-all" solution. Collectively, five key strategies appear to facilitate the effective design and implementation of performance accountability mechanisms. They are as follows: 1. ensure mechanisms are of sufficient value to motivate desired behaviors, 2. periodically renegotiate and revise mechanisms and measures, 3. ensure appropriate measurement selection, 4. ensure grantor and grantee technical capacity, and 5. allow for phased implementation. In addition to these strategies, collaboration, oversight, and feedback also appear critical to the success of performance accountability mechanisms. Opportunities exist to improve the design and implementation of federal grants. A results-focused design can enable and facilitate the use of accountability provisions. National program evaluation studies and demonstration grants can provide valuable information to support oversight of and knowledge about accountability mechanisms. Finally, the Office of Management and Budget (OMB), agencies, and grantees can benefit from sharing good practices and lessons learned regarding performance accountability provisions. OMB recognized the value in sharing information on performance accountability mechanisms, but has not yet focused on this issue. |
With this framework in mind, I will now return to the six categories of the foreign affairs budget that I established earlier. I will note funding levels and trends for activities in each category and then discuss the particular set of issues and questions that could be raised with respect to relevance, priority, and efficiency. Security and peacekeeping activities represented 33 percent of the international affairs’ fiscal years 1992-97 budget—the single largest component of this account. Foreign military financing programsconsumed the largest portion of this component—about 50 percent—followed by about 37 percent for economic support provided primarily to Israel and Egypt (Economic Support Fund); about 9 percent for multilateral peacekeeping operations; and about 3 percent for programs to provide training and equipment to foreign governments to combat crime, illegal narcotics, terrorism, and nuclear proliferation (see fig. 3). Funding for the security and peacekeeping component of the international affairs budget has declined in real terms an average of about 6 percent during fiscal years 1992-97. The funding level for fiscal year 1997 of $6.3 billion is almost 30 percent lower than in fiscal year 1992 (see fig. 4), with the most significant reductions occurring in the Economic Support Fund. This fund has been cut by over 33 percent, while foreign military financing programs have shrunk by about 26 percent. Funding levels for assistance to Israel and Egypt, the largest recipients, have remained relatively constant during this period. The executive branch has proposed a further real decrease of about 1 percent in funding for this component in fiscal year 1998. Trends in funding for this category have reflected shifting U.S. priorities to some extent, but a large core of this component serves fundamental security interests that have not changed significantly in many years. Are there opportunities to reduce security-related costs? As of fiscal year 1997, support for long-standing commitments to achieve lasting peace in the Middle East through financial assistance to Israel and Egypt represents 85 percent of the security-related costs. This includes Economic Support Fund grants and foreign military financing. The Economic Support Fund was established to allow the United States to promote economic and political stability in areas where the United States has special security interests. It has been justified to the Congress on the basis of its role in (1) strengthening the security of friendly and allied countries and (2) benefiting the U.S. economy because funds are generally spent on U.S. goods, services, and training. Since 1992, the Economic Support Fund has been reduced by about one-third, with aid to countries outside of the Middle East absorbing nearly all of these cuts. Decreases in foreign military financing to specific countries outside the Middle East have resulted from the end of the Cold War and the decline in regional conflicts, primarily in Central America. Currently, the vast majority of foreign military financing is devoted to Israel and Egypt, with most of the remainder supporting partners in Central and Eastern Europe and the Newly Independent States (NIS) of the former Soviet Union, Greece, and Turkey. Further cuts in these security-related components of the budget would appear to be difficult without a major change to the U.S. policies supporting the Middle East peace process and European security. Are there opportunities to reduce peacekeeping costs? The United States currently contributes 25 percent of the costs of U.N. peacekeeping operations and also supports, on a voluntary basis, peacekeeping activities by other multinational organizations in Africa, Latin America and the Caribbean, Europe, and the Middle East. Considerable attention has been focused on the cost and effectiveness of high-profile U.N. peacekeeping operations such as those in Bosnia, Haiti, and Somalia. Less attention has been devoted to the costs and effectiveness of long-standing but less visible U.N. peace missions, such as those in India/Pakistan, Cyprus, and Angola. These eight long-standing missions cost the United States about $148 million annually, have been in existence from 6 to nearly 50 years, and so far have cost over $6 billion. They have evolved into open-ended commitments; diplomatic efforts to resolve the underlying conflicts have stalled in nearly all of the operations, and the situations have proven intractable. We recently recommended that the Secretary of State develop plans and strategies to bring these missions to closure. I want to emphasize that we do not mean these missions should be ended immediately, but rather that concrete actions to address the underlying conflicts should be developed. Success along these lines could have budgetary implications, given the cost of these operations. Funding in the 150 account by no means represents the sum total of U.S. contributions to peacekeeping activities or U.S. support for international security interests. From fiscal year 1992 to 1995, U.S. government agencies spent over $6.6 billion to support U.N. peace operations in Haiti, the former Yugoslavia, Rwanda, and Somalia; this figure includes $3.4 billion in incremental costs incurred by the Department of Defense and funded outside of the 150 account. Between fiscal year 1992 and 1997, about 30 percent of the international affairs budget was spent on bilateral assistance programs. During this period about 37 percent supported traditional development programs administered primarily by USAID; about 21 percent funded food aid programs; about 18 percent was allocated for aid to Eastern Europe and the NIS; about 15 percent went for humanitarian aid, such as disaster relief; and about 9 percent funded USAID’s administrative costs (see fig. 5). Funding for the bilateral assistance component has declined in real terms an average of 6 percent per year during fiscal years 1992-97 (see fig. 6). It peaked in fiscal year 1993, but by fiscal year 1997 had returned to about $5.2 billion—a level 17 percent lower than in fiscal year 1992. The President has requested an increase of about 5 percent in funding for this component for fiscal year 1998. One of the more significant developments in the U.S. foreign aid program is the participation of new recipients—the countries of Eastern Europe and the former Soviet Union. Aid to these countries accounts for 18 percent of all assistance since 1992 and is consuming a greater share of a decreasing aid pie—from 8 percent of bilateral assistance in 1992 to 20 percent in 1997. Aid for these countries includes grants for training and technical assistance to facilitate development of democratic institutions and market economies. Assistance to Bosnia is now the single largest program of U.S. aid in this region—about $240 million in fiscal year 1997. Also of note is the amount of aid that has gone to alleviate problems associated with localized conflicts—“hot spots” such as Somalia, Bosnia, and Haiti. Since 1993, more than $1 billion has been spent on these three conflicts, including funds for humanitarian assistance and food aid. Typically, USAID has had to meet part of these requirements by shifting funds from other ongoing bilateral assistance programs. The one-third of bilateral assistance that supports sustainable development efforts includes programs in health and population growth, economic growth and agricultural development, democracy, education and training, and the environment. As I said earlier, a large percentage of sustainable development funding is directed by the Congress or the President for specific purposes, such as child survival and population programs. In 1997, about 70 percent of sustainable development assistance was earmarked or directed in this way, up from about 60 percent in 1995. The central issues surrounding bilateral assistance are, first, whether economic development assistance either has had or can have a positive impact on development and, second, how efficiently and effectively can aid be delivered. How relevant are our foreign aid programs in the current environment? Despite USAID’s attempt to better target its assistance, fundamental questions remain about the effectiveness and relevance of U.S. development assistance for purposes other than humanitarian relief. Critics of foreign aid point to the end of Cold War imperatives, the absence of conclusive evidence that aid makes a difference to countries’ economic progress, the shift to a new development model that relies more on the private sector, and the rapid growth in the flow of private capital to the developing world as reasons to end traditional foreign aid. Proponents stress the large number of outstanding needs and the value of assistance to achieve certain foreign policy objectives; they generally call for reform and revitalization—not elimination. Our work on USAID’s Housing Guaranty Program highlights the complexities in assisting development by using foreign aid. This program, in place for over 30 years, has guaranteed about $5 billion in loans to developing countries with the goal of stimulating increased private sector investment in housing for the poor. The program’s original premise, however, did not adequately take into account the real world limitations to achieving this objective. In fact, it was not clear at the time of our work that USAID was even pursuing the original goal anymore, but rather had established new ones throughout the years in the face of a lack of demonstrated progress in meeting program goals. Based on GAO’s work, the Congress has dramatically reduced funding for this program. A consensus is emerging, however, regarding what seems to work and what does not. Recent examinations by respected institutions have concluded that the impact of economic assistance is modest and possible only in countries with good fiscal, monetary, and trade policies and effective governing institutions. Have clear priorities been established for foreign assistance programs? In its 1997 strategic plan, developed in accordance with the Government Performance and Results Act, USAID appears to have established as a priority the importance of influencing domestic policy in the recipient countries. Many of the strategies it has described for achieving its major development goals involve persuading recipient countries to reform their economic, judicial, health care, and education policies and regulations. While USAID has attempted to incorporate consideration of whether a recipient country has changed its policy environment into the process of deciding how much further aid to give to that country, the quality of a country’s reform efforts is not yet a guiding factor in this process. Our analysis of USAID resource allocations for fiscal year 1996 does not show any significant difference between the proportion of aid allocated between the top performing countries in policy reform and the poorer performing countries. USAID acknowledges that political and foreign policy considerations continue to strongly influence USAID’s budgeting process. Allocating foreign aid based only on policy performance would limit flexibility and would require consensus—which would be very difficult to achieve—that aid is only for the purposes of economic development and not for achieving other foreign policy objectives. The next critical question that needs to be asked in this regard is whether USAID can continue to operate and be effective in a large number of countries, given the diminishing amount of foreign aid funds available. Despite having closed missions in 24 countries since 1993, USAID still has programs in over 80 countries. Many of these countries have relatively small programs. For example, in fiscal year 1996, 10 countries received over 50 percent of all sustainable development assistance allocated to specific countries, with the remainder spread among 42 countries. In about half of these 42 countries, the United States is a relatively minor donor, not even among the top three bilateral aid donors. USAID has made some efforts to “graduate” its more successful aid recipients. Indeed, it has discontinued programs in some countries, such as Chile and Thailand, whose level of development no longer justifies foreign aid. However, USAID has not established formal criteria for determining which countries should continue to receive development assistance. Can we deliver foreign assistance at lower cost? Despite the domestic skepticism attached to U.S. foreign aid in general, there still remains broad support for some specific programs—child survival and population programs are only two examples. For those programs that the U.S. government continues to support—and that meet the tests of relevance and priority—the next two questions should be (1) how can they be delivered most efficiently and (2) what level of accountability are we going to insist upon? Four years of reform under the leadership of the USAID Administrator have resulted in a smaller, more streamlined aid bureaucracy that has achieved some operational efficiencies. USAID reengineering efforts have included reorganizing missions and eliminating unnecessary administrative requirements. USAID has also sought to focus its activities on a more manageable set of strategic objectives. This process has been further refined in USAID’s strategic plan. Nevertheless, some continue to question the USAID structure in light of the declining levels of U.S. aid and have suggested that other ways of delivering bilateral assistance should be considered. The ratio of USAID’s operating expenses—about $500 million—to the costs of the programs it administers—about $4.9 billion—has been steadily increasing, with more USAID dollars going to manage a smaller aid program. One of the many options that have been discussed is the re-creation of USAID as a foundation—providing aid through nongovernmental organizations and without the hands-on implementation responsibilities and attendant infrastructure it now has. Of course it is not clear what implications the planned consolidation of some USAID and State Department administrative functions will have on USAID’s operating expenses. The trade-off of this approach, of course, is the risk of misuse of U.S. aid dollars and a loss of accountability for program results, as well as perhaps more limited opportunities to use U.S. assistance to support new or emerging foreign policy objectives. In recent years, about 14 percent of the international affairs budget has been spent to fund activities related to the management of foreign affairs. Nearly all of this funding goes to support State Department operations (see fig. 7), including its headquarters, passport offices and other domestic offices across the United States, over 250 embassies and consulates overseas, and salaries for roughly 23,000 direct-hire employees worldwide. The remainder—about 3 percent—supports the Arms Control and Disarmament Agency (ACDA) and a variety of commissions and funds. Funding appropriated to State for foreign affairs management has declined in real terms by an average of 4 percent per year during fiscal years 1992-97 (see fig. 8). The fiscal year 1997 funding level of $2.8 billion was about 15 percent lower than in fiscal year 1992. This decline has been ameliorated somewhat by visa fees that State has been allowed to retain since fiscal year 1995 to offset the cost of its operations—averaging about $140 million per year. The administration has requested a 4.9 percent real increase in appropriations for foreign affairs management in 1998. Under the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, State’s work load will increase starting in April 1998. State will assume responsibility for adjudicating all applications for border crossing cards for Mexican nonresident aliens entering the United States, a responsibility it had previously shared with the Immigration and Naturalization Service. State estimates that it will need about 70 additional employees to handle the increased workload. Over the last several years, State has closed 30 overseas posts, reduced the general work force by about 2,200 positions, lowered overseas allowances, and cut operating budgets. A recent joint Brookings Institution/Council on Foreign Relations study concluded that State’s ability to function effectively has been eroded, citing the existence of shabby, unsafe, and ill-equipped posts; obsolete information technology; and uneven staffing. At the same time, GAO and others have raised concerns about the relevance and priority of some of State’s activities and the efficiency with which it operates. Although the State Department has reduced staff and implemented some cost reduction measures, it has not undertaken a fundamental rethinking of its foreign affairs and diplomatic structure or significantly changed its business practices. This would involve reassessing the rationale for the current overseas structure and staffing, reviewing both the approach and the level of State’s involvement in some functions and activities, and adopting better business practices. Thus, some tough questions need to be asked: Does the United States need and can it afford all overseas posts as currently staffed and structured? Given the cost of our overseas infrastructure, the Congress and the President need to make sure that State’s post and staff structure is consistent with current U.S. foreign policy needs and that it makes the best use of U.S. resources and staff. About $2 billion, or over 80 percent, of the amount spent on the administration of foreign affairs is tied to the operation of overseas posts. The current structure is based on State’s policy of universality—a diplomatic presence in almost every country of the world, even those that by State’s own admission are not critical to U.S. interests. The costs of a U.S. overseas presence vary widely. For example, in 1995 the post in Western Samoa cost $2.5 million to operate and the U.S. mission in Germany cost over $90 million. Changing U.S. interests—and the mutable nature of the world problems the U.S. government faces—mean that we need to scrutinize U.S. presence and staffing on a mission-by-mission basis. Closing posts would meet opposition from various interests groups, and the savings from the closure of small individual posts would not be substantial. Greater regionalization of the U.S. diplomatic presence by having one ambassador accredited to serve in multiple countries is an option that could be explored to increase efficiency and lower costs. Taking advantage of modern telecommunications technology may make it feasible for State to consolidate a limited number of overseas posts. For example, the U.S. embassy in Bridgetown, Barbados, has full diplomatic responsibilities for 7 countries and partial diplomatic responsibility for 14 others in the eastern Caribbean; likewise, British ambassadors are accredited to 3 to 4 countries each in Africa. These could serve as models for a U.S. diplomatic reorganization in other regions beyond the Caribbean. We calculated that if State closed 20 small embassies and employed the above approach, State could reduce its costs by up to $40 million annually, after closing costs were paid and U.S. direct-hire positions were eliminated. Can the State Department operate more efficiently? The State Department is entering the 21st century with outdated and costly-to-maintain communications systems and weak and outdated management processes. State has not made the necessary investments to modernize its information technology and is only now beginning a serious attempt to improve its capabilities in this area. The success of those efforts is critical to achieving long-term savings in information management costs and to streamlining its business practices. Our work has shown that State’s business processes could be made more cost-effective. Just this month we reported that the introduction of prevailing best management practices from the private sector into State’s staff relocation process could save millions. We have previously identified weaknesses in State’s management of its overseas real estate portfolio and recommended a panel to review properties. At the Congress’ direction, State has established such a panel, including real estate experts from outside the Department. The panel has begun its work, recommending properties for sale as well as those where local conditions preclude a sale at fair price to the U.S. government. The Congressional Budget Office estimated that State could generate $150 million over the next 5 years by selling 100 properties that it has identified for potential sale. According to State, last fiscal year the Department executed final sales of over $60 million worth of properties and reinvested those proceeds in needed facilities, which will also reduce future rental costs. Is State efficiently structured, and are all of State’s functions and activities needed? Our work suggests that the answer to the first part of this question is “no,” and the answer to the second is “not clear.” State maintains a headquarters with 6 geographic and 15 functional bureaus, including a bureau for international organizations. Some programs and administrative functions overlap between geographic and functional bureaus. For example, although State has a functional bureau with responsibility for political-military issues, it also has 24 political-military positions in other bureaus, including each geographic bureau. In a way, the geographic bureaus operate as six micro-State Departments. Add to this mix the work and policy interests of the bureau dedicated to working with international organizations, and you have a complicated structure in which to develop policy. In addition to overlap within its own structure, State has bureaus, offices, and activities that mirror those of many other parts of the federal government, including agencies with primary responsibility for trade, agriculture, labor, and environmental issues. While State has a critical role in advancing U.S. interests in these increasingly international issues, it is not clear if the current approach and level of staffing to support its involvement are necessary. As an illustration, although the Department of Labor is the lead U.S. representative in multilateral forums on labor issues, several State bureaus address these issues. To support work on labor issues, the State Department has 45 labor attachés overseas that gather detailed information on workers’ rights outside the United States and prepare congressionally required reports. Work we completed in 1996 suggests that the 45 attaché positions and their corresponding headquarters complement may not be necessary because, according to several officials at overseas posts, labor issues could be adequately covered by the State Department’s political and/or economic officers as they are in countries without attachés. The Congressional Budget Office estimated that eliminating these positions through attrition over 5 years would produce savings of $30 million. State has proposed abolishing or lowering the rank of some labor attaché positions in the past but has encountered resistance from the Department of Labor and organized labor. There seems to be room to rethink State’s involvement in such functions or at least its approach. The process specified in the Government Performance and Results Act is a good vehicle to address this issue by encouraging government agencies to improve coordination of cross-cutting functions. However, we have examined the State Department’s strategic plan and noted, among other concerns, that State does not clearly indicate how it plans to provide leadership and coordinate the programs of other agencies. In some cases, changing State’s involvement may require congressional approval or interagency agreement. The problems with State’s organizational structure are widely recognized within the Department, and the Secretary of State has expressed her commitment to crafting a Department that functions better, faster, and more flexibly as she consolidates State, USIA, and ACDA. To accomplish this, the Secretary has established 15 employee task forces to examine all aspects of State’s operations with the goal of reducing potential overlap and improving the agency’s decision-making process. According to a member of State’s Reorganization Secretariat, the objective of the consolidation is to let the State Department spend less time negotiating with itself and more time engaged with foreign governments. How well is the consolidation of foreign affairs agencies being managed? The April 1997 decision to consolidate the State Department, the USIA, and the ACDA and to integrate certain administrative functions of State and USAID presents a major management challenge, but it also creates an opportunity to achieve cost savings. Among the more straightforward tasks will be consolidating the organizations’ similar administrative functions, such as travel and payroll. However, the consolidation also offers State a major opportunity to address potential overlaps and duplication not only in the areas of public diplomacy and arms control but also in all of the Department’s activities and functions. Creativity will be needed to find a way of incorporating these functions into State’s organization without taking the traditional approach of establishing positions for public diplomacy and arms control positions within both the functional and regional bureaus. If managed carefully and creatively, the consolidation should produce efficiencies and cost reductions over the long term. Let me turn now to the public diplomacy category—essentially the programs and activities of the USIA—which represents about 6 percent of the funding for international affairs programs. USIA salaries and expenses account for the bulk of public diplomacy funding; in fiscal years 1992-97, 40 percent was allocated for USIA personnel and operations at over 200 overseas locations and headquarters; about 38 percent for international broadcasting operations including the Voice of America; and about 22 percent for exchange programs such as Fulbright scholarships (see fig. 9). Funding for public diplomacy has declined in real terms an average of about 6 percent annually during fiscal years 1992-97 (see fig. 10). Funding peaked in fiscal year 1994 due primarily to increased funding for educational and cultural exchange programs for the NIS and has declined since. The fiscal year 1997 funding level of $1.1 billion was 25 percent lower than it was in fiscal year 1992. The largest decrease, between fiscal year 1995 and 1996, resulted from reductions in funding for exchanges, salaries, and expenses and the consolidation of international broadcasting activities. The executive branch has proposed a further 3.5 percent real decrease in funding for public diplomacy for fiscal year 1998. Over the years, the USIA’s programs have shifted in emphasis from one part of the world to another in response to foreign policy initiatives and direction from the executive branch as well as to congressional mandates. Even before the announcement of its consolidation with the State Department, the USIA had cut staff, consolidated all nonmilitary international broadcasting, and developed a strategy to downsize its operations and reduce costs. However, difficult questions about the continuing relevance of some public diplomacy programs remain. Many USIA programs and the agency’s overseas structure and infrastructure were established after World War II as the United States sought to counter the Soviet bloc and encourage the development of democracy. Legislative requirements have earmarked much of the USIA’s budget for specific exchanges, broadcasting programs, and grantees. More radical changes in USIA activities and programs would be needed to generate significant additional cost reductions and would require the Congress to revisit some of these legislative requirements. They would also require the USIA and the State Department to change their traditional operating philosophy that the USIA should be located wherever the State Department has a presence. Regarding public diplomacy funding, the key questions are whether we can continue to fund all USIA facilities abroad and whether we can achieve greater efficiencies in USIA broadcasting. Do we need and can we afford all USIA facilities overseas? The USIA spends about 30 percent of its budget on salaries, infrastructure, and operating expenses for overseas installations—many in flourishing democracies. For example, the USIA spent $9 million in 1995 for operations in Germany, including six outreach centers. The 77 staff at these centers, called “America Houses,” provide information on U.S. policy and business and study opportunities and host cultural events. Much of the information the USIA provides is also generated by the private sector, is available electronically, and could be distributed by a private entity. The USIA’s efforts to reform and relocate outreach centers (of which it operates about 70) have reduced costs in some cases. The USIA estimated that the 1995 decision to close an America House in Germany in favor of a local government and business-supported German/American Cultural Center saved about a million dollars per year. Also, in Singapore, the USIA terminated a $455,000 yearly lease for a cultural center and moved into embassy facilities. While the USIA should continue to explore such opportunities, eliminating posts altogether in up to 67 countries that by USIA’s own criteria are relatively less important to U.S. interests would achieve more significant cost savings. The traditional belief that the USIA should be located where the State Department has a presence has made this difficult. Are all exchange programs essential, and are they targeted to meet U.S. objectives? The USIA manages a variety of exchange programs to foster mutual understanding between the people of the United States and other countries. In 1950, shortly after the U.S. government began funding scholarships, it was the primary source of funding for 7.7 percent of foreign students in the United States. In 1994, only 1.2 percent, or about 5,400, of the 453,000 foreign students attending U.S. high schools, colleges, and universities received U.S. government funding as their primary source of support. During this period other federal agencies, as well as state and local governments and the private sector, have increased their roles in funding exchanges. The USIA currently accounts for only one-fourth of the funding for U.S. government exchange programs. In 1996, the USIA acknowledged that non-USIA exchange opportunities were plentiful in some regions such as Western Europe and that therefore it was shifting exchange resources to regions that are not as fully represented by other U.S. government agencies or the private sector. Since the end of the Cold War, the Congress has appropriated funds to establish new exchange programs, particularly in countries of Central and Eastern Europe and the former Soviet Union. Other agencies, including the Departments of Education and Defense, also engage in exchanges and other educational efforts with funding outside the 150 account. For example, the Department of Education funds a program to help improve civics and economics education in Central and Eastern Europe and the former Soviet Union. I would like to note that the House of Representatives’ foreign affairs reform bill calls for the establishment of a working group to improve the coordination and effectiveness of U.S. government-supported exchanges. Are there opportunities to achieve further efficiencies in international broadcasting? In the U.S. International Broadcasting Act of 1994, the Congress reaffirmed the importance of continued U.S. broadcasts to further U.S. interests. However, the Congress has reduced funding for most nonmilitary international broadcasting activities and mandated their consolidation. In 1996, the United States broadcasted over 1,600 hours of radio programming in 53 languages and over 400 hours of television in several languages worldwide each week to support U.S. foreign policy objectives. Only modest economies are possible by eliminating overlap and lessening duplication among broadcasters. Achieving significant cost savings would require a major reduction in the number of language services and broadcast hours. However, past experience has shown that eliminating even one language is a difficult process, due to the interest of the Congress, the National Security Council, and others and could impinge on the USIA’s readiness in a crisis situation. U.S. contributions to a variety of international organizations and programs consumed about 14 percent of the international affairs budget from fiscal year 1992 to 1997. Contributions to international organizations, including the United Nations, represented about 44 percent; about 39 percent funded our participation in the World Bank group, primarily for concessional (below-market interest rate) lending programs; and contributions to other international financial institutions (including the African, Asian, and Inter-American Development Banks and the European Bank for Reconstruction and Development) accounted for the remaining 17 percent. (See fig. 11.) The vast majority of funds the United States provides to the World Bank is used to finance interest-free loans to the poorest developing countries through the Bank’s International Development Association (IDA). The two largest recipients are India and China, which together received almost 30 percent of these loan funds—or $2.4 billion each—in fiscal years 1994-96. As China continues to develop, IDA lending to that country is being phased out and is slated to end in 1999. Funding for multilateral assistance has declined in real terms an average of about 6 percent per year during fiscal years 1992-97, as shown in figure 12. Funding peaked in fiscal year 1995, with larger than average contributions to the World Bank. Since then, contributions to the World Bank and other international financial institutions and the United Nations have declined to almost $2.2 billion in fiscal year 1997—a level about 27 percent lower than in fiscal year 1992. For fiscal year 1998, the executive branch has requested a real increase of 32.5 percent for multilateral assistance, largely to return annual funding of multilateral organizations to traditional levels. Concerning multilateral assistance, the key questions are whether such assistance continues to serve U.S. interests and can be delivered more efficiently. Are all of the multilateral organizations that we participate in still relevant? Reviewing multilateral assistance involves taking a hard look at the continuing relevance of many international organizations and the extent to which they serve U.S. interests. The State Department believes that ongoing U.S. membership in these organizations is important to the United States because their activities contribute in varied ways to U.S. security, prosperity, health, and safety. Our review of the operations of several of these organizations indicates that their policies and agendas are consistent with U.S. national security and foreign policy objectives and provide significant benefits in such areas as development, global health, and scientific research. The U.S. government participates in dozens of other international organizations established to serve specialized but limited functions, such as the World Road Association and the International Copper Study Group. The United States provided about $11 million in 1995 to organizations that the State Department viewed as making only limited contributions to U.S. interests. In recent years, the United States has withdrawn from two such organizations. State’s attempt to withdraw from at least one other organization, the International Cotton Advisory Committee, met with congressional opposition. A State official told us that other attempts would likely meet the same type of resistance. Support for the World Bank has been the subject of periodic controversy in the United States. The purpose of the World Bank is to promote economic growth and the development of market economies by providing finance on reasonable terms to countries that have difficulty obtaining capital. Critics of the Bank often cite the end of the Cold War, the recent rapid increase in private investment in developing countries, and weaknesses in project effectiveness and management reforms. In September 1996, we reported that participation in the World Bank furthered U.S. interests because it generally leverages other donors’ funds for programs and geographical areas that the U.S. government wants to support. Can the efficiency and effectiveness of these organizations be improved? The State Department acknowledges that some U.N. organizations are not operating efficiently and effectively and that some of them have functions that overlap. However, the organizations have begun to address weaknesses in the management and administration of their operations and programs that have been the subject of frequent criticism by the Congress and others. The United States and other member states are continuing to call for reforms in the belief that greater efficiency in these agencies could reduce their cost. With U.S. encouragement and assistance, the United Nations has embarked on a program of reform. Reforms could reduce costs; however, their fate is uncertain, and they cannot be expected to be completed anytime soon. Regarding the World Bank, U.S. interests could be better served by the World Bank if it could improve its record of effectiveness. Reforms have been implemented and show some early signs of progress, but in some areas major impediments still remain and improvements do not seem to have taken hold. Through its leadership, the United States is positioned to ensure that Bank reforms continue to progress and to have a positive impact on development effectiveness. To this end, we recommended that the Secretary of the Treasury monitor and periodically report to the Congress measurable indicators of progress, such as the extent to which the Bank allocates financing to those countries that make Bank-advocated market and policy reforms. International trade and investment funding represented about 4 percent of the international affairs budget in fiscal years 1992-97. Trade and investment funding supported primarily the Eximbank, the Trade and Development Agency, and the International Trade Commission. (See fig. 13). Figure 13 excludes OPIC because it returned net revenue to the U.S. Treasury during this period. Related—and large—expenditures for trade and investment activities and programs outside the 150 account include the activities of the Commerce Department’s International Trade Administration, the Office of the U.S. Trade Representative, the various agricultural trade promotion and credit guaranty programs, and the programs of the Small Business Administration. The largest increase in international trade and investment funding, between fiscal year 1993 and 1994, was due primarily to higher funding for programs in the NIS. Funding has continuously declined since reaching its highest level in 1994, with the fiscal year 1998 request representing a decrease of almost 20 percent in real terms over the preceding year. (See fig. 14.) Eximbank and OPIC programs have become increasingly controversial in recent years, generating questions about whether they continue to be relevant and whether government costs and taxpayer risk can be reduced. Both organizations provide loans, guarantees, and insurance to support U.S. exports or market-oriented private investment. In some risky markets where the Eximbank operates, some borrowers miss payments or default on entire loans; such losses must be covered by the Eximbank, resulting in subsidy costs to the federal government. Are the programs of the Eximbank and OPIC relevant in today’s environment? OPIC was created in 1969 to help mobilize U.S. capital and skills for the economic and social advancement of developing countries—a major U.S. foreign policy objective. The Eximbank’s creation was spurred by the economic conditions of the 1930s, when exports were viewed as a stimulus to economic activity and employment. The Congress continues to debate the relevance of export promotion and investment programs, most recently as it considered whether to reauthorize the Eximbank and OPIC. The debate has centered on the need for government support and the organizations’ costs and benefits. Critics question whether the U.S. government should provide direct assistance to private exporters and investors. They charge that expenditures to subsidize the transactions of the Eximbank and OPIC amount to “corporate welfare.” In the case of the Eximbank, critics claim that a substantial portion of its subsidy expenditures and financing commitments is used to support the operations of large exporting multinational firms that are experienced exporters and have their own resources to export their products. Moreover, the economic benefits of the programs are uncertain. Some economists argue that the market is a much more efficient allocator of resources than the government and that these programs cannot produce a substantial change in employment levels. The nearly fivefold increase in private investment flows to the developing world since 1990 may also raise questions concerning the continued need for the Eximbank and OPIC, given the private sector’s growing willingness to support trade and investment transactions in some emerging markets. Conversely, proponents of continued U.S. government support argue that there is still a niche for the Eximbank and OPIC. Risky markets still exist where the private sector is reluctant to operate or invest without public financing. Concerning the Eximbank, our recent work indicated that although definitive evidence about the economic impact of U.S. government trade programs is lacking, perhaps the most compelling argument in defense of the Eximbank is its role in helping to “level the international playing field” for U.S. exporters. All major industrialized countries operate similar programs and thus are primarily countered through U.S. programs. Our recent work on OPIC suggests that, despite increasing private capital flows to the developing world, there are still markets where U.S. private firms are unwilling to participate without some form of public support, be it from OPIC, the Eximbank, foreign governments, or multilateral organizations. Turning to OPIC, historically its combined finance and insurance programs have been self-sustaining. OPIC’s net income from transactions with the private sector amounted to about $43 million in fiscal year 1996. During fiscal year 1996, approximately 18 percent of OPIC’s financing commitments supported small businesses and cooperatives; the remaining 82 percent supported large businesses. The U.S. foreign policy objective of promoting private investment in developing countries encourages OPIC to underwrite risks that the private sector may not assume without public support. OPIC, the State Department, and other U.S. government officials consider OPIC to be a major tool for pursuing U.S. foreign policy goals, such as assisting Russia in its transition toward achieving a free market economy. Are there opportunities to support U.S. exports and investments while reducing costs and risks? If legislation is enacted reauthorizing Eximbank and OPIC, the question becomes whether there are opportunities to reduce the costs of their programs. The Eximbank and OPIC could undertake actions such as better leveraging resources, decreasing portfolio risk, and lowering costs by raising their fees, changing their portfolio mix, or changing the structure of their transactions. For example, work we completed in 1996 identified two options that would allow the Eximbank to reduce subsidies while remaining competitive with foreign export credit agencies: (1) raising fees for services and (2) reducing the risks of its programs; that is, limiting program availability in certain high-risk markets. The Congressional Budget Office estimated that increasing fees could save the Eximbank up to $450 million over 5 years, and reducing program risks could save up to $1.2 billion over 5 years. Some progress has been made: the Organization for Economic Cooperation and Development, with U.S. leadership, has now set a minimum fee for services effective in April 1999. This should provide the Eximbank with the opportunity to further reduce the costs of its operations. Our recent work suggests that OPIC could further reduce the risk in its portfolio, given the private sector’s willingness to have greater involvement in some emerging markets. For instance, OPIC could lower the risks associated with its portfolio through increased use of reinsurance and coinsurance and by decreasing project coverage or terms. However, if OPIC is to continue pursuing its mission of promoting investment in risky markets, its portfolio will always be considered more risky than the portfolios of private sector insurers. Mr. Chairman, this concludes my prepared remarks. I would be happy to respond to any questions you or other Committee members may have. See the end of this statement for a list of related products that GAO has recently completed. This appendix contains two tables. Table I.1 shows international-related programs with identified funding. Table I.2 shows international-related programs where specific funding is not identified. These tables are intended to illustrate the broad range of activities that support U.S. international policy objectives and are funded outside the 150 account. FY 1998 request (millions) Advises the President on the integration of domestic, foreign, and military policies relating to national security. Coordinates U.S. policy issues on combating terrorism for federal efforts to respond to terrorist incidents abroad or domestic incidents with foreign involvement. Examines programs, budget requests, and management activities; proposes changes; and participates in counterterrorism efforts. Develops, coordinates, and advises the President on U.S. international trade policy; conducts international trade negotiations; and conducts U.S. affairs related to the World Trade Organization. Administrative expenses only. Bulk of funding is mandatory. In order to increase U.S. agricultural exports, the Corporation guarantees payments due from foreign banks and buyers. Opens, expands, and maintains global market opportunities through international trade, cooperation, and sustainable development. Encourages export of agricultural commodities by financing sales to developing countries and promotes foreign policy by enhancing the food security of developing countries. Through the program, U.S. agricultural commodities are sold to developing countries on long-term credit at below-market interest rates. Enforces U.S. export trade laws consistent with national security, foreign policy, and short supply objectives. Develops the export potential of U.S. firms in a manner consistent with national security and foreign and economic policy and promotes an improved trade posture for U.S. industry. Serves as principal adviser to the President on domestic and international communications policy. Develops and advocates U.S. interests in international telecommunications regulation and policy and helps oversee the Communications Satellite Corporation (COMSAT), the U.S. signatory to international satellite organizations. Serves as the focal point for civilian technology and competitiveness in the administration, improves U.S. industrial competitiveness and exercises leadership as the private sector’s advocate, participates in international science and technology groups and agreements. (continued) FY 1998 request (millions) Established in FY 1996 to issue guarantees for sale or long-term lease of defense articles, services, or design and construction services to a NATO member, non-NATO ally, and certain countries in Central Europe and Asia. Drug Interdiction and Counter-drug Activities Assists U.S. and foreign government law enforcement agencies by providing detection, monitoring, and tracking support; intelligence support; planning assistance; and communications, logistics, and training support. Facilitates elimination, transportation, and storage of nuclear, chemical, and other weapons; establishes programs to prevent proliferation; and trains and supports defense personnel for demilitarization and protection of weapons. Acquires and constructs military facilities and installations and funds related expenses for the collective defense of the North Atlantic Treaty Area. Funds international-related studies of U.S. students. Supports international arms control treaty implementation, including inspections of foreign facilities, territories, or events. Funds Bosnia Peace Operation. Assumes June 1998 U.S./NATO military pullout. Provides U.S. financial contributions for the operation of the NATO international military commands and facilities, the NATO Airborne Early Warning and Control System, and the Central European Operating Agency Pipeline System; supports U.S. personnel assigned to international organizations; funds programs that further Army-to-Army cooperation with allied and friendly nations; supports Latin American Cooperation activities and the School of the Americas; and funds the Marshall Center (Institute for Eurasian Studies), nonsecurity assistance of military groups, and unreimbursed costs of foreign military sales activities. Funds two programs: general Humanitarian Assistance and Foreign Disaster Relief Program and Humanitarian Demining Program. Helps improve civics and economics education in Central and Eastern Europe, the former Soviet Union, and the United States. Falcon and Amistad Hydroelectric Facilities: operation, maintenance, and emergency expenses. Most of funds given to International Boundary and Water Commission, which assists in operating the facilities, through a reimbursable agreement with EPA. Introduces U.S. clean coal technology in China for electricity production. Electricity demand in China represents a significant market for U.S. vendors. $50 million available October 1998. Supports safety improvements; encourages development and continuation of a U.S. equivalent nuclear safety culture at select Soviet-designed reactor sites; addresses safety and nonproliferation concerns in the former Soviet Union; supports closure of Chernobyl; and continues efforts at Argonne National Laboratory regarding spent fuel. (continued) FY 1998 request (millions) Provides policy, direction, technology development and implementation, and leadership in national and international efforts to reduce the danger to national security posed by weapons of mass destruction. Supports international agreement in physics. $394 million advance appropriation requested for fiscal years 1999-2004. Hosts symposiums, organizes cooperative research between the National Institutes of Health and foreign scientists, provides fellowships to foreign scientists in the United States, supports foreign research by U.S. fellows, and hosts foreign visitors to the NIH. Provides assistance in order to help refugees achieve economic self-sufficiency and social adjustment within the shortest time possible following their arrival in the United States. Funds economic assistance and necessary expenses for the Republics of the Marshall Islands and Palau and the Federated States of Micronesia. Cooperates through training and technical assistance programs with foreign park service and conservation personnel, participates in studies of coastal resource management, and assists in protecting and managing internationally significant sites. Fulfills obligations under the North American Waterfowl Management Plan with Canada and Mexico. May fund projects in Canada or Mexico. Total costs of international activities will be higher. Continues legal attaché expansion plan, assigns additional agents overseas to fight drug trafficking, and continues investigative efforts against drug trafficking and public corruption along the Southwest border. Serves as U.S. liaison to International Criminal Police Organization and facilitates international law enforcement cooperation. Supports U.S. foreign policy objectives through relationships with international organizations and foreign governments; provides analysis on the labor market and economic impact of trade proposals and legislation, and immigration-related initiatives; and does assessments of compliance with worker rights provisions in U.S. trade law. Negotiates and supervises joint projects with Mexico to solve international problems and operate and maintain facilities. Constructs projects to solve international problems of water supply and quality, sewage treatment, and flood-damage reduction. EPA reimburses. (continued) FY 1998 request (millions) International Boundary Commission maintains boundary between the United States and Canada. International Joint Commission approves, regulates, and monitors structures in boundary waters and investigates matters referred by the United States and Canada, mainly transboundary environmental issues. Border Environment Cooperation Commission works with states and local communities to develop solutions to environmental problems in border regions. Funds U.S. share of expenses for eight international fisheries commissions, three international marine science sea organizations, one international council, and the expenses of the commissioners. Promotes growth of U.S. merchant marine and shipyards. Extended to foreign purchasers and for conversion from military to international commerce. Replaces operating-differential subsidies. Maintains a U.S.-flag merchant fleet crewed by U.S. citizens to serve U.S. commercial and national security needs. Pays U.S. shippers engaged in U.S.-foreign trade. Increases competitiveness and productivity of U.S. maritime industries and provides manpower for emergencies. Funds administration and direction, officer training, coordination of U.S. maritime industry activities under emergency conditions; promotes port and intermodal development; and undertakes technology assessment projects. Recommends and implements U.S. international tax, financial, fiscal, and economic policies; maintains foreign assets control; manages development financial policy; represents the United States on international monetary, trade, and investment issues and treaties; oversees operations abroad; and oversees law enforcement bureaus. Exercises original and exclusive jurisdiction of civil actions against the United States, and certain civil actions brought by the United States, arising out of import transactions and federal statutes affecting international trade. Supports intelligence community. Participates in international research project. Participates in joint space missions, including Mir. Participates in setting and carrying out all international affairs goals. Oversees international drug control programs. Develops U.S. national drug control strategy and oversees and coordinates the drug control efforts of about 50 different U.S. federal agencies engaged in implementing the strategy. Supports protection of U.S. air, sea, and land borders from the importation of illegal narcotics. Coordinates implementation of international science and technology agreements. Furthers national interest, security, or defense at home or abroad. Helps improve U.S. competitiveness abroad. Participates in foreign cooperative programs, inspections, and international trade in certain endangered species. Procures goods from foreign and domestic sources for foreign and domestic use. Supports Foreign Agricultural Service. Inspects domestic plants involved in foreign trade and reviews foreign inspection systems. Regulates weighing of grain and registers buyers in foreign commerce, briefs foreign buyers, assesses foreign inspection and weighing techniques, and responds to foreign complaints. Collects and analyzes data on international food and agriculture. Prepares international economic accounts that provide information on international transactions in goods, services, investment income, and government and private financial flows and are used to formulate and evaluate international economic policy. Collects and publishes foreign trade statistics. Expands international markets for minority-owned businesses. Assists with international standardization certification. Monitors compliance with select fisheries acts, monitors and predicts global environments, and supports global environmental programs. Develops and implements intellectual property policies and proposals abroad. Combats terrorism; with the FBI, trains and equips former Soviet Union and Eastern European law enforcement officials, judges, and prosecutors to counter nuclear material smuggling and trafficking and chemical and biological weapons proliferation. Supports foreign partners’ participation in joint exercises and projects, including the Warsaw Initiative, Army’s Developing Countries Combined Exercise Program, and Joint Contact Team. Assists local educators in providing high-quality instructional programs to children and youth with limited English proficiency. (continued) Supports international education and foreign language study programs. With others, trains personnel from six countries in the former Soviet Union on investigating and prosecuting nuclear-related crimes; and reduces the opportunity for terrorists to acquire nuclear materials. Receives and manages foreign research reactor spent nuclear fuel. Increases national security and creates jobs and global opportunities for U.S. firms. Prepares reports on international matters. Improves prediction of global change, including climate; provides scientific contribution to international activities and negotiations; enhances global sales of U.S. energy products, and provides technical assistance. Participates in the development and implementation of international agreements, such as the Nuclear Safety Convention, the U.S./North Korean Agreed Framework on Nuclear Issues, and the Agreement for Cooperation Between the United States and the European Atomic Energy Community Concerning Peaceful Uses of Atomic Energy. Tracks civilian-use nuclear materials imported by the United States and exported to foreign countries. Relies largely on data required to be reported under international agreements for peaceful nuclear cooperation. Formulates international energy policy, analyzes and assesses current world energy situation, and participates in international efforts. Enables the United States to meet International Energy Agency’s emergency response plans. Evaluates foreign countries’ physical protection systems, addresses emerging nuclear proliferation threats and problems, promotes technical exchanges and cooperation for physical protection, strengthens international cooperation and implementation of treaties and agreements. Markets power from federally owned power plants, including the International Boundary and Water Commission. Promotes achievement of U.S. and international goals through participation in multilateral health organizations, promotes cooperative health programs with other countries, provides humanitarian and developmental assistance in health, and helps assure appropriate policies and support on refugee health issues internationally. Supports operations and provides assistance to territories and freely associated states. Provides technical assistance, training, joint research, and personnel exchanges in international fisheries and wildlife management efforts, including the protection of biological diversity. Enhances compliance with international agreement on trade in endangered species. Supports efforts to counter, investigate, or prosecute domestic or international terrorism. (continued) Supports the formulation and execution of international criminal justice enforcement policies; participates in the negotiation of international agreements and treaties relating to criminal law enforcement, extradition, and mutual legal assistance; posts attorneys abroad; enforces U.S. laws against importing goods made with prison labor by prosecuting criminal cases; and prosecutes cases against international drug traffickers and money launderers and seizes and forfeits their illicit proceeds and laundered assets overseas. Conducts international investigations, posts staff overseas, coordinates drug enforcement intelligence gathering overseas, conducts law enforcement operations, and provides training to foreign government law enforcement personnel. Participates in foreign cooperative investigations. Protects the United States from foreign hostile intelligence efforts. Assist international law enforcement agencies. Combat terrorism; with others, train and equip former Soviet Union and Eastern European law enforcement officials, judges, and prosecutors to counter nuclear material smuggling and trafficking and chemical and biological weapons proliferation. Provides technical assistance and advice on corrections-related issues to foreign governments. Administers laws relating to the admission, exclusion, deportation, and naturalization of aliens; posts staff abroad; and conducts investigations. Enforces U.S. laws against importing goods made with prison labor by prosecuting criminal cases and defending Customs’ determinations; prosecutes cases against international drug traffickers and money launderers and seizes and forfeits their illicit proceeds and laundered assets domestically and abroad. Conducts safety programs; supports international investigations; posts staff abroad; eliminates maritime routes as a significant trafficking mode for the supply of illegal drugs to the United States; and enforces treaties. Conducts safety programs, supports international investigations, posts staff abroad, provides technical assistance, oversees foreign carriers, and supports efforts to combat terrorism domestically and abroad. Promotes U.S. businesses abroad and provides technical assistance to foreign governments (reimbursed). Helps to develop worldwide safety standards and practices in civil aviation, disseminates accident and incident information, and helps foreign countries investigate transportation accidents. Negotiates bilateral aviation accords and addresses problems U.S. airlines face in doing business abroad. Provides departmental leadership on aviation economic policy and international transportation issues. Supports international law enforcement, posts staff abroad, and trains foreign law enforcement officials. Coordinates with foreign counterparts, participates in international banking agreements, and charters and supervises foreign banks. Settles international claims. (continued) Trains foreign law enforcement officials (reimbursable). Identifies underlying criminal financial activity and emerging trends and patterns of international money laundering investigations; empowers international law enforcement to take action against financial criminals through the transfer of information and expertise; and helps other countries meet international anti-money laundering standards. Assists international investigations, posts staff abroad, trains foreign law officials, provides technical assistance to foreign governments, manages tax treaties, and monitors compliance of foreign-controlled companies with relevant U.S. income tax laws. Processes persons and cargo entering the United States; enforces import and export laws; collects and reports trade statistics; supports international investigations; enforces international agreements; supports counterterrorism efforts; with others, trains personnel from six former Soviet Union countries on investigating and prosecuting nuclear-related crimes; and interdicts illegal drugs and investigates drug-smuggling organizations. Assists international investigations; posts staff abroad; provides technical assistance to foreign governments; and protects select foreign visitors, foreign diplomatic missions in the United States, and select U.S. officials abroad. U.S. Court of Appeals for the Federal Circuit Exercises jurisdiction over international trade cases. Compensates and reimburses travel expenses of guardians acting on behalf of financially eligible minor or incompetent offenders in connection with transfers from the United States to foreign countries. Legislative branch boards and commissions Participates in Commission on Security and Cooperation in Europe and House and Senate international meetings. Trains nationals of developing countries in intellectual property laws and policies. Operates overseas centers. Provides information on national security and international affairs and gives training to foreign audit organizations. Gathers intelligence abroad. Coordinates with international regulators. Participates in international negotiations, provides technical assistance, opens commercial opportunities for U.S. firms, supports international research, and supports U.S.-Mexico Border Environmental Plan. Helps oversee COMSAT. Promotes competition in international telecommunications. Resolves labor negotiation impasses, including those involving Panama Canal workers. Self-financing entity but revenues contribute to total U.S. government revenues. Conducts monetary policy (including helping to stabilize financial markets internationally and to detect and combat counterfeiting of U.S. currency abroad), supervises and regulates banks (including the foreign activities of member banks, U.S. operations of foreign banks, and international banking agreements), and coordinates with international counterparts. Recommends international policies on marine mammals. Strengthens international competitiveness of key industry sectors. (continued) Refines the experiment hardware planned for use on the International Space Station. Supports international space-faring agencies on a reimbursable basis. Participates in global change research. Facilitates international scientific cooperation. Studies polar regions, which have a major influence on world weather and climate and are considered as likely bellwethers of global climate change. Participates in international cooperative efforts among nations with Arctic regions, or with Antarctic interests. Renders services to foreign governments and international organizations; participates in development and implementation of the Nuclear Safety Convention; and reviews licenses to export nuclear materials. Some costs reimbursed. Coordinates with international counterparts to discuss securities developments, development and implementation of cooperation agreements concerning securities, and provision of technical assistance for the development of foreign securities markets. Supervises and regulates securities markets to ensure fairness and competition and meet changing international conditions. Encourages small business exports and improves access to capital for trade finance. Supports U.S. overseas research centers. NATO Enlargement: Cost Implications for the United States Remain Unclear (GAO/T-NSIAD-98-50, Oct. 23, 1997). Combating Terrorism: Federal Agencies’ Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, Sept. 26, 1997). Cooperative Threat Reduction: Review of DOD’s June 1997 Report on Assistance Provided (GAO/NSIAD-97-218, Sept. 5, 1997). NATO Enlargement: Cost Estimates Developed to Date Are Notional (GAO/NSIAD-97-209, Aug. 18, 1997). Military Offsets: Regulations Needed to Implement Prohibition on Incentive Payments (GAO/NSIAD-97-189, Aug. 12, 1997). NATO Enlargement: U.S. and International Efforts to Assist Potential New Members (GAO/NSIAD-97-164, June 27, 1997). Nuclear Nonproliferation: Implementation of the U.S./North Korean Agreed Framework on Nuclear Issues (GAO/RCED/NSIAD-97-165, June 2, 1997). Hong Kong’s Reversion to China: Effective Monitoring Critical to Assess U.S. Nonproliferation Risks (GAO/NSIAD-97-149, May 22, 1997.) Export Controls: Sales of High Performance Computers to Russia’s Nuclear Weapons Laboratories (GAO-T-NSIAD-97-128, Apr. 15, 1997). Cooperative Threat Reduction: Status of Defense Conversion Efforts in the Former Soviet Union (GAO/NSIAD-97-101, Apr. 11, 1997). Nuclear Safety: International Atomic Energy Agency’s Nuclear Technical Assistance for Cuba (GAO/RCED-97-72, Mar. 24, 1997). Weapons of Mass Destruction: DOD Reporting on Cooperative Threat Reduction Assistance Has Improved (GAO/NSIAD-97-84, Feb. 27, 1997). Nuclear Safety: Uncertainties About the Implementation and Costs of the Nuclear Safety Convention (GAO/RCED-97-39, Jan. 2, 1997). Nuclear Safety: Status of U.S. Assistance to Improve the Safety of Soviet-Designed Reactors (GAO/RCED-97-5, Oct. 29, 1996). Nuclear Weapons: Russia’s Request for the Export of U.S. Computers for Stockpile Maintenance (GAO/T-NSIAD-96-245, Sept. 30, 1996). Weapons of Mass Destruction: Status of the Cooperative Threat Reduction Program (GAO/NSIAD-96-222, Sept. 27, 1996). School of the Americas: U.S. Military Training for Latin American Countries (GAO/NSIAD-96-178, Aug. 22, 1996). Nuclear Nonproliferation: Status of U.S. Efforts to Improve Nuclear Material Controls in Newly Independent States (GAO/NSIAD-96-89, Mar. 8, 1996). Foreign Assistance: Controls Over U.S. Funds Provided for the Benefit of the Palestinian Authority (GAO/NSIAD-96-18, Jan. 8, 1996). Military Exports: Offset Demands Continue to Grow (GAO/NSIAD-96-65, Apr. 12, 1996). Foreign Military Sales (GAO/NSIAD-96-50R, Dec. 12, 1995). Military Exports: A Comparison of Government Support in the United States and Three Major Competitors (GAO/NSIAD-95-86, May 18, 1995). Greece and Turkey: U.S. Assistance Programs and Other Activities (GAO/NSIAD-95-100, Apr. 17, 1995). Cost of Assistance and Sales Programs (GAO/NSIAD-95-110R, Mar. 2, 1995). DOD Budget: Selected Categories of Planned Funding for Fiscal Years 1995-99 (GAO/NSIAD-95-92, Feb. 17, 1995). Military Exports: Concerns Over Offsets Generated With U.S. Foreign Military Financing Program Funds (GAO/NSIAD-94-127, June 22, 1994). Foreign Military Sales: Use of FMS in Proposed Commercial Sale of Airborne Self-Protection Jammer (GAO/NSIAD-94-202, June 16, 1994). Military Sales’ Cash Flow Financing (GAO/NSIAD-94-102R, Feb. 8, 1994). Security Assistance: Need for Improved Reporting on Excess Defense Article Transfers (GAO/NSIAD-94-27, Jan. 18, 1994). Foreign Military Aid to Israel: Diversion of U.S. Funds and Circumvention of U.S. Program Restrictions (GAO/T-OSI-94-9, Oct. 27, 1993). Military Aid to Egypt: Tank Coproduction Raised Costs and May Not Meet Many Program Goals (GAO/NSIAD-93-203, July 27, 1993). Military Sales to Israel and Egypt: DOD Needs Stronger Controls Over U.S.-Financed Procurements (GAO/NSIAD-93-184, July 7, 1993). Security Assistance: Excess Defense Articles for Foreign Countries (GAO/NSIAD-93-164FS, Mar. 23, 1993). Bosnia: Cost Estimating Has Improved but Operational Changes Will Affect Current Estimates (GAO/NSIAD-97-183, July 28, 1997). Bosnia Peace Operation: Progress Toward the Dayton Agreement’s Goals—An Update (GAO/T-NSIAD-97-216, July 17, 1997). Bosnia Peace Operation: Progress Toward Achieving the Dayton Agreement’s Goals (GAO/NSIAD-97-132, May 5, 1997). U.N. Peacekeeping: Issues Related to Effectiveness, Cost, and Reform (GAO/T-NSIAD-97-139, Apr. 9, 1997). United Nations: Limitations in Leading Missions Requiring Force to Restore Peace (GAO/NSIAD-97-34, Mar. 27, 1997). U.N. Peacekeeping: Status of Long-standing Operations and U.S. Interests in Supporting Them (GAO/NSIAD-97-59, Apr. 9, 1997). Peace Operations: U.S. Costs in Support of Haiti, former Yugoslavia, Somalia, and Rwanda (GAO/NSIAD-96-38, Mar. 6, 1996). Peacekeeping: Assessment of U.S. Participation in the Multinational Force and Observers (GAO/NSIAD-95-113, Aug. 15, 1995). Peace Operations: DOD’s Incremental Costs and Funding for Fiscal Year 1994 (GAO/NSIAD-95-119BR, Apr. 18, 1995). Drug Control: U.S. Heroin Control Efforts in Southwest Asia and the Former Soviet Union (GAO/NSIAD-97-148BR, May 9, 1997). Drug Control: Long-standing Problems Hinder U.S. International Efforts (GAO/NSIAD-97-75, Feb. 27, 1997). Drug Control: U.S. Heroin Control Efforts in Southeast Asia (GAO/T-NSIAD-96-240, Sept. 19, 1996). Drug Control: Observations on Counternarcotics Activities in Mexico (GAO/T-NSIAD-96-239, Sept. 12, 1996). Foreign Assistance: USAID’s Reengineering at Overseas Missions (GAO/NSIAD-97-194, Sept. 12, 1997). The Results Act: Observations on USAID’s November 1996 Draft Strategic Plan (GAO/NSIAD-97-197R, July 11, 1997). Foreign Assistance: Impact of Funding Restrictions on USAID’s Voluntary Family Planning Program (GAO/NSIAD-97-123, Apr. 25, 1997). Foreign Assistance: Harvard Institute for International Development’s Work in Russia and Ukraine (GAO/NSIAD-97-27, Nov. 27, 1996). USAID Democracy Contracts (GAO/NSIAD-97-19R, Nov. 27, 1996). Foreign Assistance: Contributions to Child Survival Are Significant, but Challenges Remain (GAO/NSIAD-97-9, Nov. 8, 1996). Foreign Assistance: Status of USAID’s Reforms (GAO/NSIAD-96-241BR, Sept. 24, 1996). International Relations: Food Security in Africa (GAO/T-NSIAD-96-217, July 31, 1996). Former Soviet Union: Information on U.S. Bilateral Program Funding (GAO/NSIAD-96-37, Dec. 15, 1995). Foreign Housing Guaranty Program: Financial Condition Is Poor and Goals Are Not Achieved (GAO/NSIAD-95-108, June 2, 1995). Promoting Democracy: Foreign Affairs and Defense Agencies’ Funds and Activities—1991 to 1993 (GAO/NSIAD-94-83, Jan. 4, 1994). State Department: Using Best Practices to Relocate Employees Could Reduce Costs and Improve Service (GAO/NSIAD-98-19, Oct. 17, 1997). The Results Act: Observations on the Department of State’s May 1997 Draft Strategic Plan (GAO/NSIAD-97-198R, July 18, 1997). State Department: Efforts to Reduce Visa Fraud (GAO/T-NSIAD-97-167, May 20, 1997). Vietnamese Asylum Seekers: A Review of Selected Cases in Four Southeast Asia Countries (GAO/NSIAD-97-51, Dec. 31, 1996). Foreign Affairs: Perspectives on Foreign Affairs Programs and Structures (GAO/NSIAD-97-6, Nov. 8, 1996). State Department: Options for Addressing Possible Budget Reductions (GAO/NSIAD-96-124, Aug. 29, 1996). Overseas Real Estate: Millions of Dollars Could Be Generated by Selling Unneeded Real Estate (GAO/NSIAD-96-36, Apr. 23, 1996). Overseas Presence: Staffing at U.S. Diplomatic Posts (GAO/NSIAD-95-50FS, Dec. 28, 1994). State Department: Overseas Staffing Process Not Linked to Policy Priorities (GAO/NSIAD-94-228, Sept. 20, 1994). U.S. Information Agency: Options for Addressing Possible Budget Reductions (GAO/NSIAD-96-179, Sept. 23, 1996). Exchange Programs: Inventory of International Educational, Cultural, and Training Programs (GAO/NSIAD-93-157BR, June 23, 1993). Multilateral Organizations: U.S. Contributions to International Organizations for Fiscal Year 1993-95 (GAO/NSIAD-97-42, May 1, 1997). International Organizations: U.S. Participation in the United Nations Development Program (GAO/NSIAD-97-8, April 17, 1997). Nuclear Safety: International Atomic Energy Agency’s Nuclear Technical Assistance for Cuba (GAO/RCED-97-72, Mar. 24, 1997). State Department: U.S. Participation in Special-Purpose International Organizations (GAO/NSIAD-97-35, Mar. 6, 1997). United Nations: U.S. Participation in Five Affiliated International Organizations (GAO/NSIAD-97-2, Feb. 27, 1997). United Nations: Status of Alternative Revenue Raising Proposals (GAO/NSIAD-97-31, Nov. 8, 1996). World Bank: U.S. Interests Supported, but Oversight Needed to Help Ensure Improved Performance (GAO/NSIAD-96-212, Sep. 26, 1996). Export Finance: Federal Efforts to Support Working Capital Needs of Small Business (GAO/NSIAD-97-20, Feb. 13, 1997). National Export Strategy (GAO/NSIAD-96-132R, Mar. 26, 1996). Government Reorganization: Observations About Creating a U.S. Trade Administration (GAO/T-GGD-95-234, Sep. 6, 1995). Government Reorganization: Issues Relating to International Trade Responsibilities (GAO/T-GGD-95-218, July 25, 1995). U.S. & Foreign Commercial Service: Comments on Proposed Transfer to the Department of State (GAO/T-GGD-95-141, Mar. 21,1995). Export Finance: Comparative Analysis of U.S. and European Union Export Credit Agencies (GAO/GGD-96-1, Oct. 24, 1995). Export Promotion: Rationales for and Against Government Programs and Expenditures (GAO/T-GGD-95-169, May 23, 1995). International Trade: U.S. Efforts to Counter Competitors’ Tied Aid Practices (GAO/T-GGD-95-128, Mar. 28, 1995). International Trade: Combating U.S. Competitors’ Tied Aid Practices (GAO/T-GGD-94-156, May 25, 1994). Export-Import Bank: Key Factors in Considering Eximbank Reauthorization (GAO/T-NSIAD-97-215, July 17, 1997). U.S. Export-Import Bank: Process in Place to Ensure Compliance with Dual-Use Export Requirements (GAO/NSIAD-97-211, July 17, 1997). Export-Import Bank: Reauthorization Issues (GAO/T-NSIAD-97-147, Apr. 29, 1997). Ex-Im Bank’s Retention Allowance Program (GAO/GGD-97-37R, Feb. 19, 1997). Export Finance: Federal Efforts to Support Working Capital Needs of Small Business (GAO/NSIAD-97-20, Feb. 13, 1997). Export-Import Bank: Options for Achieving Possible Budget Reductions (GAO/NSIAD-97-7, Dec. 20, 1996). Retention Allowances: Usage and Compliance Vary Among Federal Agencies (GAO/GGD-96-32, Dec. 11, 1995). Export Finance: Challenges Facing the U.S. Export-Import Bank (GAO/T-GGD-94-46, Nov. 3, 1993). Food Aid: Competing Goals and Requirements Hinder Title I Program Results (GAO/GGD-95-68, June 26, 1995). Cargo Preference Requirements: Objectives Not Significantly Advanced When Used in U.S. Food Aid Programs (GAO/GGD-94-215, Sept. 29, 1994). U.S. Agricultural Exports: Strong Growth Likely but U.S. Export Assistance Programs’ Contribution Uncertain (GAO/NSIAD-97-260, Sept. 30, 1997). Overseas Investment: Issues Related to the Overseas Private Investment Corporation’s Reauthorization (GAO/NSIAD-97-230, Sept. 8, 1997). Trade Liberalization: Western Hemisphere Trade Issues Confronting the United States (GAO/NSIAD-97-119, July 21, 1997). The Results Act: Observations on USTR’s September 1996 Draft Strategic Plan (GAO/NSIAD-97-199R, July 18, 1997). Customs Service: Office of International Affairs (GAO/NSIAD-97-146R, Apr. 25, 1997). World Trade Organization: Observations on the Ministerial Meeting in Singapore (GAO/T-NSIAD-97-92, Feb. 26, 1997). U.S.-Japan Trade: U.S. Company Views on the Implementation of the 1994 Insurance Agreement (GAO/NSIAD-97-64BR, Dec. 20, 1996). International Trade: Challenges and Opportunities for U.S. Businesses in China (GAO/T-NSIAD-96-214, July 29, 1996). U.S. Trade and Development Agency: Limitations Exist in Its Ability to Help Generate U.S. Exports (GAO/GGD-94-9, Oct. 20, 1993). International Trade Commission: Administrative Authority Is Ambiguous (GAO/NSIAD-92-45, Feb. 25, 1992). International Aviation: Competition in the U.S.-U.K. Market (GAO/T-RCED-97-103, June 4, 1997). International Aviation: DOT’s Efforts to Promote U.S. Air Cargo Carriers’ Interests (GAO/RCED-97-13, Oct. 18, 1996). Telecommunications: Competition Issues in International Satellite Communications (GAO/RCED-97-1, Oct. 11, 1996). International Aviation: DOT Needs More Information to Address U.S. Airlines’ Problems in Doing Business Abroad (GAO/RCED-95-24, Nov. 29, 1994). Agricultural Inspection: Improvements Needed to Minimize Threat of Foreign Pests and Diseases (GAO/RCED-97-102, May 5, 1997). Food Safety: Procedures for Inspecting Canadian Meat Imports (GAO/T-RCED-97-21, Apr. 2, 1997). International Financial Crises: Efforts to Anticipate, Avoid, and Resolve Sovereign Crises (GAO/GGD/NSIAD-97-16, July 7, 1997). Financial Crisis Management: Four Financial Crises in the 1980s (GAO/GGD-97-96, May 1, 1997). Foreign Banks: Opportunities Exist to Enhance Supervision Program as Implementation Proceeds (GAO/GGD-97-80, May 9, 1997). Foreign Banks: Implementation of the Foreign Bank Supervision Enhancement Act of 1991 (GAO/GGD-96-187, Sept. 30, 1996). International Environment: Operations of the Montreal Protocol Multilateral Fund (GAO/T-RCED-97-218, July 30, 1997). International Environment: U.S. Funding of Environmental Programs and Activities (GAO/RCED-96-234, Sept. 30, 1996). Global Warming: Difficulties Assessing Countries’ Progress Stabilizing Emissions of Greenhouse Gases (GAO/RCED-96-188, Sept. 4, 1996). International Environment: Environmental Infrastructure Needs in the U.S.-Mexican Border Region Remain Unmet (GAO/RCED-96-179, July 22, 1996). Space Station: Cost Control Problems Continue to Worsen (GAO/T-NSIAD-97-177, July 18, 1997). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-146, Aug. 29, 1997). Budget Issues: Fiscal Year 1996 Agency Spending by Budget Function (GAO/AIMD-97-95, May 13, 1997). Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1998 (GAO/OCG-97-2, Mar. 14, 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 discussed the programs and activities funded by the international affairs budget, the function 150 account of the federal budget, focusing on the issues that should be raised in assessing the current programs and activities on the books that support U.S. foreign policy and economic objectives. GAO noted that: (1) funding in the 150 account, which totalled $18.1 billion in fiscal year 1997, constitutes only 1 percent of the federal budget and just 3 to 4 percent of discretionary funding; (2) these expenditures fund activities that are designed to influence world political and economic agendas; (3) to support its interest in such agendas, the U.S. government maintains a worldwide infrastructure of embassies, missions, consulates, and trade offices, with an overseas staff of more than 35,000; (4) the 150 account funds a wide range of programs and activities; (5) a large percentage of the funds in the account is directed by Congress or the President for specific countries and purposes; (6) to facilitate the examination of 150 account funding, GAO grouped the various programs and activities into six categories: (a) security and peacekeeping operations; (b) bilateral assistance; (c) foreign affairs management; (d) public diplomacy; (e) multilateral assistance; and (f) trade and investment; and (7) GAO presented information on the funding levels and trends for activities in each of the six categories and also discussed the particular set of issues and questions that could be raised with respect to relevance, priority, and efficiency. |
For the approximately 10,000 individuals who age into Medicare every day, the first opportunity to sign up for an MA plan may occur during their initial Medicare election period. After that, beneficiaries in FFS Medicare may enroll in MA—and MA beneficiaries may change their plan selection—during the annual election period from October 15 to December 7. Beneficiaries’ plan selections, effective January 1, are then “locked in” for that calendar year, with some exceptions. CMS grants certain special election periods (SEP) outside of the annual election period when beneficiaries may join MA or change their MA plan selection. For example, MA enrollees who move to states not served by their MA plans are entitled to an SEP to select new coverage. By offering comprehensive coverage and limiting out-of-pocket costs, MA has attracted a substantial number of Medicare beneficiaries. As of May 2015, nearly 16 million beneficiaries, or 30 percent of the Medicare population, were enrolled in approximately 3,800 plan options offered by about 500 MAOs. The Congressional Budget Office has projected that, as the Medicare-eligible population increases, MA enrollment will grow to 30 million beneficiaries, representing about 40 percent of Medicare, by 2025. A fundamental characteristic of MA is that most plans direct enrollees to a limited network of health care providers. The size of a provider network may range from very narrow to fairly broad, depending on the type of plan, the area of the country, and local market characteristics. For example, in urban areas, competition may allow MAOs to recruit providers who are willing to offer discounts on their usual fees in order to be included in the network, providing easy access to an MAO’s many enrollees. However, in rural areas, MAOs may have difficulty organizing an adequate network due to the more limited supply of providers in those areas. To provide beneficiaries with wide access to MA plans, CMS network adequacy requirements take into account differences in utilization, patterns of care, and supply of providers in urban and rural areas. In building their networks, MAOs contract directly with providers. To establish or renew a contract, MAOs negotiate with providers to find agreed-upon payment rates, terms, and duration. MAOs can initiate contracts with providers at any point during the year and can also terminate contracts with network providers at any point. These terminations can be made “for cause,” for such things as a loss of license or breach in contract, or “without cause”—requiring no explanation for the termination. Under Medicare rules, MAOs must give providers written notice at least 60 days in advance of terminating them without cause and must offer providers a process for appealing contract terminations. CMS does not take part in those appeals. To determine whether their current provider, or a provider they wish to use, participates in their MA plan network, beneficiaries commonly rely on provider directories. CMS has published a model directory template, which, though not mandatory, provides MAOs that use it with an expedited agency review. MAOs are required to provide enrollees with paper directories and maintain current directories on their websites at all times. However, research has shown that provider directories issued by insurers often contain inaccurate information and, as a consequence, may mislead beneficiaries about their provider options. The following are examples: The HHS Office of Inspector General reported that 35 percent of 1,800 primary care and specialty providers could not be found at the location listed by the selected Medicaid managed care organizations. The California Department of Managed Health Care called physician offices listed in the provider directories for two large plans in the state’s PPACA marketplace. For Anthem Blue Cross, it found that 12.5 percent of the listings had inaccurate locations and about 13 percent of physicians did not take Anthem Blue Cross patients. For Blue Shield of California, it found that about 18 percent of the listings had inaccurate locations and about 9 percent of physicians did not take Blue Shield of California patients. A study of 4,754 MA dermatology providers listed in directories of large MAOs in 12 metropolitan areas found that about 46 percent of the listings were duplicates and 8.5 percent of the unique providers had died, retired, or moved out of the area. Posing as patients, researchers phoned 360 in-network psychiatrists listed on a major insurer’s website and attempted to make appointments. Sixteen percent of the telephone numbers were wrong and 15 percent of practices were not accepting new patients. Through the annual MAO contracting process, MAOs must attest to the regulatory requirement that they “maintain and monitor a network of appropriate providers that is supported by written agreements and is sufficient to provide adequate access to covered services to meet the needs of the population served.” These networks must also conform to the local pattern of health care delivery. MAOs that do not comply with CMS requirements for network adequacy or do not maintain complete and accurate provider directories may be subject to enforcement actions, including civil monetary penalties or enrollment sanctions. Beginning with contract year 2011, CMS adopted network adequacy criteria designed to be more objective and defensible, as well as updated procedures for reviewing the criteria. Lewin analyzed utilization patterns and standards used by other entities, among other things, to develop the current criteria that CMS regional offices use in conducting their reviews of the MAO submissions. Lewin also revisits network adequacy criteria and CMS oversight processes annually, and provides recommendations for improvement, as needed. To update requirements for MAOs and its oversight of network adequacy, CMS sets forth new policies in its Medicare Managed Care Manual and Marketing Guidelines as well as in its annual Final Call Letter. For example, the 2015 Final Call Letter put forth several changes in network adequacy-related guidance, including a policy that allows an SEP when beneficiaries are affected by significant midyear provider network terminations initiated by MAOs without cause. Through its network adequacy criteria, CMS requires that MAOs have enough providers in their networks to ensure that enrollees can access care within specific travel time and distance maximums. The agency’s quantitative criteria take into account differences in utilization across provider types and patterns of care in urban and rural areas. However, contracting with a certain number and type of providers may not be the same as true provider availability—measured by appointment wait times, providers accepting new patients, or how often a provider practices at a particular location. To varying degrees, provider availability standards have been incorporated broadly into other programs and used in some states to more completely assess the adequacy of provider networks. Since 2011, CMS has defined an adequate MAO network as meeting two criteria: a minimum number of providers and maximum travel time and distance to those providers. These criteria are sensitive to local conditions in that they vary by type of provider and type of county. A minimum number of providers. To determine the minimum number of providers required, CMS considers such county-specific factors as the total number of Medicare beneficiaries and historical data on MA market share in similar counties. CMS sets minimum provider ratios per 1,000 beneficiaries by provider type in each county, for both primary care (including geriatrics and internal medicine) and specialty care (such as cardiology, gastroenterology, and oncology). These ratios differ by the county’s geographic designation as large metro, metro, micro, rural, or counties with extreme access considerations. Maximum travel time and distance. CMS’s time and distance criteria also vary substantially by provider type and county geographic designation. CMS developed these measures—such as 10 minutes/5 miles for primary care providers in large metro counties or 40 minutes/30 miles for primary care providers in rural counties—by juxtaposing beneficiary addresses with provider locations. At least 90 percent of beneficiaries in a county must have access to the appropriate number of providers within the required time and distance maximums. To count toward the threshold, network providers do not have to be located in the same county as beneficiaries as long as they are within the required proximity. Each year, CMS updates its network adequacy criteria for each county and provider type for the subsequent contract year. In advance of contract year 2016, CMS required that MAO networks comprise 55 provider types, including 6 specific primary care provider types, 26 specialty care types, and 23 facility types. For the minimum number of providers criterion, CMS counts each specialty care type separately, but counts all primary care provider types together as one group for mapping purposes. For example, in a metro county with nearly 32,000 total Medicare beneficiaries, each MAO—regardless of the number of plan enrollees—must include in its network at least 7 primary care providers, 2 cardiologists, 2 general surgeons, and 1 of each of the remaining specialty care types. Each MAO in this metro county must also include 47 acute inpatient beds per 1,000 beneficiaries, and one of each of the facility and transplant program types. (For more information on CMS’s network adequacy criteria for contract year 2016, see app. I.) Health care researchers have noted that network adequacy criteria measured by provider type and geographic designation serve to protect beneficiary access while preserving MAO flexibility in provider network design. Furthermore, some researchers have pointed out that quantitative standards derived from sound research provide clarity and certainty, and level the playing field among insurers. In addition, the CMS regional office officials we spoke with expressed a preference for the current criteria. Before 2011, the criteria CMS used were more ambiguous and did not allow for the more objective and consistent application they do now. One beneficiary advocacy group we interviewed described the MA network adequacy criteria as acceptable and appropriate parameters for the program. However, some medical associations we spoke with and recent research by the HHS Office of Inspector General have noted shortcomings in CMS’s reliance on geography-based provider ratios. Medical associations stated that CMS does not obtain information on whether providers in MAO networks are accepting new patients or if the appointment wait times reasonably ensure that patients can see a provider in a timely manner. In commenting on CMS’s draft Call Letter for contract year 2016, a number of medical associations collectively stated that a provider’s full-time equivalent status at a given location should be taken into account to ensure access to care without unreasonable delay. As the HHS Office of Inspector General recent study of Medicaid managed care standards found, when provider availability is not factored into network adequacy criteria, insurers may be able to meet network adequacy criteria even if their network providers are not readily available to all their enrollees. As noted by a Lewin representative, CMS’s priority in updating MA criteria has focused on the number and geographic distribution of providers over other measures of access. She noted, for example, the challenge in identifying network physicians who do not take new MA patients due to practice capacity constraints. Although physicians may choose to participate in multiple health plans or serve FFS patients, MAOs do not require that they report on their practice capacity—that is, the extent to which they contract with other MAOs or the size of their patient panel. Without such data it is difficult to determine the number of potential beneficiaries providers could reasonably serve. Additionally, medical associations told us that CMS’s provider type classifications in the MA criteria mask distinctions within specialties that could have consequences for how MAOs design their networks. The American Academy of Ophthalmology noted that MAOs do not make distinctions for retina or glaucoma specialties. Similarly, the American Society of Retina Specialists reported that it can be challenging for MA enrollees with certain eye conditions to receive treatment when MAOs are not required to include retina specialists in their networks. The American Academy of Dermatology said that dermatologists in plan networks may include subspecialists whose practices focus on certain populations, such as pediatric dermatology. Therefore, counting all specialists regardless of practice focus, as CMS’s criteria do, may overstate the actual number of specialists available to serve MA enrollees. Lewin acknowledged the difficulty in recognizing variation with medical subspecialties as the provider identification data used to establish ratios does not account for these type of breakdowns. For example, because retina specialists are not identified separately from other ophthalmologists in CMS data, there was no way for Lewin to develop subspecialty requirements. Network adequacy standards in other managed care programs we examined cover a variety of approaches to setting network adequacy criteria and differ, to some extent, from MA criteria. To measure the adequacy of provider networks, these standards generally include aspects of provider availability, along with time and distance maximums and provider-to-enrollee ratios. Most of the programs—NAIC’s model act, PPACA marketplaces, and Medicaid managed care—establish minimum network requirements, with states having flexibility to impose additional standards. Since 1996, NAIC has made available to states a model act for network adequacy. To update the model act, NAIC convened a group of state insurance regulators and other interested parties and expects to issue a new model act in 2015. The draft NAIC revised model suggests that states incorporate aspects of provider availability, such as wait times for visits with network providers. NAIC uses a subjective “reasonable access” standard instead of distinct time and distance maximums, which accommodates state differences in geographic accessibility and population dispersion. NAIC’s model act also suggests that states consider provider-to-enrollee ratios for primary and specialty care. While some groups, such as consumer advocates, called on NAIC to establish more quantitative requirements, it has chosen not to be as prescriptive as these groups recommend. QHPs offered in the PPACA marketplaces (whether state-based or federally facilitated) are subject to federal network adequacy standards, which CMS updates in annual rulemaking. CMS used the 1996 NAIC model act for network adequacy as the basis for the PPACA marketplace standards and intends to use the revised model to update requirements applicable to QHPs. States may also impose additional network adequacy requirements on QHPs. Federal rules for PPACA marketplaces do not address network provider availability. Federal regulations do specify that services be accessible without unreasonable delay, but do not include any maximum time or distance requirements. Also, federal regulations do not set any provider-to-enrollee ratios, although QHPs are generally required to contract with a sufficient number of essential community providers, such as federally qualified health centers and other providers that serve predominately low-income, underserved populations. A 2015 Commonwealth Fund study of plans in PPACA marketplaces found that 23 states have quantitative time or distance criteria, while fewer states have quantitative criteria for appointment wait times (11 states) and provider-to-enrollee ratios (10 states). Medicaid managed care organizations are subject to broad federal network adequacy requirements, and states may impose additional or more specific standards. Federal law generally requires a Medicaid managed care organization to provide adequate assurances it has sufficient capacity to serve expected enrollment in its service area. Federal Medicaid regulations contain standards covering different aspects of network adequacy, but do not include any quantitative measures. To address provider availability, regulations require that states consider the numbers of network providers who are not accepting new Medicaid patients. While the rules do not set specific time and distance maximums, regulations point to other access considerations—means of transportation and physical access to care for individuals with disabilities. Additionally, the law does not set specific provider-to-enrollee ratios, but requires that states consider other aspects that would factor into a ratio, including anticipated enrollment, expected utilization, and number and types of providers required to furnish services. In a review of 33 states with Medicaid managed care programs, the HHS Office of Inspector General reported that states typically set standards for appointment wait time, travel time and distance, as well as provider-to-enrollee ratios. These requirements varied widely among the states reviewed, with some differentiation by provider type (primary or specialty care) and location (urban or rural). For example, the states ranged from a maximum appointment wait time for a routine primary care visit of 10 business days in California and Pennsylvania to 45 calendar days in Massachusetts and Minnesota. CMS recently issued a proposed rule that would amend current Medicaid managed care standards to reduce variation in how states evaluate and define network adequacy, and would impose minimum time and distance standards for certain types of providers. TRICARE’s managed care access standards generally have a more quantitative approach. To address provider availability, TRICARE sets appointment wait time limits for routine visits, well-patient visits or specialty care referrals, and urgent care. TRICARE standards set maximum travel times at 30 minutes for primary care and 1 hour for specialty care under normal circumstances. The only aspect of network adequacy standards that TRICARE does not set specific requirements for are provider-to-enrollee ratios, where TRICARE generally requires a sufficient number and mix of specialists to reasonably meet the anticipated needs of enrollees. The inclusion of provider availability in other programs’ network adequacy requirements suggests CMS may be missing a key element for measuring access. In addition, recent health care research we examined and representatives of medical associations we spoke with have suggested that provider availability is a key element for measuring access to care, which most network-based programs have broadly incorporated into federal standards, state standards, or both. While the federal or nationwide requirements are largely broad and subjective, some states have set more quantitative criteria. MA criteria are more robust than those of other programs in terms of distinct travel time and distance for a defined set of providers, but CMS does not assess whether those providers are truly available to enrollees. CMS’s goal has been to set objective measures of network adequacy. Certain programs or states have demonstrated that quantifiable criteria can also extend to measures of provider availability, such as appointment wait time limits. One of CMS’s key MA oversight responsibilities is to ensure that MAOs maintain a network of providers sufficient to meet the needs of all their enrollees. However, CMS limits its annual application of its network adequacy criteria to only those provider networks in counties that MAOs propose to enter in the upcoming year—less than 1 percent of all networks. To facilitate its review of these networks, CMS has established standardized data collection via an automated system. However, the agency performs minimal validation of network data. MAO applicants cannot serve counties without meeting all network criteria, but they may seek—and often receive—exceptions from CMS. While CMS has established criteria defining network adequacy, the agency does not ensure that every network is meeting its current requirements. Instead, it has chosen to collect data for only a minimal subset of MAO networks during the annual application process. Rather than assessing all MAO county-based provider networks against its network criteria, CMS limits its use of the criteria by focusing exclusively on networks in counties that MAOs propose to enter in the upcoming year. During the annual MA application process, CMS’s criteria are only applied against proposed networks, not networks in counties that MAOs already serve. For contract years 2013 through 2015, the agency reviewed over 9,000 proposed networks. CMS approved about half of these networks, while the rest were either withdrawn by MAOs or denied by CMS. (See table 1.) The approval rate varied greatly across the 10 CMS regional offices, ranging from 68 percent at the Atlanta regional office to 22 percent at the San Francisco regional office. The proposed county-based provider networks that CMS approves constitute a fraction of MAO networks and account for a small percentage of enrollees. For contract years 2013 through 2015, new provider networks comprised 0.38 percent of all networks and served 1.99 percent of all MA enrollees during their initial year of operation (see table 2). The small scope of CMS’s network adequacy reviews raise questions as to the agency’s internal controls. For an agency to achieve its objectives, federal internal control standards provide that management must obtain relevant data in a timely manner based on identified information requirements. However, CMS only collects network information for proposed MAO networks during the annual application process. CMS has established a standardized process for collecting data on proposed county-based MAO provider networks. Each January, CMS posts on its website Health Services Delivery (HSD) reference tables that contain network adequacy criteria thresholds for each county. CMS requires MAO applicants to report network data using the HSD table format and transmit the data through the Health Plan Management System (HPMS)—the primary communication tool between CMS and MAOs. The HSD table template has fields to record each network provider’s name, address, provider type, medical affiliation, and employment status. Before submitting their applications to CMS in February, MAOs are able to determine the adequacy of their provider networks by comparing their HSD table data against the thresholds in the HSD reference tables. For example, MAOs planning to enter Cook County, Illinois, for contract year 2016 know from the HSD reference tables that they need at least 92 primary care providers within 10 minutes or 5 miles from at least 90 percent of beneficiaries’ homes in that county, and also know the thresholds for all other required provider types. If MAOs do not meet all the thresholds in Cook County, they may choose, among other options, to contract with more providers to build an adequate network or to not enter that county. After MAOs submit their applications, CMS evaluates their provider networks using an automated system. Through HPMS, CMS performs automated checks, which rely on the HSD reference tables, to determine whether provider networks meet each threshold and then generates two reports on the data errors detected. One report lists problematic address information, such as blank fields, duplicative records, and street addresses and zip codes that are not recognized by the system. The other HPMS report lists all providers shown as supporting the threshold for more than one type of specialty care within a given network. CMS regional office officials praised the automated checks for being far more thorough than the manual review process used before contract year 2011 and for requiring significantly less of their time. Beyond these system- generated reports, CMS does little else to assess the accuracy of the HSD data that MAOs submit. While the HPMS reports identify certain data errors and anomalies, challenges remain with verifying MAO provider network data submissions. In its review of provider submissions, Lewin raised concerns about the validity of addresses in the HSD tables and the overstatement of beneficiary access. In addition, CMS and MAOs both told Lewin they had difficulty verifying provider data. They noted that commonly used verification resources, such as public Medicare websites for comparing physicians or hospitals against quality and cost ratings, often contain incorrect data due to lags in updates and poor provider self-reporting. To address these concerns, Lewin recommended that CMS develop data verification tools to facilitate the accuracy and consistency of application data submissions and HSD table reviews and include more information on the strengths and limitations of commonly used verification resources in its standard operating procedures. While CMS officials said they developed a tool during the contract year 2015 application cycle to facilitate the consistency of submissions, they told us they have no plans to develop additional tools to determine the accuracy of submissions or add information to the standard operating procedures. Federal internal controls call for management to obtain relevant data that have a logical connection with, or bearing upon, identified information requirements; be reasonably free from error and bias; and faithfully represent what they purport to represent. For effective monitoring, management must also evaluate the reliability of data sources. However, CMS does not check the HSD data against other data sources to identify inconsistencies and other indications of error. Officials from one CMS regional office questioned the purpose of cross-checking the HSD data, but officials from another regional office noted that they occasionally call providers and perform Internet searches to verify the data. The lack of data validation is notable because provider directories, which contain the same elements as the HSD data, have been proven to be inaccurate, as previously discussed. Because the HSD data and provider directories are populated from the same source, according to the trade organization that represents MAOs, the HSD data likely contain the same inaccuracies. Inaccuracies in provider directories—and, as an extension, HSD tables— may be attributable to both MAOs and providers. According to the trade organization that represents MAOs, it is a challenge for health plans to ensure that provider directories are up-to-date and accurate because providers often do not notify the plans of changes, such as retirements and office relocations, in a timely manner. The American Academy of Dermatology representatives explained that MAOs are responsible for updating provider directories, in part because MAOs use networks to attract consumers and sell their insurance policies. Representatives from two medical associations reported that they were not aware of any MAO contract requirements regarding updates to directory information. The American Academy of Ophthalmology representatives told us that most providers inform MAOs of address changes, for example, but such notices are not always acted upon by the MAOs. To eliminate the hassle of notifying multiple MAOs of changes in office hours or locations, the representatives proposed the construction of an electronic portal accessible by all health plans to allow providers to update their information in one place. Medical association representatives also contended that MAOs are in a better position to detect when directories need to change, because the absence of claims for a specific period, such as 30 days, would indicate whether a provider has, for example, moved or died. In CMS’s 2016 Final Call Letter, the agency reported plans to conduct direct monitoring of online provider directories to verify the information MAOs include about network providers. The agency also indicated it will consider requiring MAOs to provide, and regularly update, network information in a standardized, electronic format for eventual inclusion in a nationwide provider database readily available to beneficiaries and others. March MAOs whose provider networks do not meet CMS’s network adequacy criteria are able to request exceptions from the criteria. CMS allows MAOs whose proposed networks fail to meet the adequacy criteria for a particular provider type in a county to request an exception from the criteria. After completing the automated checks, CMS provides an opportunity in March to MAOs whose provider networks did not pass the checks to request exceptions from its network criteria along with a justification. If MAOs’ provider networks do not initially pass the automated checks, CMS notifies them and requests updated data, if applicable. HPMS then generates a report that MAOs can use to prepare exception requests for each provider type deemed insufficient. According to CMS, exceptions are intended to be granted under limited circumstances, primarily when its network criteria are not in line with local patterns of care. CMS’s standard operating procedure for reviewing exceptions states that they may be allowed when an insufficient number of providers are located in or near the county, the pattern of care in the county does not support the need to have the required number of providers, or the services of the provider type can be rendered by another provider type. For each exception request, CMS requires MAOs to submit a detailed plan for ensuring access to the services of the provider type for which the exception is being made. MAOs must identify non-contracted providers in or near the county, explain why they have not contracted with those providers, specify the local patterns of care issues they identified, propose another provider type to offer services, and describe each data source used. Along with this information, MAOs must upload in HPMS lists of the network providers that can provide the services of the provider type and the closest network providers of the provider type. CMS’s policy is that an MAO’s refusal to contract with a provider or a provider’s refusal to contract with an MAO is not a valid reason for an exception. April CMS manually reviews the exception requests from MAOs. In April, regional offices—which CMS officials said best understand their markets—review and grant exception requests on a case-by-case basis. Regional office reviewers manually scrutinize each request for the counties in their region. While the Atlanta, Boston, Kansas City, and Philadelphia regional offices approved all the exception requests they reviewed during contract years 2013 through 2015, the San Francisco and Seattle regional offices each approved approximately 80 percent. According to the reviewers we interviewed, it can take 5 minutes to up to a day to review each one, depending on the experience and workload of the reviewer, the complexity and thoroughness of the exception request, and the availability of providers in a county. The reviewers may use Internet search engines and mapping tools to confirm whether providers are at the listed location and may call providers to determine the local pattern of care in a county. Some reviewers told us they also examine state and local medical board information, while others said they perform only spot checks for well-written exception requests. Asked if they considered analyzing Medicare FFS claims data for patterns of care, reviewers from one regional office said such analyses would not be helpful in determining where a county’s beneficiaries customarily obtain health services. They explained that determining the local pattern of care can be subjective and an understanding of the geographic area where exceptions are requested is all that is needed. CMS has approved most exception requests of those it has reviewed over the past 3 years. For contract years 2013 through 2015, CMS reviewed approximately 2,300 exception requests and approved 91.8 percent. For contract year 2015, CMS approved all but 1 of the 641 exception requests it reviewed. (See table 3.) While exceptions may be warranted under certain conditions, CMS never revisits its approved exceptions to see if they continue to be justified. Although provider networks and provider markets are constantly changing, exceptions that are based on a point in time hold indefinitely. Moreover, CMS officials noted that regional office account managers are often not aware of past exceptions that have been granted to existing MAOs. The number of exception requests CMS has reviewed has varied greatly across different types of counties. For contract years 2013 through 2015, less densely populated counties accounted for most exception requests. Approximately 23 percent of the requests were for provider types in counties with extreme access considerations, 24 percent in rural counties, 18 percent in micro counties, 27 percent in metro counties, and 8 percent in large metro counties. Although the time and distance requirements are more generous in less populated areas, the pattern of care may be unusual. Some provider types do not exist in certain rural areas, according to CMS officials, and it may not be unusual for beneficiaries to travel far distances to receive specialty care. In addition, since contract year 2013, the number of exception requests and the CMS approval rate have varied widely across provider types. Of the 2,304 exception requests CMS reviewed over the past 3 years, specialists accounted for 78 percent, facilities for 20 percent, and primary care providers for 2 percent. While the CMS approval rate for exception requests was 78 percent for facilities, it was 95 percent and 96 percent for specialists and primary care providers, respectively. The 4 types of providers with the greatest number of exception requests were gastroenterology (154), dermatology (151), outpatient dialysis facilities (132), and pulmonology (102). The CMS approval rate ranged from 12 percent for chiropractors to 100 percent for infectious diseases, physiatry and rehabilitative medicine, neurosurgery, and 12 other provider types. In addition to chiropractors, the approval rate was notably low for outpatient dialysis facilities (40 percent) and skilled nursing facilities (67 percent). April-May CMS approves or denies MAOs’ applications depending on the adequacy of their provider networks. After the manual review of exception requests ends in late April, CMS either approves the requests or issues a notice of intent to deny the requests. MAOs whose exception requests are not approved have the opportunity to submit revised requests in May, and then CMS makes its final decisions. The regional office reviewers we interviewed noted that they commonly deny requests from MAOs that do not follow the instructions, provide poorly written responses, or do not provide enough information on the local pattern of care. The reviewers explained that many denials are the result of MAOs trying to expand too quickly or being pressured by deadlines. MAOs may choose to withdraw their application for a particular county so that CMS does not deny their entire application. CMS’s regional account managers hold regular discussions with MAOs during which network adequacy issues are sometimes raised, but CMS does not routinely examine MAO information on provider networks to assess ongoing compliance with criteria. CMS recently added a requirement that MAOs disclose their plans to significantly narrow their networks, but the agency has not defined what it means to have a significant change, allowing each MAO to determine the need for disclosure. CMS further expects that evidence of problems related to any undisclosed network narrowing to appear as complaints to the agency, even though some complaints may not be accounted for. As part of its broader MAO oversight activities, CMS regularly holds teleconferences with MAOs, where network issues may or may not be discussed. The agency’s regional account managers monitor compliance with various aspects of MA contracts—such as issues with provider payments—but network adequacy is not always an item for discussion. At the regional offices we interviewed, CMS account managers met with MAOs in varying frequencies, with some meeting weekly and others meeting monthly. Officials from three of the five regional offices told us that account managers regularly prompt MAOs to discuss network issues, such as pending provider contract negotiations; officials at the remaining two told us that network adequacy discussions occur only on an as- needed basis. Moreover, CMS does not routinely collect or review provider network information from MAOs not subject to the application process, leaving nearly all—over 99 percent—of ongoing county-based provider networks unexamined against the current MA criteria. Internal control standards stipulate that agencies should establish and operate ongoing monitoring activities to assess quality performance over time; the standards also note that operating information is needed to determine whether agencies are achieving compliance with requirements under various laws and regulations. Because a plan’s network providers and enrollees change from year to year, the lack of regular review means CMS cannot be assured that MAO networks continue to be adequate, providing sufficient access for enrollees. CMS also never examined the networks that existed before 2011 against the current network adequacy criteria, and as a result, lacks the requisite information needed for proper oversight of network adequacy in the MA program. Lewin analyzed samples of these pre-existing networks and found that most, but not all, of the provider network specialties met current adequacy requirements. Lewin further concluded that more regular assessments of provider networks against the current network adequacy criteria could help ensure that MA plans continue to meet network adequacy criteria and would not be overly burdensome for MAOs. Lewin recommended to CMS that the agency develop a rigorous network monitoring program to ensure that all MAO networks—not just those entering a county for the first time—continue to meet network adequacy criteria. For example, Lewin suggested that CMS consider evaluating each MA plan on a cyclical basis, such as every 3 years. Additionally, officials from two regional offices noted that more regular assessments of adequacy based on HSD data submissions would be an effective monitoring tool. CMS told us that it does not have plans underway to review all networks for adequacy on a cyclical basis, but the agency has announced plans to include network adequacy as a part of its audit process on a pilot basis beginning in late 2015. Under the monitoring processes that CMS has put in place, MAOs must disclose efforts to significantly narrow provider networks, but the agency allows MAOs discretion in determining whether this disclosure is necessary. As of contract year 2015, MAOs must notify CMS at least 90 days prior to significant changes involving provider contract terminations. In deciding whether a network reduction is significant, CMS has not provided any explicit criteria but directed MAOs to take a conservative approach. According to CMS, leaving the definition of significant to each MAO stems from the lack of consensus among stakeholders—including beneficiary advocates and professional associations—about how to define a significant network change. In the event of a self-disclosed significant change, CMS requires MAOs to provide information demonstrating their continued compliance with network adequacy criteria, such as through the submission of updated HSD tables or automated reports. In addition, it requires MAOs to develop and submit a plan for ensuring continuity of care for affected enrollees. If CMS determines that access for a large number of enrollees has been impaired as a result of a significant network reduction, the agency may approve an SEP. This would allow those enrollees to switch MAOs or enroll in FFS Medicare outside the annual open election period. To make this determination, CMS takes into account the number of enrollees affected, the size of the area served, the timing of the termination, and information related to the enrollee notification, but also requires that enrollees demonstrate that they were affected by the loss of their network provider. Some CMS officials we spoke with asserted that MAOs have an incentive to self-disclose major provider network reductions because they are subject to more severe compliance actions if they are not forthcoming about changes impacting access to care. However, from 2011 to early 2015, CMS had taken only one compliance action—issuance of a warning letter—against an MAO for a network adequacy issue. Other MAOs, including Humana and Blue Cross Blue Shield affiliates, have conducted similar provider network narrowing efforts. UHC is presented here because it was the largest MAO in 2014, accounting for 20 percent of total MA enrollment. CMS relies on complaints it receives to identify any problems related to network changes that are not identified through MAO self-disclosure, but does not routinely review complaints made to MAOs directly or data on out-of-network service utilization. CMS tracks complaints from beneficiaries and providers made to its Medicare call center (1-800- MEDICARE), State Health Insurance Assistance Programs, congressional offices, or directly to its regional offices. Complaint information is compiled in CMS’s Complaints Tracking Module (CTM) and categorized by topic before being assigned to a regional office caseworker. Agency officials told us that any network adequacy issues not already disclosed by MAOs would be reflected as a spike in complaints reported by MA enrollees or providers. As a part of the agency’s ongoing monitoring responsibilities, CMS account managers are directed to analyze trends in the CTM data and investigate those trends that they believe need to be addressed, particularly as they relate to beneficiary access issues. Until recently, network adequacy was not a separate category in the CTM but may have been included under other categories, such as one for problems with plan enrollment. In 2014, CMS created a distinct category—”provider or network issues”—to better monitor trends in network-related complaints, but agency officials acknowledge that such complaints may still appear in several other categories. Furthermore, CMS does not routinely ask MAOs about the complaints they receive through their customer service lines or information about out- of-network utilization. In the event an MAO discloses significant network changes, CMS may follow up about the types of complaints the MAO subsequently receives, but the agency does not regularly do so. In addition, CMS does not collect data from MAOs on how frequently enrollees claim care from out-of-network providers, which would provide account managers an additional tool to evaluate access in provider networks. CMS requires that MAOs make a good faith effort to give enrollees advance written notice when a provider contract is terminated, but has not established information requirements for those notices. MAOs are expected to send a letter to affected enrollees at least 30 calendar days before the effective date of termination, and CMS suggests a longer notification period in the event of a significant change to a provider network. CMS issued guidance in its 2015 Final Call Letter that suggests that, as a best practice, MAOs include information on in-network providers to replace terminated providers in their notification letters to enrollees. CMS also recommended that notices indicate how enrollees can request continuation of ongoing medical care—such as chemotherapy or post-operative rehabilitation—from the enrollee’s current provider at in-network rates for a limited period of time. Unlike some other beneficiary communications, CMS has not developed a model template or list of required content for these notices. The agency maintains standards for other MAO material distributed to beneficiaries to ensure clarity and completeness. For example, CMS developed models for MAO marketing materials, including provider directories. MAOs may use a directory format different from the model directory, but it must contain, at a minimum, all the same information elements required in the model directory. Similarly, MA plans offering prescription drug coverage must mail standardized annual notices of change to enrollees that contain CMS-required elements about formularies and pharmacies. Yet, CMS does not require that enrollee notifications of provider terminations include all pertinent information in an understandable format. Furthermore, CMS does not regularly review sample notices of terminated providers sent to enrollees. For instance, officials at one regional office told us that MAO account managers would review enrollee notification letters only in the event of significant terminations. Officials at four other regional offices did not identify this as a triggering event for review. CMS officials explained that these notifications are considered ad hoc communications and are classified as materials that are not subject to marketing review. CMS regulations prohibit MAOs from engaging in marketing activities, including communications about provider networks, that could mislead or confuse Medicare beneficiaries. In addition, internal control standards state that management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. Because CMS neither requires specific information elements nor reviews notifications, enrollees may receive inconsistent and potentially confusing or inaccurate information when their providers are terminated from MAO networks. For example, communication we examined indicated that enrollees had been told by their MAO to select a new provider long before the effective termination date for their current provider. An MAO wrote to a primary care physician on May 21, 2014, stating that his contract with the MAO would end May 11, 2015, the anniversary date of the agreement. Then the MAO sent a letter to that physician’s patient, dated June 3, 2014, stating that he must select a new primary care provider by July 8, 2014, or one would be chosen for him. Thus, although the enrollee could have continued receiving care from his network physician for another 10 months, the MAO shifted the physician’s patients to other providers. CMS is responsible for ensuring that Medicare beneficiaries can access timely care. To do this effectively, the agency must set appropriate MA network adequacy criteria, oversee MAOs’ adherence to its requirements, and ensure that enrollees are properly notified about MAO network changes. Yet, the rules and processes the agency has put in place— which lack certain elements used in other managed care programs and outlined in federal internal controls—cannot reasonably ensure that MAO networks continue to meet the needs of MA enrollees. CMS has established network adequacy criteria that put a premium on the number of providers in a network within county-based time and distance standards. The advantage of such quantitative criteria is that they can be operationalized through automated processes. However, unlike those of some other managed care programs, the CMS criteria ignore measures of provider availability. CMS does not consider whether an MAO’s contracted providers are part-time, work at their listed locations, or are taking new patients. As a result, provider networks may appear to regulators and beneficiaries as more robust than they actually are if not all providers are open for business. Under current CMS policy, the agency cannot be sure that all MAO networks either fully meet its current criteria or qualify for an exception. Although Medicare contracts with MAOs every year, CMS does not require that MAOs demonstrate compliance with network adequacy criteria every year. Instead, CMS performs systematic reviews of network adequacy for only a small fraction of MA networks, relying on information that is supplied by MAOs but is not fully checked for accuracy. For the vast majority of plans, MAOs annually attest that they have an adequate network, and CMS accepts that statement without verification. The agency’s approach to monitoring existing networks is largely reactive, relying on MAO disclosure of adequacy issues and beneficiary and provider complaints. Unless CMS verifies provider information submitted by MAOs and periodically requires evidence of compliance, for example every 3 years, the agency cannot be confident that MAOs are meeting network adequacy criteria. Furthermore, while CMS requires that MAOs make a good faith effort to notify enrollees in advance of a provider termination, the agency has no standards for those notices. Also, unlike some beneficiary communication and plan marketing materials, MAO notification letters are not subject to any minimum information requirements. Without greater standardization, the agency cannot ensure that MAO communications are clear, accurate, and complete, and MA enrollees remain at risk of receiving potentially confusing information. To improve its oversight of network adequacy in MA, we recommend that the Administrator of CMS augment MA network adequacy criteria to address provider verify provider information submitted by MAOs to ensure validity of the Health Services Delivery data; expand network adequacy reviews by requiring that all MAOs periodically submit their networks for assessment against current Medicare requirements; and set minimum requirements for MAO letters notifying enrollees of provider terminations and require MAOs to submit sample letters to CMS for review. We provided a draft of this report to HHS for comment. The agency provided written comments, which are printed in appendix II. In addition, CMS provided technical comments, which we incorporated as appropriate. HHS concurred with our recommendations. In its comment letter, the agency outlined several actions it plans to take, or is considering, to strengthen its oversight of MAO network adequacy. Because these efforts have yet to be implemented, it is too early to determine whether they will fully address the issues we identified. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Health and Human Services, and the CMS Administrator. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@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. The Centers for Medicare & Medicaid Services (CMS) uses two criteria for determining network adequacy in Medicare Advantage (MA): minimum number of providers and maximum travel time and distance. There are several key elements CMS uses each year to update its requirements. One key element is the provider types that MA organizations (MAO) must include in their networks. Lewin—the agency contractor that developed the criteria—explained that CMS had an original list of provider types that it reviewed to see if the categorizations were appropriate. They found that CMS’s list was mostly aligned with frequently used facility types. The 55 provider types required in contract year 2016 are listed in table 4. For the minimum number of providers, CMS requires that MAOs demonstrate that their networks have a sufficient number of providers based on county characteristics. The five county classifications are based on population and density estimates from U.S. Census Bureau and Office of Management and Budget data. A county must meet both the population and density indicators to be included as that county type. CMS then multiplies three variables to determine the minimum number of providers. The first variable is the 95th percentile of MA market penetration rates for each county type. CMS chose the 95th percentile to estimate market share through work conducted by Lewin, which examined the market penetration in managed care and network-based private fee-for-service (FFS) plans. The percentiles are updated each year based on current enrollment. County type classifications and each county’s respective percentile for contract year 2016 are listed in table 5. The second variable in the formula is the number of Medicare beneficiaries—those in MA and FFS—in a specific county. Each year, CMS updates the total number of beneficiaries in each county. This variable is multiplied with that year’s 95th percentile of MA market penetration in the respective county type to determine the number of beneficiaries an MAO could reasonably serve in its initial year in the proposed county. For example, the 95th percentile for metro counties in contract year 2016 was 12.1 percent. For an MAO seeking to enter that county, the 95th percentile (0.121) would be multiplied by the total number of Medicare beneficiaries in the county the MAO proposes to enter to develop the number of beneficiaries the MAO must cover. The third and final variable in the calculation is the established ratios of provider types required per 1,000 beneficiaries for each county type. CMS bases the established ratios on primary and secondary research of utilization patterns and clinical needs of beneficiaries. To calculate the minimum number of each provider type in each county, CMS multiplies the ratio for each provider type by the number of beneficiaries an MAO must cover and then rounds up to the nearest whole number. Table 6 illustrates the calculation for a minimum number of providers for primary care in Muscogee, Georgia, which is a metro county. For maximum travel time and distance, CMS requires that MAOs ensure that their networks meet specific geographic metrics. CMS uses geo- mapping software to determine the distance between the locations of beneficiaries’ addresses and network provider practices. For each county MAOs propose to enter, they must show that at least 90 percent of beneficiaries in that county will have access to at least one provider of each type within CMS’s time and distance criterion for the applicable county type. In addition to the contact named above, Rosamond Katz, Assistant Director; Sandra George; David Grossman; Kate Nast Jones; and E. Jane Whipple made key contributions to this report. | MAOs contract with a network of providers to manage health care delivery to their enrollees. MAOs can initiate or terminate contracts with providers at any time for any reason. Recently, some MAOs have been narrowing their provider networks, prompting concerns about ensuring enrollee access to care and CMS's oversight of MAO compliance with network adequacy criteria. GAO was asked to review how CMS ensures adequate access to care for MA enrollees. This report examines (1) how CMS defines network adequacy and how its criteria compares with other programs, (2) how and when CMS applies its criteria, (3) the extent to which CMS conducts ongoing monitoring of MAO networks, and (4) how CMS ensures that MAOs inform beneficiaries about terminations. GAO reviewed CMS and other guidance on network adequacy, federal regulations, and standards for internal control. GAO also interviewed CMS officials and representatives of medical associations and beneficiary advocacy groups, and analyzed CMS data on oversight of MAO provider networks for contract years 2013 through 2015. The Centers for Medicare & Medicaid Services (CMS) is the agency within the Department of Health and Human Services (HHS) responsible for overseeing the Medicare Advantage (MA) program—Medicare's private plan alternative. Since 2011, CMS has defined an adequate MA provider network as meeting two criteria: a minimum number of providers and maximum travel time and distance to those providers. To reflect local conditions, the requirements are specific to different county types and a range of provider types. However, the MA criteria do not reflect aspects of provider availability, such as how often a provider practices at a given location. In contrast, other network-based health programs use provider availability measures to assess network adequacy. For example, federal Medicaid managed care rules address providers' ability to accept new patients and TRICARE criteria address appointment wait times for active duty servicemembers. Without taking availability into account, as is done in some other programs, MA provider networks may appear to CMS and beneficiaries as more robust than they actually are. CMS applies its network adequacy criteria narrowly. Rather than assessing all county-based provider networks against its criteria, CMS limits its annual application of the criteria to provider networks in counties that MA organizations (MAO)—private organizations that offer one or more health benefit plans—propose to enter in the upcoming year. From 2013 through 2015, CMS's reviews accounted for less than 1 percent of all networks. To facilitate its review of these networks, CMS has established standardized data collection via an automated system. However, CMS does little to assess the accuracy of the network data in applications MAOs submit, even though the submissions contain the same data elements as in provider directories, which have been shown to be inaccurate in a number of government and private studies. Until CMS takes steps to verify MAO provider information, as outlined in federal internal control standards, the agency cannot be confident that MAOs meet network adequacy criteria. For established provider networks, CMS does not require MAOs to routinely submit updated network information for review, but may learn of any adequacy issues through its broader oversight of MAOs. CMS recently required that MAOs disclose efforts to significantly narrow provider networks, allowing MAOs to determine when such disclosure is necessary. CMS also relies on complaints it receives to identify any problems related to network changes that are not otherwise identified. However, contrary to internal control standards, CMS does not measure ongoing MAO networks against its current MA criteria. Because a plan's providers may change at any time, CMS cannot be assured that networks continue to be adequate and provide sufficient access for enrollees until the agency collects evidence of compliance on a regular basis. While CMS requires that MAOs give enrollees advance notice when a provider contract is terminated, the agency has not established information requirements for those notices and does not review sample notices sent to enrollees. This lack of scrutiny appears inconsistent with the agency's oversight of other Medicare beneficiary communications and with internal controls. Without a minimum set of required information elements and a check on adherence to them, the agency cannot ensure that MAO communications are clear, accurate, and consistent. The Administrator of CMS should augment oversight of MA networks to address provider availability, verify provider information submitted by MAOs, conduct more periodic reviews of MAO network information, and set minimum information requirements for MAO enrollee notification letters. HHS concurred with the recommendations. |
Each year, American consumers arrange more than 2 million funerals at a total cost of billions of dollars. During 1997, according to Conning & Company, an insurance industry publications and research firm, almost 27,000 funeral service providers, such as funeral homes and crematories, had sales revenue of about $10 billion. The National Funeral Directors Association (NFDA) reported that in 1997, the average adult funeral cost about $5,500, including casket and vault. Table 1 shows NFDA data on the average cost for the most commonly selected funeral items as of January 1997. NFDA also maintains some data on the cost of final disposition, such as burial and cremation. For example, in 1997, according to NFDA, the cost of an individual grave space ranged from about $150 to over $1,900, and the cost of opening and closing the grave ranged from $125 to $750 for nonovertime work. In addition, according to NFDA, the cost of cremation ranged from $75 to $395; a bronze urn to hold cremated remains cost from $230 to $1,800; and in-ground placement of an urn ranged from $450 to $1,250. Although the variety of choices and the range of costs make it difficult to precisely estimate the cost of a typical funeral and burial, AARP estimated the cost in 1998 to be about $8,000 and as much as $10,000 in some markets. Furthermore, AARP reported that the cost of funeral and burial arrangements is increasing. In fact, according to data collected by the Bureau of Labor Statistics (BLS), funeral expenses have grown faster than the rate of inflation. Figure 1 shows the extent to which funeral expenses have exceeded the rate of inflation, as indicated by the consumer price index (CPI), since 1990. FTC has a major role in protecting consumers during death care transactions. The FTC Act declares unfair or deceptive acts or practices to be unlawful when they affect commerce. Under its authority to promulgate rules, FTC has issued a trade rule entitled Funeral Industry Practices—more commonly called the Funeral Rule. The Funeral Rule was designed to (1) ensure that consumers receive the information necessary to make informed purchasing decisions and (2) lower existing barriers to price competition in the market for funeral goods and services. The Funeral Rule, which became fully effective in April 1984, declares it an unfair or deceptive act or practice for funeral providers to (1) fail to furnish accurate price information to funeral consumers, (2) require consumers to purchase items they do not want to buy, and (3) embalm deceased human remains for a fee without authorization. The Rule further declares it a deceptive practice for funeral providers to make certain misrepresentations, such as that embalming is required by law when it is not, that caskets must be used for cremation, or that funeral goods and services have certain preservation and protection capabilities. To prevent those practices, providers of funeral goods and services are to, among other things, (1) give detailed printed information about prices, including certain legal disclosures, to consumers who inquire about funeral arrangements; (2) allow consumers to select only those goods and services they desire (rather than offering goods and services only in predetermined packages); and (3) seek express approval before embalming the deceased for a fee. Since the Funeral Rule’s inception, it was amended once in 1994. In April 1999, FTC announced that it was beginning to review the Funeral Rule to determine if it should be further amended, maintained as is, or repealed. Appendix I contains a copy of the Funeral Rule that was in effect as of July 1999. State and local governments also have a role in regulating and overseeing funeral homes and cemeteries. Commercial cemeteries are regulated primarily at the state or local level. According to a 1998 book on making funeral arrangements, funeral homes and cemeteries are regulated by state boards as well as other agencies, including offices of attorneys general and departments of health and insurance. In addition, the book points out that licensing and minimum education requirements for funeral directors and embalmers differ from state to state. State laws also are the primary source of regulation over preneed funeral contracts. According to a 1996 law journal article, although every state, with the exception of Alabama and the District of Columbia, has enacted some sort of regulatory action to oversee preneed contracts, the laws vary from state to state.Examples of areas of differences in state statutes include the funding options available to consumers, limitations on where proceeds from preneed funeral contracts may be invested, and the percentage of preneed sales proceeds required to be placed in trust. One of the major changes in the nature of death care industries is the increase in preneed contracts. Conning & Company estimated that the preneed funeral market, including preneed trust deposits and preneed insurance contracts, amounted to over $21 billion in 1996. Another change, according to FTC, is that cemeteries and casket retailers are now competing with traditional funeral providers, such as funeral homes, in the sales of caskets and other funeral goods and services. At the same time, an NFDA official said that there has been a movement away from independent family-owned funeral homes and a movement toward corporate or publicly owned homes. And according to reports in the media, there is a growing incidence of funeral homes and cemeteries being owned by the same few organizations. To meet our objectives, we did our work primarily at FTC in Washington, D.C., and Dallas, TX; and at state funeral and cemetery regulatory offices in five states—California, Florida, Maryland, New York, and Texas. As agreed with your offices, we focused our efforts on five states because of time and staffing constraints. We selected California, Florida, New York, and Texas because these states had the highest number of deaths of all 50 states in 1998. We selected Maryland because it recently had established a state regulatory agency with oversight responsibility for all but certain religious nonprofit cemeteries and because of Maryland’s close proximity to our headquarters. In addition, we interviewed selected national representatives of industry trade and regulatory associations and consumer advocacy groups that deal with death care issues (see app. II for the organizations of the representatives and officials we spoke with). From each of these organizations we collected and reviewed available documents on such matters as issues affecting death care industries and consumers, sales and revenues of death care providers and average costs of death care goods and services, and federal and state regulatory issues. We also did a literature and Internet search for information on issues affecting death care industries and consumers and reviewed pertinent books, magazines, trade publications, and periodicals regarding consumer concerns with related death care industries. We did our work between July 1998 and July 1999, in accordance with generally accepted government auditing standards. Appendix II discusses our objectives, scope, and methodology in more detail. We requested comments on a draft of this report from FTC’s Chairman. FTC’s comments are discussed near the end of this letter and are reprinted as appendix VI. We also contacted responsible officials from the regulatory bodies in the five states to verify the information on regulation, oversight, and consumer information in this report. We made technical changes as appropriate. Comprehensive information on consumer complaints that would indicate the overall nature and extent of problems that consumers experienced with various aspects of death care industries was not available for a number of reasons. One reason is that consumers can complain to a variety of organizations about death care issues and can complain to more than one organization about the same incident. Another reason is that no single organization or combination of organizations collects and compiles all complaints into one database. Also, each organization can have its own way of compiling and maintaining complaint information, which would confound efforts to compile and analyze aggregate complaint data. Although the organizations we contacted were able to provide some data, the number of complaints about death care was generally low compared to complaints about other categories of consumer issues. Among the reasons these organizations gave for the relatively low number of complaints was the personal or emotional component of the death care situation. Consumers can complain to a number of organizations about death care issues—from FTC at the federal level, to funeral licensing boards at the state level, to local consumer groups. Thus, it is difficult to determine the universe of organizations accepting complaints. In addition, consumers can lodge the same complaint to more than one of these organizations. For example, although consumers can lodge a complaint with FTC, intervening in individual disputes is not something FTC does. Instead, FTC refers consumers to other organizations for complaint resolution. Thus, FTC officials said that a single complaint could be contained in the files of multiple organizations. At the state level, consumers may complain to a variety of organizations. For example, in Texas, a consumer may complain to the state’s office of the Attorney General and also to regulators responsible for any particular aspect of the death care industry, such as the Texas Department of Banking, which is responsible for regulating cemeteries and preneed funeral arrangements; or the Texas Funeral Service Commission, which is responsible for regulating funeral providers. Consumers also can register complaints with nongovernmental organizations, both those that handle consumer complaints in general and those that specialize in death care matters. One of the best-known general consumer complaint organizations is the Better Business Bureau (BBB), which accepts complaints and can intervene on behalf of consumers through its local bureaus. One specialized organization that accepts complaints only about death care is the Funeral Service Consumer Assistance Program (FSCAP), which provides consumer information, problem-solving resources, and recommendations for action concerning funeral services. According to FSCAP, it attempts to work with consumers to resolve their concerns, but if it cannot, FSCAP officials refer them to the appropriate state or local government agency. Another specialized organization, the Cemetery Consumer Service Council (CCSC), assists consumers in matters involving private cemeteries and memorial parks. According to CCSC, consumer complaints it receives at its national office are forwarded to the appropriate state CCSC representative for investigation and action. CCSC reports that its state representatives resolve many complaints by telephone and then notify the consumer. At the local level, organizations such as the Syracuse Memorial Society will respond to complaints about death care industries. Regardless of how many organizations accept complaints, no single organization or combination of organizations collects and compiles all complaints. Even if data from all of the organizations that accept complaints could be collected and compiled, because of differences in the way complaints are recorded, there is no assurance that the aggregate number of complaints would be accurate—that is, not overstated or understated—or that the nature of complaints would be recorded. This is because the various organizations and agencies that accept complaints have their own approaches for compiling and maintaining complaint information, often in dissimilar formats that do not lend themselves to systematic compilation or analysis. For example, in the selected states we visited, we found that most of the states (California, Maryland, New York, and Texas) used a manual process, rather than an automated one, for recording and filing death care complaints. This manual process made it difficult to retrieve aggregate data. For example, before 1998, in Maryland, complaints for cemeteries were filed with complaints about other licensed businesses, such as beauty shops. For the one state, Florida, that used an automated system for complaints, detailed information about the nature of complaints was not recorded. In addition, not all organizations that accept complaints record information on the nature of complaints, only whether a complaint was lodged. For example, BBB headquarters, which compiles all BBB data on consumer complaints, does not have information in its database on the nature of those complaints, only information on the number of complaints by industry category. The reason for this, according to a BBB official, is that local bureaus of the BBB give headquarters statistics only on the aggregate number of complaints. Only the bureaus have details on the nature of those complaints. For that information, one would have to contact each local BBB office, which may or may not have the information available for a given year. Although we were unable to identify the overall nature and extent of consumers’ problems with various aspects of death care industries, available complaint data indicated a range of consumers’ concerns. These concerns ranged from cemeteries’ failure to mow or trim grass to funeral homes’ efforts to dissuade customers from using caskets sold by parties other than themselves. Although the range of complaints was broad, we did not find large numbers of complaints at FTC, nongovernmental organizations, and selected state agencies. Generally across all of the types of organizations we contacted, most officials and representatives said that they received few complaints about death care. Reasons provided for the low number of complaints included the personal or emotional component of the death care situation and the fact that consumers may have been satisfied with the goods and services received. For example, for fiscal year 1998, FTC’s internal consumer complaint database, the Consumer Information System (CIS), contained 46,091 consumer complaints, 152 of which were on the subject of death care (0.33 percent). FTC staff assessed these complaints and determined that 58 involved potential violations of the Funeral Rule; the remaining 94 concerned other issues, such as rude service, contractual disputes, and cemetery and preneed complaints. Our analysis of CIS data for specific complaints consumers made to FTC in fiscal year 1998 includes the following as examples of the broad range of complaints received: A California consumer used the Internet to complain that a preneed trust for the entire cost of a funeral was purchased in 1977, yet additional fees of $1,026 were added when the trust was executed in 1998. A Michigan consumer complained by mail that a funeral home’s fees were combined rather than being displayed as separate line items as required by FTC’s Funeral Rule. A New Jersey woman complained by telephone that she was a victim of deceptive practices. The complainant reported that her mother was embalmed without permission and that the funeral home claimed that communicable disease laws prevented the use of a rental casket; her inquiry to the state mortuary board revealed that there were no such laws. A California consumer complained by telephone that a funeral home was going to charge an additional $470 for the use of a casket not purchased directly from the home. An Iowa consumer complained by mail that the casket delivered by a funeral home was not the model specified in the preneed agreement and that this funeral home regularly attempted to get customers to pay more for caskets. The BBB received 453 complaints about death care goods and services for calendar year 1997, the most recent year for which BBB headquarters had data. Table 2 shows the area of death care goods and services about which consumers complained and the number of complaints BBB received. When comparing 1997 BBB inquiry and complaint data for death care to such data for other types of businesses, there were about one-third fewer total complaints for death care than there were for barber and beauty shops (654). The data indicate that BBB received far fewer complaints about death care than about automotive repair (15,551). Data were not available that would permit adjustment of these comparisons to a per- transaction basis. That is, although there were far fewer consumer transactions concerning death care industries than concerning barber and beauty shops or automotive repair shops, we cannot make a proportional assessment of the complaints. In the selected states, consumer complaint data from each state were not available for us to review. For example, the California Public Interest Research Group stated that the California Department of Consumer Affairs received 603 complaints about cemeteries and 384 complaints about funeral homes for fiscal year 1995/1996. However, officials from both organizations said the complaint data were not available to confirm those numbers. In general, if they collected complaints, state-level organizations were either (1) only able to provide statistics about them and not detailed information on the nature or extent of complaints or (2) did not want to furnish such information because of confidentiality concerns. In our discussions with state agency officials and our review of available documents provided, officials generally stated that they received few complaints about death care. Clearly consumers may not complain about the goods and services they receive from death care providers because they are satisfied. However, there are also factors that might inhibit complaints. Officials from organizations at all levels told us that consumers often did not report problems because of the emotional component of death care or because they did not want to dwell on negative occurrences about the death of a loved one. One FTC official said that although he was not aware of any study to support it, anecdotally, consumers tended not to complain because of embarrassment or ignorance. In addition, a representative of a consumer group in Texas said that consumers are sometimes reluctant to complain because they know they have overpaid for death care services and do not want to reveal their mistakes to others. A BBB representative said that consumers might believe that death care is a personal matter rather than a consumer matter. Therefore, consumers may not think to complain the same way they would about a defective washing machine or automobile. Similarly, AARP officials said that AARP members are generally not inclined to report personal problems they have experienced with death care and that for this reason complaints are not considered to be a good measure of customer satisfaction. Further, users of preneed arrangements may leave no one in a position to complain. Also, consumers may not be aware of the FTC Funeral Rule and states’ laws relating to death care industries. Without knowing about the Funeral Rule and the laws, consumers may not know they have the right to complain. FTC officials said that they believe that consumers are not comparison-shopping when they enter into funeral transactions and that the lack of comparison-shopping could be related to the lack of consumer information about FTC and its Funeral Rule. Thus, if consumers do not get price lists from funeral homes or cemeteries when they are supposed to, they probably do not know that they are entitled to such lists. “the emotional trauma of bereavement, the lack of information, and time pressures place the consumer at an enormous disadvantage in making funeral arrangements. These conditions mean that the funeral consumer lacks much of the information and freedom of choice available in most other consumer transactions.” Over the last 5 years, FTC has taken steps, including distributing compliance guides and working with the funeral home industry, to promote compliance with the Funeral Rule. FTC took these steps because it was concerned about what it perceived as a relatively low level of compliance. For the late 1980s, FTC reported that only about one-third (36 percent) of funeral providers complied with two key requirements of the Funeral Rule—giving consumers a general price list (GPL) and an itemized final statement of goods and services selected. FTC based this compliance rate on a study it did in 1987 during a review of the Funeral Rule. To conduct its study, FTC questioned selected consumers who had arranged funerals in the past 18 months about their experiences with the funeral homes and what was done by the homes to comply with the Rule. During the early years after the Funeral Rule became effective, FTC’s enforcement of the Rule was complaint-based. FTC filed 41 civil penalty cases from 1984 through 1994 that were based on investigations of complaints received about individual funeral providers. Because of the perceived low compliance rate based on the 1987 study results it reported and the small number of funeral providers FTC was able to investigate in 10 years, FTC adopted a new approach to try to ensure funeral provider compliance. According to FTC, it mailed more than 18,000 compliance guides to “virtually every member” of the funeral home industry throughout the nation in June 1994. Beginning in October 1994, FTC initiated a test- shopping Rule enforcement approach, called “sweeps,” targeting funeral homes in a particular region, state, or city. Under this approach, FTC sent FTC staff, state investigators (such as those from offices of state attorneys general), or other volunteers (such as members of AARP) posing as consumers to test-shop a funeral home--by simulating a funeral transaction--and determine whether the funeral home was complying with the Rule. An FTC official said that FTC did not investigate individual complaints about a funeral home unless a complaint was made about a home in an area that FTC had already targeted for test-shopping. According to FTC, the sweeps methodology was initially designed to quickly raise the overall compliance level with the Funeral Rule’s core requirement: giving consumers an itemized GPL early in their meetings with funeral home staff. FTC officials said they believed the sweeps methodology was a more effective law enforcement tool than conducting traditional investigations because FTC could leverage its resources to make a bigger impact by test-shopping more funeral homes. Thus, according to FTC officials, there was a greater likelihood that noncompliance with the Rule would be detected. In September 1995, NFDA proposed sponsoring a nonlitigation alternative to civil penalty actions for Rule violations when test-shopping revealed that funeral homes failed to provide the GPL and other price lists required by the Rule (i.e., for caskets and outer burial containers). This proposal, which was approved in modified form and implemented by FTC in 1996, was called the Funeral Rule Offenders Program (FROP). Among other things, violators of the Funeral Rule could have been offered the FROP option. Those who chose to enroll in FROP would agree to make voluntary payments to the U.S. Treasury equal to 0.8 percent of average annual gross sales and participate in training organized by NFDA that was designed to teach them how to comply with the Rule. According to FTC, the sweeps and FROP were expected to deter funeral homes from violating the Rule because (1) Rule violations were more likely to be detected and (2) violations required payments that were substantial enough to be treated as more than the mere cost of doing business as well as 5 years of compliance training and monitoring. Although sweeps focused solely on whether a funeral home provided a GPL, by fiscal year 1997, the sweeps methodology had evolved so that additional violations were considered when FTC was making the decision about whether to offer FROP to a funeral home. In addition by fiscal year 1997, the official in each FTC region coordinating the test-shopping was to review the GPL to ensure that it contained the disclosures and other requirements. From October 1994 to September 1998, FTC test-shopped 958 funeral homes, or 4.3 percent of the 22,300 funeral homes in the United States (see app. III for information on the number of sweeps and funeral homes shopped by state and city). In addition, FTC has taken steps to educate consumers and funeral industry providers about the Funeral Rule. These steps include the publication and distribution of Funeral Rule consumer brochures and speaking engagements before consumer and industry groups. FTC maintains that compliance among providers covered by the Rule has increased “substantially” over the years. However, FTC does not have a systematic or structured process for measuring funeral homes’ compliance so that overall conclusions can be drawn about the effectiveness of its enforcement efforts. FTC’s efforts to measure compliance have been limited to narrowly scoped test-shopping sweeps in selected areas. These sweeps were not representative of the universe of funeral providers and have not covered all elements of the Funeral Rule. We analyzed the available records of funeral homes FTC test-shopped in fiscal years 1997 and 1998. Our analysis indicated that among the limited sample of homes visited, compliance indeed was high for the Funeral Rule’s core requirement--giving consumers itemized price lists early in their meetings with funeral home staff--and somewhat lower for other elements of the Rule we reviewed. However, it appears that FTC did not always take action on funeral homes that potentially violated the Rule. According to FTC, one of the primary reasons it may not have taken action was because it exercised prosecutorial discretion. FTC has reported a substantial increase in Funeral Rule compliance among funeral providers from 1987, when FTC conducted its study, to 1998, the most recent year for which FTC provided compliance data. According to FTC, since the inception of FROP, funeral home test- shopping has demonstrated that compliance among funeral homes has substantially increased. FTC press releases and documents that FTC provided during our review indicate that test-shopping has demonstrated that compliance with the Funeral Rule was as high as 90 percent during fiscal years 1997 and 1998. However, although FTC has reported a substantial improvement in Funeral Rule compliance, FTC’s approach for measuring changes in the levels of compliance is somewhat problematic. This is because (1) FTC’s current approach is not comparable to the approach used to derive its baseline level of compliance, (2) compliance is not measured in a systematic way using a statistically valid sample of the universe of funeral providers, and (3) FTC’s reported compliance figures deal solely with what FTC considered the core requirement and does not measure compliance with other elements of the Rule. Our review of available documents and our discussions with FTC officials showed that FTC could not substantiate whether compliance has increased since the inception of the Rule. The methodology of FTC’s 1987 study, which FTC used to report a compliance rate of 36 percent, differs from that of the post-1994 test-shopping, which it used to report a compliance rate of 90 percent for fiscal year 1997. The two methodologies are not comparable, and the elements of the Funeral Rule tested were not the same. The methodology of the 1987 study involved interviewers querying consumers who had arranged a funeral during the 18 months preceding the inquiry about whether they were shown a GPL and provided an itemized final statement of goods and services. It seems likely that at least some respondents who may have been grieving and in emotional distress would not remember whether or not they had been shown a GPL or provided an itemized statement of goods and services selected. The Funeral Rule requires that consumers be given a GPL rather than shown one. The more recent sweeps methodology assesses whether consumers were given a GPL. Thus, the behavior being measured by FTC’s baseline study and the more recent sweeps methodology is different. Further, the more recent sweeps methodology does not assess whether consumers received an itemized statement of goods and services. Because of the differences in methodologies and measures used to reach the reported compliance rates, any increase reported by FTC cannot be substantiated. In fact, the sweeps methodology, while retaining a strong focus on whether a GPL is given, has evolved in such a manner that it would be difficult to confirm a pattern of change and compliance resulting from sweeps from year to year. Also, FTC’s selection of test-shopping sites cannot be considered representative of funeral providers nationwide. According to FTC, the goal of Funeral Rule sweeps is to increase funeral homes’ compliance with the Funeral Rule and to deter noncompliance. We could not assess whether these goals were being met, nor could FTC, given the test-shopping samples and the scope of the sweeps. To undertake its sweeps, FTC did not select a representative sample of funeral homes to test-shop. For example, FTC did not test-shop funeral homes in New England in either fiscal year 1997 or fiscal year 1998, the period for which we reviewed FTC data. In addition, in fiscal year 1998, although FTC test-shopped funeral homes in the West, Midwest, and Southwest, Florida was the only state in which homes were test-shopped on the East Coast. According to FTC, the factors it considers in selecting sites for conducting sweeps include whether resources are available in FTC regional offices and whether resources are available at the respective offices of state attorneys general or AARP for partnering with FTC to carry out sweeps. Although the Funeral Rule applies to all providers of funeral goods and services, including certain cemeteries, FTC has test-shopped only funeral homes. According to FTC officials, they have not identified the number of cemeteries that are covered by the Funeral Rule or performed any sweeps at cemeteries to date. Therefore, FTC has neither identified the universe of providers of funeral goods and services that are to comply with the Rule nor tested such providers’ compliance. Without knowing which providers are subject to the Funeral Rule, FTC cannot select a representative sample to determine an accurate compliance rate. FTC’s reported compliance figures for recent years refer only to compliance with what FTC considers to be the core Funeral Rule requirement—giving consumers itemized price lists early in their meetings with funeral home staff. Although sweeps in fiscal years 1997 and 1998 collected data concerning other elements, such as misrepresentations and disclosures, FTC has confined its reporting of compliance to the core requirement. Our analysis of FTC records on 22 funeral home sweeps covering a total of 596 funeral homes for fiscal years 1997 and 1998 indicated that compliance with certain elements of the Funeral Rule ranged from 79 to 99 percent, depending on the element tested. However, it appears that FTC did not always take action on funeral homes that potentially violated the Rule. Available records did not always enable us to determine the reasons FTC did or did not take action when potential Funeral Rule violations occurred. However, FTC officials told us that the agency may not have taken action for a number of reasons, including prosecutorial discretion, lack of staff resources, and the evolving nature of the sweeps program. Our analysis of FTC records for funeral home sweeps for fiscal years 1997 and 1998 showed that for the items we examined, compliance was high at the funeral homes shopped. For example, most of the homes FTC test- shopped provided a GPL at the appropriate time during the discussion of the funeral transaction, and very few homes engaged in verbal misrepresentations of the goods and services consumers were required to purchase. Table 3 shows the results of our review of FTC’s records regarding the provision of the GPL at the required time for fiscal years 1997 and 1998. FTC records also are to document whether the funeral home made misrepresentations about whether embalming was required or certain items must be purchased, depending on the type of funeral. Our analysis of FTC’s records showed that most funeral homes did not make misrepresentations to the test-shopper. Table 4 shows the results of our review of FTC’s records concerning representations about embalming and items consumers were required to buy for fiscal years 1997 and 1998. We also examined FTC records to test whether funeral homes provided identifying information and disclosures on the GPL as required by the Funeral Rule. We reviewed the GPLs that FTC made available to us to determine whether funeral homes included (1) the requisite identifying information, such as the address and telephone number of the funeral home and the effective date of the GPL; and (2) selected disclosures required by the Rule. We selected three of the six disclosures that the Funeral Rule requires a funeral home to put on its GPL and other price lists to focus on. These disclosures were a consumer’s right to purchase only goods and services desired; proper representation about whether embalming is required by the state or municipality; and, if the funeral home offers cremation, a consumer’s right to an alternative container to a casket for cremation. Our analysis showed that most funeral homes included identifying information and the selected disclosures. Table 5 shows the extent to which the identifying information and the three selected disclosures were on the GPLs from sweeps conducted from fiscal years 1997 and 1998. We also analyzed the extent to which FTC took action on funeral homes for which potential violations were identified during sweeps for fiscal years 1997 and 1998. We found that FTC did not always (1) take action when potential violations occurred or (2) document the reasons for its actions. Once FTC staff have noted that a Funeral Rule violation has occurred, they can determine the appropriate response or action according to the severity of the violation. One possible enforcement action is a letter that notifies the funeral home that it is not in compliance with the Rule, including a warning that future noncompliance could result in a monetary penalty; another is a written offer for the funeral home to enter FROP as an alternative to a law enforcement proceeding; and a third is a full law enforcement proceeding based on the determination that the funeral home has committed gross violations. Our analysis showed that in some cases FTC did not use any of these options when test-shopping disclosed potential violations. Specifically, according to its records, in fiscal years 1997 and 1998, FTC did not take action in more than half the instances in which funeral homes had one or more potential Funeral Rule violations. Table 6 shows the extent to which FTC did or did not take enforcement action on such homes as noted during our review of FTC records on sweeps carried out in fiscal years 1997 and 1998. Because other factors could influence FTC's decision to pursue a case, an indication in its records of a potential violation does not necessarily mean that FTC would be expected to take an enforcement action. However, available records did not always allow us to identify the specific reasons FTC did not act on potential violations of the Funeral Rule. When records indicated that FTC took action on a potential Rule violation, we were not always able to determine why. In addition, FTC’s letters to the funeral homes in violation did not always provide the reason FTC took action, a practice that is suggested in FTC guidance on responding to a violation. FTC headquarters officials told us that they were uncertain as to the exact reasons why regional staff did not act on individual potential violations. However, FTC’s Funeral Rule Coordinator and the Assistant Director for Marketing Practices told us that there are numerous reasons FTC would not take action against a funeral home, even though the documentation on the home may indicate that a violation occurred. For instance, the Funeral Rule Coordinator said that the FTC official reviewing the test-shopping record may have asked further questions of the test-shopper and determined that the Rule had not really been violated. She and the Assistant Director stated that they were uncertain why that information was not documented. FTC officials also told us that another reason an action may not have been taken is that FTC staff have discretion as to whether they should pursue a potential violation on the basis of the likelihood that FTC staff can make a solid case. In comments on a draft of this report, FTC’s Chairman also stated that FTC can exercise prosecutorial discretion when deciding to take action on any individual case. During our review, FTC officials pointed out that FTC policy is to pursue full enforcement actions only if there is sufficient evidence to file the matter in federal court. These officials also told us that they did not believe that some types of violations, particularly those for missing identifying information, warranted any type of action because, in isolation, they were not considered substantive. Nonetheless, the officials acknowledged that such violations as those involving missing disclosures would probably warrant a compliance letter, and they could not explain why such a letter had not been sent in certain cases. They acknowledged that a more consistent procedure for use of compliance letters was needed. FTC headquarters officials also told us that FTC staff may not have taken action or documented the reasons because the sweeps program is still evolving. They said that during the early sweeps, such as those conducted during 1995, FTC sweeps focused on the key requirement of the Rule— having a GPL and giving it at the right time. By fiscal year 1996, FTC staff also started to examine whether two other lists—the outer burial container list and the casket price list—were provided to test-shoppers. And by fiscal year 1997, test-shoppers were instructed to also gather information on misrepresentations about embalming and required purchases during the funeral consultation. Also in that year, FTC regional offices were instructed to review GPLs to ensure that the required disclosures were included. However, given the sweeps methodology, FTC cannot determine whether funeral homes were complying with certain elements of the Funeral Rule, such as accuracy of prices and the provision of a statement of goods and services selected. In fact, FTC’s guidance for conducting sweeps instructs FTC regional staff to consult with the Funeral Rule Coordinator in the Division of Marketing Practices at FTC headquarters in making determinations about such things as a GPL being in compliance with the Rule or the timing of the presentation of the GPL. According to the guidance, FTC’s Funeral Rule Coordinator is to maintain records regarding these determinations so that they may be instructive in subsequent sweeps and cases. The guidance also points out that advising the Funeral Rule Coordinator about actions, such as sending a compliance letter, “will allow the development of a consistent response to these violations.” FTC headquarters officials acknowledged that they had not done an analysis of the documentation on sweeps as we had. They said that when regions are doing sweeps, staff from the Division of Marketing Practices hold conference calls with regional staff to discuss issues that arise during the sweeps. FTC also provided documentation that indicated such communication between headquarters and regions occurred. However, FTC headquarters officials said that headquarters staff viewed Funeral Rule sweeps as primarily a regional program and assumed that regional offices would be consistent in their implementation of the program based on the training provided. FTC was unable to provide evidence of historical, systematic documentation of sweeps decisionmaking and results. The lack of such documentation could indicate weak internal controls over the Funeral Rule program. Among other things, such controls are to help ensure that the objectives of the program are achieved. The five selected states differed in their approaches to protecting consumers who deal with funeral homes and cemeteries and make preneed arrangements. Differences were most notable concerning the (1) regulatory structure of the five states and (2) requirements that these states placed on death care providers. However, the five states also had similarities in their approaches to protecting consumers who engage in death care transactions. For example, the five states all had licensing and minimum education requirements that funeral providers were required to meet. Each of the states also had laws and regulations that required funeral providers to disclose price and other information to consumers similar to the requirements of FTC’s Funeral Rule. Appendix IV contains additional information on the selected states’ laws and regulations and the oversight of funeral homes and cemeteries. The selected states had various approaches for regulating funeral homes. For example, in three of the states (Florida, Maryland, and Texas) regulatory agencies with responsibilities for funeral homes were governed by a board or a commission made up of industry practitioners and consumer representatives. In the other two states (California and New York), the industry was regulated by a government agency but not by a board or a commission. Another difference among the states was their approach to inspections of funeral homes. Two of the states (Florida and Maryland) required that all funeral homes within the state be inspected on an annual basis. In Maryland, for example, inspections included reviews of required price lists, a completed funeral services contract, a preneed contract form, and funeral home facilities. Texas law required biennial inspections of funeral homes. California and New York did not have an annual inspection requirement and took a more complaint-driven approach to conducting inspections. The five states also had some key differences among their requirements for funeral providers that affected consumers. For example, two of the states (California and Texas) required that funeral directors make available to consumers a state-produced brochure answering commonly asked questions concerning death care, including information on where to send complaints. Maryland and New York have produced consumer brochures but had no requirement that funeral homes make them available to consumers. Florida did not produce a brochure. Similarities also existed among the five states’ regulatory approaches. For example, the five states all had licensing requirements for funeral directors and embalmers and minimum education requirements that these funeral providers were required to meet. In addition to FTC’s Funeral Rule, each of the states had state requirements similar to those of the Rule. For example, each state (1) required that funeral directors provide an itemized price list to consumers; and (2) prohibited funeral directors from making misrepresentations, including falsely representing that embalming is required by law. The five states also differed in their approaches to regulation and oversight of those cemeteries within their jurisdictions, such as nonreligious, for- profit cemeteries (see app. IV for details on cemeteries covered by the selected states). For example, in Maryland the office with regulatory responsibility for cemeteries was administered by a single individual with the authority to perform the numerous functions of the office. In New York, cemeteries were regulated by a board consisting of the Secretary of State, the Attorney General, and the Commissioner of Health. The selected states also differed in terms of the requirements and restrictions placed on cemeteries, including restrictions on what goods and services cemeteries could sell. In addition, New York was unique among the five states in that it required that cemeteries under its jurisdiction be operated on a not-for- profit basis. In each of the selected states, the state regulatory agencies responsible for cemeteries had jurisdiction over only a fraction of the total number of cemeteries in the state because certain types of cemeteries, such as religious and municipal cemeteries, were exempt from state regulation. Oversight of cemeteries is conducted primarily at the state or local level. FTC’s Funeral Rule applies only to certain cemeteries that sell both funeral goods and services. The selected states also differed in their treatment of preplanned, prepaid funeral transactions, which are commonly called preneed arrangements and are regulated by state law. Although each of the five states had promulgated some sort of regulation of preneed contracts, the laws varied widely. Differences in the states’ statutes included the percentage of preneed sales proceeds that each state required to be placed in trust and limitations on where proceeds from preneed contracts may be invested. In addition, two of the five states (Florida and Texas) required sellers of preneed contracts to pay a fee to a state consumer protection fund for every preneed contract they sold. The purpose of such a fund is to compensate consumers for situations in which sellers of preneed contracts are later unable to perform the terms of the contract. Appendix V contains additional information on preneed arrangements in general and in the selected states. Our review found that although some data on problems that consumers experienced with various aspects of death care were available, comprehensive information on consumer complaints that would indicate the overall nature and extent of such problems was not. The organizations we contacted generally stated that the number of complaints about death care was low compared to other consumer issues. Among the reasons these organizations gave for the relatively low number of complaints included the personal or emotional nature of the death care situation. State and federal governments have laws and regulations to protect consumers in arranging death care transactions. For the five states we focused on, we found differences in their regulatory structures for death care providers and in their requirements for those providers; we also found similarities, including licensing and minimum education requirements for funeral providers. In addition, all five states had laws and regulations that required funeral providers to disclose price and other information to consumers, similar to the requirements of FTC’s Funeral Rule. At the federal level, FTC’s Funeral Rule was designed to protect consumers when arranging death care transactions. FTC has taken steps, including distributing compliance guides to funeral homes and working with the funeral home industry, intended to ensure compliance with the Funeral Rule. However, FTC cannot, with any reasonable assurance, report that there is high nationwide compliance with the Rule or a substantial increase in compliance compared to a decade ago, because FTC does not have a systematic or structured process for measuring funeral homes’ compliance so that overall conclusions can be drawn about their actual compliance with the Rule and the effectiveness of FTC’s enforcement strategies. FTC’s efforts to measure compliance have been limited to narrowly scoped test-shopping sweeps in selected areas—that is, they are not representative of the universe of funeral providers and do not cover all elements of the Rule. We did not do an analysis on the resources needed for FTC to establish a nationwide compliance rate. However, a more strategic selection of sites and a more systematic approach to conducting sweeps and analyzing results could provide more convincing evidence of the overall level of compliance with the Funeral Rule. Although our work indicated that indeed compliance was high among funeral homes that FTC test-shopped in fiscal years 1997 and 1998 for the three elements of the Funeral Rule we reviewed, it appears that FTC did not always take enforcement action against funeral homes that potentially violated the Rule and did not always document the reasons. When records indicated that FTC took action on a potential Rule violation, we were not always able to determine why. In addition, FTC’s letters to the funeral homes in violation did not always provide the reason FTC took action, a practice that is suggested in FTC guidance on responding to a violation. Just as any agency’s management is responsible for ensuring its agency’s compliance with laws and regulations, it also is responsible for establishing effective internal controls. In the case of the Funeral Rule, FTC promulgated the Rule and is responsible for establishing effective internal controls for ensuring consistency in its (1) determinations of whether violations of the Rule’s requirements occurred and (2) documentation on the specific reasons FTC did or did not act on such violations. Although FTC had guidance on how determinations regarding violations were to be made, the guidance was not followed consistently, as evidenced by the lack of documentation explaining whether and why FTC took action for some potential violations and not others. To help assess the overall effectiveness of FTC’s Funeral Rule enforcement strategy, we recommend that the Chairman of FTC (1) review possible approaches to determine the most cost-effective means for FTC to conduct sweeps that would result in both a more convincing sample of funeral providers and a broader analysis of the various requirements of the Funeral Rule and (2) develop and implement a plan for carrying out such an approach in a systematic manner. To ensure that FTC can consistently (1) determine whether violations of the Rule’s requirements occurred and (2) document the specific reasons FTC did or did not act on such violations, we recommend that the Chairman of FTC train FTC staff on the specific standards needed for a consistent and acceptable level of documentation. We received written comments on a draft of this report from the FTC Commissioners in a letter dated August 25, 1999 (see app. VI). These comments are contained in a letter signed by the Chairman of FTC, by the direction of the Commission, and in a dissenting statement by one of FTC's Commissioners. According to the Chairman's letter, the Commission voted 3 to 1 to issue this response. The dissenting statement reflected the views of the one commissioner who voted against submitting the response. FTC did not specifically comment on our recommendations. However, the letter signed by the Chairman discussed three points under separate headings: (1) "Test Methodology" for measuring funeral providers' compliance with FTC's Funeral Rule, (2) enforcement practices, and (3) other comments. Under the first heading of test methodology, the Chairman’s letter stated that the report "incorrectly suggests that the FTC cannot document a nationwide increase in compliance with the core requirement of the Funeral Rule and that tested compliance in 'narrowly scoped test-shopping sweeps.'" As we have stated in the report, we believe that because of the differences among the methodologies and the elements FTC used in the 1980s and in the 1990s to measure compliance with the Funeral Rule, the assessed methodologies do not yield results that are comparable. Therefore, any increase in compliance reported by FTC cannot be substantiated. Also, although FTC has test- shopped 958 funeral homes in its 32 sweeps of 22 states and the District of Columbia over a 4-year period, FTC selected these sites and the homes to be shopped on the basis of the availability of resources from FTC regional offices and offices of partnering organizations, not as an appropriate sample from which to assess compliance. Indeed, FTC has not identified the universe of providers of funeral goods and services that are to comply with the Rule. Thus, we do not believe that FTC is positioned to draw overall conclusions about actual compliance with the Rule. As we recommended, FTC would benefit from an approach that used a more convincing sample of funeral providers for conducting sweeps and a broader analysis of Funeral Rule requirements. Under the second heading of enforcement practices, the Chairman’s letter stated that the report correctly notes that FTC has "not pursued every potential violation of each provision of the Rule." The Chairman’s letter continues to state that "merely focusing on quantity of prosecutions does not present an accurate picture of the impact of the Commission's activities." We do not find fault with the statement in the Chairman’s letter that "the decision to take action in any individual case is the result of the exercise of prosecutorial discretion, which is no different from the sort of decisionmaking and resource allocation in which all law enforcement agencies must engage." However, in FTC's case, it did not take action on more than half of all funeral homes identified in sweeps for fiscal years 1997 and 1998 as having potential Funeral Rule violations. As the one dissenting Commissioner pointed out in his statement, the proportion of all the potential violations for which FTC did not act is worthy of review to “confirm that they are not likely to cause substantial consumer injury.” Because available records did not always allow us to identify the specific reasons FTC did or did not act on potential violations of the Funeral Rule, we could not determine the impact of such inaction on consumers. Finally under the third heading of other comments, the Chairman’s letter stated that "we believe that GAO fairly points out that some improvements are needed in the Funeral Rule program's record keeping." According to the Chairman’s letter, FTC officials have said that a review of FTC staff’s procedures has begun. We applaud FTC’s efforts to review its procedures and believe that FTC’s acknowledgement of needed improvements to the program’s recordkeeping is an appropriate first step in establishing effective internal controls over the Funeral Rule program. By taking this step and training staff as we recommended, FTC should be better positioned to ensure consistency in its (1) determinations of whether violations of the Rule’s requirements occurred and (2) documentation of the specific reasons it did or did not act on such violations. Furthermore, we believe that these efforts may better position FTC to more effectively manage the Funeral Rule program and systematically analyze the extent to which certain Rule violations have the potential for substantial consumer injury. In his dissenting statement, the one Commissioner who voted against submitting the response agreed with many of the points made by his colleagues, including that the decision to not take action on individual cases appears to have resulted from the exercise of prosecutorial discretion. However, he stated he did not believe the response appropriately addressed the concerns raised in our draft report. Among other things, he said that (1) FTC should take great care to avoid stating or implying that it is in a position to conclude that a statistically valid nationwide projection of compliance can be made, and (2) a careful analysis of the concerns raised in the draft would have better served the public interest to confirm his suspicions that FTC does not have any substantial enforcement problems. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Honorable Robert Pitofsky, Chairman of the Federal Trade Commission; Judd Gregg, Chairman, and Ernest F. Hollings, Ranking Minority Member, of the Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, Senate Appropriations Committee; John Ashcroft, Chairman, and Richard H. Bryan, Ranking Minority Member, Subcommittee on Consumer Affairs, Foreign Commerce and Tourism, Senate Committee on Science, Commerce, and Transportation; Harold Rogers, Chairman, and Jose E. Serrano, Ranking Minority Member, of the Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies of the House Appropriations Committee; and W.J. Tauzin, Chairman, and Edward J. Markey, Ranking Minority Member, Subcommittee on Telecommunications, Trade and Consumer Protection, House Committee on Commerce. We will also make copies available to other interested parties upon request. Please contact me or John F. Mortin on (202) 512-8676 if you or your staff have questions. Major contributors to this report are acknowledged in appendix VII. Our objectives were to (1) describe the availability of information on the nature and extent of consumer complaints about the death care industry, (2) describe and assess the Federal Trade Commission’s (FTC) efforts to ensure compliance with its Funeral Rule, and (3) provide information on selected state governments’ roles in protecting consumers in their transactions with the death care industry. We did our work primarily at FTC in Washington, D.C., and Dallas, TX; and at state funeral and cemetery regulatory offices in five states—California, Florida, Maryland, New York, and Texas. We selected California, Florida, New York, and Texas because these states had the highest number of deaths of all 50 states in 1998. We selected Maryland because it had recently established a state regulatory agency with oversight responsibility for all but certain religious nonprofit cemeteries and because of Maryland’s close proximity to our headquarters office. As agreed with your staff, we focused our efforts on these five states because of time and staffing constraints. Once we selected the states, we concentrated our efforts at the agencies that we identified as those most likely to have responsibility for consumer-related death care matters in their respective states. In addition, we interviewed representatives of selected national, state, and local industry trade and regulatory associations and consumer advocacy groups that deal with death care issues. Although we recognize that there are numerous organizations that are involved in one or many components of death care, we judgmentally selected the organizations to contact because of time constraints, staff availability, and travel costs. Although regulatory bodies may exist in each of the selected states for monuments, crematories, and other funeral industries, we focused our efforts on regulatory bodies for funeral homes, cemeteries, and preneed arrangements. In consideration of these factors, in addition to the state agencies responsible for death care oversight and regulation, we met with representatives of various industry and consumer groups. At the national level, we contacted the following organizations: AARP; the Better Business Bureau (BBB); the Cremation Association of North America; the Funeral and Memorial Society of America (FAMSA); the International Cemetery and Funeral Association; the National Alliance of Life Insurance Companies; the National Association of Attorneys General; the National Association of Insurance Commissioners; the National Funeral Directors Association (NFDA); the North American Cemetery Regulators Association; the Insurance and Research Publications Division of Conning & Company; and the editor of Preneed Perspective. At the state level, we contacted the following organizations by state: California—State Offices: Office of the Attorney General, California Department of Justice; Cemetery and Funeral Programs, California Department of Consumer Affairs; and California Department of Insurance. Consumer Groups and Industry Representatives: California Public Interest Research Group; Forest Lawn Memorial Parks and Mortuary; Association Resource Center, a management company for the California Funeral Directors Association. Florida—State Offices: Bureau of Life and Health Insurer Solvency and Market Conduct Review, Division of Insurer Services, Florida Department of Insurance; Bureau of Funeral and Cemetery Services, Division of Finance, Office of the Comptroller; Board of Funeral Directors and Embalmers, Division of Professions, Florida Department of Business and Professional Regulation; Office of the Attorney General. Consumer Groups and Industry Representatives: Florida Funeral and Memorial Society; Florida Funeral Directors Association. Maryland—State Offices: State Board of Morticians, Department of Health & Mental Hygiene; Office of Cemetery Oversight, Division of Occupational and Professional Licensing, Department of Labor, Licensing, and Regulation; Office of the Attorney General; Life and Health Section, Maryland Insurance Administration. Consumer Groups and Industry Representatives: Memorial Society of Maryland; Maryland State Funeral Directors Association; Loudon Park Funeral Home and Cemetery. New York—State Offices: Division of Cemeteries, State of New York Department of State; Bureau of Funeral Directing, State of New York Department of Health; Office of the Attorney General. Consumer Groups and Industry Representatives: Memorial Society of Hudson-Mohawk Region, the Rochester Memorial Society, and the Syracuse Memorial Society; L. F. Sloane Consulting Group (a cemetery representative); New York Funeral Directors Association. Texas—State Offices: Texas Funeral Service Commission; Special Audits Division, Texas Department of Banking; Texas Department of Insurance; Office of the Attorney General. Consumer Groups and Industry Representatives: Austin Memorial and Burial Information Society; Texas Funeral Directors Association; Greenwood Funeral Homes and Cemetery. At each of the nongovernmental organizations we contacted, we spoke with officials regarding death care issues and collected and reviewed available documents and studies on such things as industry sales and revenues, consumer issues associated with the sales of death care goods and services, and consumer-related federal and state regulatory issues. We also did a literature and Internet search for information on issues affecting death care industries and consumers and reviewed pertinent books, magazines, trade publications, and periodicals regarding consumer concerns with those industries. To describe the availability of information on the nature and extent of consumer complaints about the death care industry, we met with FTC officials; representatives of the aforementioned national trade, regulatory, and consumer advocacy organizations; and state regulatory officials in the five states. At FTC, we reviewed data from FTC’s Consumer Information System (CIS), which became fully operational in the fall of 1997 and is FTC’s database of consumer complaints, inquiries, and requests for information. The CIS database contained a total of about 200 categories within which consumer complaints were included. The categories in CIS covered a wide range of topics, such as (1) creditor debt collection; (2) home repair; (3) investments; (4) health; and (5) leases for various products and services, such as automobiles and furniture. We identified one of those categories—funeral services—as the one that could most likely provide us information on consumers’ complaints about death care issues. FTC provided data from CIS showing 834 records for fiscal year 1998. We then sorted the records into individual categories and analyzed the data to determine the extent and nature of complaints received by FTC. In addition, at the other organizations we contacted, we discussed with officials the extent to which they may have collected and maintained readily available data on consumers’ problems concerning death care issues and the types and extent of complaints they received. We also discussed with them the various reasons why such information was not readily available. To describe and assess FTC’s efforts to ensure compliance with its Funeral Rule, we met with FTC officials to discuss regulatory practices, enforcement, and oversight of death care industries. We also obtained and reviewed pertinent laws, regulations, and FTC documents pertaining to the history of FTC’s efforts to promulgate the Rule and enforce compliance. In addition, we reviewed FTC’s manual for initiating, implementing, and concluding Funeral Rule test-shopping, sometimes called Funeral Rule sweeps; and we analyzed FTC records on funeral provider compliance with the Funeral Rule for fiscal years 1997 and 1998. Specifically, for these fiscal years, we requested the universe of records (596) that documented the results of FTC’s Funeral Rule test-shopping efforts at funeral homes in various locations across the country. FTC could not provide 36 files because the regional office performing the sweep did not retain those records when a test-shopper did not find a problem. For each of the 560 available files, we used a standardized data collection instrument (DCI) that was designed to capture such information as whether the shopper received a general price list (GPL) or whether specific misrepresentations were made about matters like embalming. We also used the DCI to compile data from the available GPLs provided by funeral homes during the test-shopping. FTC could provide price lists for only 469 test-shops. FTC officials could not fully explain why the GPLs were missing from the records but stated several possible reasons. According to FTC officials, in one regional office, an FTC official used the GPLs from previous test-shopping experiences to train future test- shoppers. Also, an FTC official speculated that perhaps other price lists were missing because the GPL was not received from the test-shopper, or FTC lost the GPL from the records. We reviewed the available GPLs to determine whether identifying information and disclosures contained on them was required by the Funeral Rule. The identifying information we looked for was the name, address, and telephone number of the funeral home; the caption “General Price List”; and the effective date of the GPL. We also reviewed the GPL for three required disclosure statements: “The goods and services shown below are those we can provide to our customers. You may choose only the items you desire. However, any funeral arrangements you select will include a charge for our basic services and overhead. If legal or other requirements mean you must buy any items you did not specifically ask for, we will explain the reason in writing on the statement we provide describing the funeral goods and services you selected.” “Except in certain special cases, embalming is not required by law. Embalming may be necessary, however, if you select certain funeral arrangements, such as a funeral with viewing. If you do not want embalming, you usually have the right to choose an arrangement that does not require you to pay for it such as direct cremation or immediate burial.” “If you want to arrange a direct cremation, you can use an alternative container. Alternative containers encase the body and can be made of materials like fiberboard or composition materials (with or without an outside covering). The containers we provide are (specify containers).” The Funeral Rule also requires that the GPL contain other disclosures, such as a casket price list statement; and requires itemization of prices for certain goods and services, such as immediate burial. We did not review individual GPLs for compliance with these other items because of time and staffing constraints. In addition, we used the DCI to record what action FTC took, if any, in regard to potential Funeral Rule violations. We then analyzed these data to determine the number and type of potential Funeral Rule violations that may have occurred and whether FTC acted on them. We considered FTC to have taken action if it had sent a letter (1) to the funeral home advising the home of noncompliance and warning that additional action could occur if the home did not comply in the future, (2) offering the funeral provider the opportunity to enter NFDA’s Funeral Rule Offender’s Program (FROP) rather than be subject to civil penalty actions, or (3) notifying the funeral home that it was beginning full law enforcement proceedings on the basis of gross violations of the Funeral Rule. We did not assess the effectiveness of FROP, a program sponsored by FTC and NFDA. We reviewed the letters FTC sent to the funeral homes in question, when available, to determine the reason FTC took action on potential violations. To provide information on selected state governments’ roles in protecting consumers in their transactions with the death care industry, we spoke with officials from the previously mentioned state agencies that have responsibility for regulation and oversight of death care in those states. At these organizations, we collected pertinent laws, regulations, and documents covering three areas—funerals, cemeteries, and preneed funeral arrangements—and analyzed these laws, regulations, and documents with a focus on consumer protection issues in each jurisdiction. We also administered a DCI to discuss regulatory and consumer protection issues with appropriate state officials and to ensure that we obtained consistent information from each of the organizations. The DCI covered such topics as preneed funeral and burial arrangements, including trusts and insurance; at-need funeral and cemetery arrangements; and consumer affairs and consumer awareness in the state regarding both preneed and at-need death care arrangements. We contacted responsible officials from the regulatory bodies in the five states to verify information on the states. We did our work between July 1998 and July 1999, in accordance with generally accepted government auditing standards. The following table contains information on the 32 sweeps FTC carried out since it began test-shopping funeral homes to ensure their compliance with the Funeral Rule and the number of funeral homes shopped by state and city. This appendix contains information about the regulation and oversight of funeral homes and cemeteries in the five selected states—California, Florida, Maryland, New York, and Texas. It also discusses state-required information that is to be provided to consumers about funeral homes and cemeteries. Appendix V discusses preneed funeral arrangements and provides information on the regulation of preneed arrangements in the selected states. The Cemetery and Funeral Programs (CFP) of the California Department of Consumer Affairs regulates both the funeral and cemetery industries in California. Table IV.1 provides information on the regulation and oversight of California funeral homes and shows state requirements regarding consumer information. All three licenses must be renewed on an annual basis. Licensees are required to complete 14 hours of continuing education every 2 years. All caskets must be either physically displayed in the casket selection room or displayed photographically. A CFP official stated that the office does not inspect all of the state’s funeral homes on an annual basis, but it conducts unannounced inspections of about 200 of the state’s approximately 800 funeral homes. He further said that although complaints often generate inspections, CFP maintains an ongoing random inspection program. California law requires that CFP produce and make available to funeral establishments a consumer guide for funeral and cemetery purchases. Funeral establishments are required to prominently display and make available this guide. California law requires that CFP’s name, address, and telephone number be on such contracts. The Board of Funeral Directors and Embalmers of the Department of Business and Professional Regulation has jurisdiction over the funeral industry in Florida. The Board is made up of seven members appointed by the governor; five of whom are licensed funeral directors, and two of whom are consumer representatives who must have no affiliation with the funeral industry. Table IV.2 provides information on the regulation and oversight of Florida funeral homes and shows state requirements regarding consumer information. All three licenses must be renewed every 2 years. Licensees are required to complete 12 hours of continuing education every 2 years. Licensees also must have completed a single Board- approved course on communicable diseases and HIV/AIDS. The least expensive casket offered for sale must be displayed in the same manner as the other caskets. Annual inspections of funeral homes are required, and additional inspections can be conducted in response to complaints. State inspectors have responsibility for 800 to 1,000 funeral homes in addition to inspections for cosmetology salons, barbers, and veterinarians. The State Board of Morticians, Department of Health & Mental Hygiene regulates the funeral industry in Maryland. The Board of Morticians consists of 12 members; 8 of whom are licensed morticians or funeral directors, and 4 are consumer representatives. An Executive Director oversees the day-to-day work of the Board. Table IV.3 provides information on the regulation and oversight of Maryland funeral homes and shows state requirements regarding consumer information. All three of these licenses must be renewed every 2 years. Licensees are required to complete the equivalent of 12 hours of Board-approved continuing education courses during the 2-year term of the license. A Board of Morticians official stated that the owner would be required to have separate licenses for the funeral home and the cemetery. Inspections also are made on the basis of written complaints received by the Department. A Board of Morticians official stated that the Board has produced a brochure, in collaboration with the Maryland Office of Cemetery Oversight, which will be made available to funeral homes for distribution. However, another official added that funeral homes are not required by law to hand out these brochures. The Bureau of Funeral Directing of the State of New York’s Department of Health has jurisdiction over funeral homes in New York State. A Director administers the Bureau. The Bureau also has a funeral directing advisory board, which consists of six licensed funeral directors, three consumer representatives, and one cemetery representative. Table IV.4 provides information on the regulation and oversight of New York funeral homes and shows state requirements regarding consumer information. All three licenses must be renewed every 2 years. A Bureau of Funeral Directing official stated that a continuing education bill passed the state legislature and is currently awaiting the governor’s signature. If enacted, this bill would require 12 hours of continuing education every 2 years. Bureau officials stated that about 300 of the state’s approximately 2,000 funeral homes are inspected each year. These officials further stated that inspections and investigations are largely complaint driven. The Bureau has produced separate consumer brochures for preneed and at-need funeral arrangements; however, there is no requirement that funeral directors make these brochures available to consumers. A Bureau of Funeral Directing official stated that the Bureau’s contact information is required to be included on the itemized statement that funeral directors give to consumers. The Texas Funeral Service Commission regulates funeral homes in Texas.The Commission is made up of nine commissioners, including four licensed embalmers or funeral directors and five consumer representatives. An Executive Director administers the daily business of the Commission. Table IV.5 provides information on the regulation and oversight of Texas funeral homes and shows state requirements regarding consumer information. A Texas Funeral Service Commission official stated that funeral directors and embalmers licenses must be renewed every 2 years and funeral establishment licenses must be renewed annually. Licensees renewing in 1999 are required to complete 14 hours of continuing education. Licensees renewing in 2000 are required to complete 16 hours of continuing education. Although Texas law requires that funeral establishments be inspected every 2 years, a Commission official stated that all Texas funeral establishments are inspected on an annual basis. Texas law requires that the Commission produce and make available to funeral establishments a consumer brochure for funeral purchases. Funeral establishments are required to provide each prospective customer with a copy of the brochure when funeral services are discussed. CFP also regulates the cemetery industry in California. CFP has jurisdiction over private cemeteries but does not regulate others, such as religious and municipal cemeteries and fraternal burial parks. As mentioned earlier, CFP has jurisdiction over both the funeral and cemetery industries in California. Table IV.6 provides selected information on the regulation and oversight of cemeteries in California and shows state requirements regarding consumer information. Religious and public cemeteries, and certain private and fraternal burial parks less than 10 acres in size and established before September 19, 1939, are exempted from state regulation. CFP officials stated that about 200 of the approximately 2,000 cemeteries, representing about 40% of the burials in the state, are under CFP’s jurisdiction. Comments Separate cemetery brokers and salespersons licenses must be obtained from CFP and must be renewed on an annual basis. A certificate of authority also must be obtained for a cemetery before interments can be made there. California law does not permit a cemetery authority to represent an endowment care fund as “perpetual or permanent.” CFP- regulated cemeteries must create an endowment care fund and must fulfil a minimum deposit requirement of $2.25 per square foot for each grave sold. CFP conducts investigations of regulated cemeteries on the basis of complaints. The Board of Funeral and Cemetery Services, Department of Banking and Finance, Office of the Comptroller, regulates the cemetery industry in Florida. The Board consists of seven members appointed by the governor, including two funeral directors who are not associated with a cemetery company, two licensed cemetery operators, and three consumers who are not associated with the funeral or cemetery industry. The Board does not have jurisdiction over certain religious, county and municipal, and community and nonprofit association cemeteries. Table IV.7 provides selected information on the regulation, oversight, and information available to consumers concerning cemeteries under Florida’s jurisdiction. An official with the Office of the Comptroller stated that approximately 170 of the 3,000 cemeteries in the state are under the jurisdiction of the Office. Some of the cemeteries that fall outside of the Office’s jurisdiction include religious cemeteries of less than 5 acres; religious cemeteries owned and operated before June 23, 1976; county and municipal cemeteries; and community and nonprofit association cemeteries, which provide only single-level ground burial and do not sell burial spaces or merchandise. A license is required to operate a cemetery, and must be renewed on an annual basis. Cemeteries regulated by the Office of the Comptroller must deposit into a care and maintenance trust fund 10% of payments received for gravesites sold. An official with the Office of the Comptroller stated that cemeteries are inspected annually for upkeep and recordkeeping. The Office has the authority to examine the financial affairs of cemetery companies and to conduct investigations on the basis of written complaints. An official from the Office of the Comptroller said that preneed cemetery contracts must contain certain disclosures, including state regulatory information; however, these disclosures are not required for at-need contracts. The Office of Cemetery Oversight in the Department of Labor, Licensing, and Regulation (DLLR) regulates the cemetery industry in Maryland. The Office was created in 1997 in response to concerns that consumers were not adequately protected in their dealings with cemeteries. The Office has responsibilities for all but certain religious, nonprofit cemeteries in the state and is administered by a Director appointed by the Secretary of DLLR. Table IV.8 provides selected information on the regulation, oversight, and information available to consumers concerning cemeteries under Maryland’s jurisdiction. Religious, nonprofit cemeteries that do not sell preneed goods and not-for-profit organizations created before 1900 are exempted from the Office’s jurisdiction. An Office of Cemetery Oversight official stated that the Office has jurisdiction over about 60 for-profit cemeteries. In addition, this official estimated that there are approximately 300 nonprofit cemeteries and 800 religious cemeteries in the state. Cemetery operators must register with the Office and must renew registrations every 2 years. Maryland requires that, if the cemetery offers perpetual care, 10% of the selling price of each burial lot or 35 cents for each square foot of land burial space be placed in a trust fund for perpetual care. Although there is no requirement that all licensed cemeteries in the state be inspected on an annual basis, an Office of Cemetery Oversight official stated that these cemeteries are subject to inspection at any time. An Office of Cemetery Oversight official stated that the Office has produced a consumer brochure, in collaboration with the State Board of Morticians that will be made available to cemeteries for distribution. However, this official stated that cemeteries are not required by law to hand out these brochures. X to states’ perpetual or endowment care deposit requirements for gravesites sold. According to a cemetery industry representative, perpetual care suggests a cemetery will provide a certain level of maintenance regardless of available funding; under endowment care, a cemetery will provide a certain level of maintenance according to the level of funding. The Division of Cemeteries of the New York Department of State regulates the cemetery industry in New York. The Division is administered by a Director who carries out day-to-day operations. The Director is appointed by the State Cemetery Board, which comprises the Secretary of State, the Attorney General, and the Commissioner of Health. New York does not have jurisdiction over religious or municipal cemeteries. However, New York also requires that cemeteries under its jurisdiction be operated on a nonprofit basis. According to Division of Cemetery Officials, this restricts profit-making entities from taking advantage of consumers at a time of vulnerability. New York also prohibits joint ownership of funeral homes and cemeteries. Table IV.9 provides selected information on the regulation, oversight, and information available to consumers concerning cemeteries under New York’s jurisdiction. The Division of Cemeteries does not have jurisdiction over religious or municipal cemeteries. Division of Cemeteries officials stated that the Division has jurisdiction over 1,885 of the more than 6,000 cemeteries in the state. Officials stated that cemeteries are permitted to sell grave liners; but they are prohibited from selling caskets, burial vaults, and monuments. Cemeteries must deposit 10% of the sale of a lot into a permanent maintenance fund and must deposit an additional 15% deposit into a current maintenance fund. Inspections are largely complaint-driven. Cemeteries with assets of $400,000 or more are subject to an examination by an independent certified public accountant. The Division also conducts field and desk audits on the basis of financial reports resulting from these examinations. The Special Audits Division of the Texas Department of Banking regulates the cemetery industry in Texas. The Department does not have jurisdiction over certain religious, public, family, and non-profit cemeteries. Table IV.10 provides selected information on the regulation, oversight, and information available to consumers concerning cemeteries under Texas jurisdiction. Religious, family, fraternal, or community cemeteries not larger than 10 acres, unincorporated associations of plot owners not operated for profit, and nonprofit corporations organized by plot owners are not under the jurisdiction of the Department. Department of Banking officials stated that perpetual care cemeteries are required to be licensed and that these licenses must be renewed annually. Cemetery corporations must deposit the greater of $1.50 a square foot of ground area conveyed as perpetual care property or 10% of the total purchase price of that ground area. The books and records of cemetery corporations relating to their perpetual care trust funds are required to be examined by the Department on annual basis, or as often as necessary. This appendix contains information on preplanned, prepaid funeral transactions, which are commonly called preneed arrangements. In addition, the appendix provides information on the regulation of preneed arrangements in the five selected states. In purchasing a preneed arrangement, a consumer typically makes an agreement with a preneed seller to pay for funeral goods and services that will be provided at a later time—that is, following the death of the consumer or another designated person. In many cases, the consumer has the option of selecting a guaranteed price contract, which fixes the price of goods and services selected, regardless of price inflation that may occur after the contract is signed. According to death care industry studies, the most commonly used options for funding preneed arrangements are trust accounts and insurance or annuity policies. Conning & Company, an insurance research and publication firm, describes the trust option as a state-regulated trust account that is established in connection with the preneed contract and managed by a trustee. According to Conning & Company, the rationale behind this funding method is that interest earned on the trust account will accumulate over time so that future increases in funeral prices can be accounted for. The funeral provider receives the funds held in trust after the funeral. According to a 1996 law journal article, under state law, a consumer also typically has the option of creating an irrevocable trust contract, which allows the consumer to maintain his or her eligibility for public assistance. According to the article, under the insurance option, the consumer purchases, either in a lump sum or by installments, an insurance policy and names the seller as the beneficiary of the policy. Following the consumer’s death the benefit is paid out to the seller. According to Conning & Company, these preneed insurance products typically have an increasing death benefit to cover future increases in the prices of funeral goods and services. Conning & Company states that another option for consumers who would face difficulty obtaining life insurance is to purchase annuities. Following the death of the purchaser, the annuity is to be paid out by the insurer to the funeral provider to cover funeral expenses. Conning & Company states that preneed insurance typically is sold in conjunction with a funeral home, either by a funeral director who holds an insurance license or an independent insurance agent. A spokesman for the preneed insurance industry said that preneed insurance is actuarially based and has less underwriting than other whole life policies. This spokesman described a typical 10-year installment premium plan as one that would pay a death benefit of 35 percent of face value during the first year, 70 percent during the second year, and 100 percent the third year and thereafter. According to death care industry observers, an advantage of preneed insurance policies over trusts is that unlike trust accounts, the purchaser is not taxed for interest income earned. However, an insurance industry spokesman also noted that the rate of return for preneed insurance is typically lower than that of trusts. The following tables provide information on the regulation of preneed arrangements in California, Florida, Maryland, New York, and Texas. The Cemetery and Funeral Programs (CFP) of the California Department of Consumer Affairs has jurisdiction over preneed funeral trusts in California, and the California Department of Insurance has jurisdiction over preneed insurance. Table V.1 contains information on the regulation of preneed arrangements in California. Trusting requirements are 100% for funeral goods and services. Trustees may withdraw an annual fee for administering a funeral trust from the current trust income. CFP officials stated that the total withdrawal in any year shall not exceed 4% of the trust balance. The consumer would receive 100% plus interest less administration fees and a revocation fee. Comments CFP officials stated that the law does not specifically address this issue, and the terms of the individual contract would determine whether the contract may be transferred to another state. CFP officials stated that California law provides various options for depositing funeral trust funds, such as in bonds or securities guaranteed by the U.S. government or agency; bonds or securities guaranteed by the state, or any city or county within the state, or certificates of deposit or other interest-bearing accounts in any bank in the state insured by the Federal Deposit Insurance Corporation (FDIC). CFP officials stated that California law also allows the funds to be deposited in any investment deemed prudent by a prudent person as allowed under the California Uniform Prudent Investor Act. CFP officials stated that California law provides various options for investing funeral trust funds, such as in bonds or securities guaranteed by the U.S. government or agency; bonds or securities guaranteed by the state, or any city or county within the state, or certificates of deposit or other interest-bearing accounts in any bank in the state insured by FDIC. CFP officials stated that California law also allows the funds to be invested in any investment deemed prudent by a prudent person as allowed under the California Uniform Prudent Investor Act. The Board of Funeral and Cemetery Services, Department of Banking and Finance, Office of the Comptroller, has regulatory responsibility for preneed funeral trusts, and the Department of Insurance regulates preneed insurance policies. Table V.2 contains information on the regulation of preneed arrangements in Florida. Sellers of preneed contracts are permitted to choose between trusting 30% of the purchase price or 110% of the wholesale price of funeral goods. For funeral services, the trusting requirement is 70% of the purchase price. An official with the Office of the Comptroller stated that administrative fees are permitted to be withdrawn from trust income and there is no limit on these fees. The consumer is entitled to receive a full refund of the purchase price if the contract is revoked within 30 days of purchase. After 30 days, services remain fully refundable, but goods are refundable if they cannot be delivered within 24 hours of need. An official with the Office of the Comptroller stated that any accumulated interest earnings are paid to the seller. An official with the Office of the Comptroller stated that a transfer could be accomplished only by canceling the contract and entering into a new contract in a different location. Trusts must be deposited with either a national or state bank or savings and loan association having trust powers or a trust company in the state. Florida provides the opportunity to invest in numerous types of investments. These include, for example, bonds, notes, and other obligations of the United States; Florida state and county bonds pledging the full faith and credit of the state or county; savings accounts or certificates of deposit insured by FDIC; and investments in real property. Use of the fund for an individual case is restricted to 50% of the fund’s current balance. Preneed sellers must contribute $1.00 to the fund for all contracts. The State Board of Morticians, Department of Health & Mental Hygiene has regulatory responsibility over preneed funeral arrangements in Maryland. In May 1999, Maryland’s Governor signed legislation to authorize a preneed contract or preneed burial contract to be funded by life insurance. The Maryland Insurance Administration has jurisdiction over insurance contracts in Maryland. Table V.3 contains information on the regulation of preneed arrangements in Maryland. Sellers of preneed contracts are required to place 100% of funds received for both goods and services into trust, with the exception of caskets, for which they are required to trust 80%. Board of Morticians officials stated that the consumer would receive a refund of the full purchase price plus interest. Board of Morticians officials stated that irrevocable preneed funeral contracts can be transferred to another state. For revocable contracts, consumers would have to cancel the contract and enter into a new contract in the new location. Funds shall be deposited into an interest- bearing escrow or trust account with a federally insured banking or savings and loan institution. A Board of Morticians official stated that there are no further requirements in Maryland law regarding investments. This official stated that all investments must be made with a federally insured bank or savings and loan institution. The Bureau of Funeral Directing of the State of New York’s Department of Health has jurisdiction over preneed funeral trusts. New York State does not allow the sale of preneed insurance. Table V.4 contains information on the regulation of preneed arrangements in New York. Trusting requirements are 100% for funeral goods and services. The administrative fee may not exceed 0.75 of 1% of the trust fund. If a preneed seller charges this fee, this must be disclosed to the consumer in writing. The consumer would receive a refund of the purchase price plus accrued interest. A Bureau of Funeral Directing official stated that irrevocable contracts are directly transferable. For revocable contracts, consumers would have to cancel the contract and enter into a new contract in a different location. Funds must be deposited in an interest- bearing account in a bank or savings and loan association that shall earn interest at a rate not less than the prevailing rate of interest earned by other such deposits in such banks and savings and loan associations; or a trust company in an investment backed by the U.S. government. No further investments may be made with deposited funds. Preneed funeral trust contracts are regulated by the Special Audits Division of the Texas Department of Banking. Preneed insurance contracts are regulated by both the Texas Department of Insurance and the Texas Department of Banking. Table V.5 contains information on the regulation of preneed arrangements in Texas. For funeral goods and services, the preneed seller has the option of trusting either 90% or 100% of sales proceeds. However, the seller must disclose to the consumer which option has been selected. The seller may withdraw money from earnings to pay (1) reasonable and necessary trustee’s fees or depository fees, (2) the examination fee for one examination by the Texas Department of Banking each calendar year, or (3) the expense of preparation of financial statements. With the Texas Department of Banking’s approval, the seller also may withdraw money from earnings on an account to pay for (1) any tax incurred or (2) an assessment. The purchaser is entitled to a refund of the amount paid minus the amount that the seller is permitted to retain for expenses. This amount is not to exceed one-half of all money collected or paid until the seller has received an amount equal to 10% of the total amount the purchaser agreed to pay under the contract. Department of Banking officials stated that there is no statutory requirement for contracts to be transferable. Funds must be deposited in a bank or savings and loan association in the state in a federally insured interest-bearing account, or a trust department in a bank or trust company authorized to do business in the state. Texas law provides the opportunity to invest in numerous types of investments. Some of these include federally insured banks or savings and loan associations, U.S. government bonds, certain state or local bonds, and the common stock of a U.S. corporation with a net worth of at least $1 million. This fund is termed the Guaranty Fund and its stated purpose is to guarantee performance by sellers of trust funded prepaid funeral contracts. The Department of Banking collects $1 from sellers of trust funded preneed contracts for each contract sold, to be deposited in this fund. Consumers can also make preneed arrangements with cemeteries in the five states. In Florida and New York, cemeteries and funeral homes are included under the same sections of state preneed law; in Texas, a Department of Banking official stated that with the exception of perpetual care funds, cemetery trusts are not regulated; and in California and Maryland, different laws apply to cemetery and funeral trusts. For example, although California law restricts the amount of administrative fees that can be withdrawn from current funeral trust income, a CFP official told us that California law does not place any limitation on the total amount of administrative fees that may be withdrawn from preneed cemetery trusts, which in California are called special care funds. Under Maryland law, sellers of preneed funeral contracts are required to place 100 percent of funds received for both goods and services into trust (with the exception of caskets). Sellers of preneed cemetery contracts are required to place 55 percent of funds received for goods and services into trust (with the exception of caskets, for which, as with funeral trusts, they are required to trust 80 percent). Jeremy Latimer, Susan Michal-Smith, Jan B. Montgomery, Kiki Theodoropoulos, and Gregory H. Wilmoth made key contributions to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch- tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO examined various issues involving consumers' dealings with funeral-related or death care industries, which include businesses that provide funeral and cemetery goods or services, focusing on: (1) the availability of information on the nature and extent of consumer complaints about death care industries; (2) the Federal Trade Commission's (FTC) efforts to ensure compliance with its Funeral Rule; and (3) selected state governments' roles in protecting consumers in their death care transactions. GAO noted that: (1) comprehensive information on consumer complaints that would indicate the overall nature and extent of problems that consumers experienced with various aspects of death care industries was not available for a variety of reasons; (2) one reason is that consumers can complain to a variety of organizations about death care issues and can lodge the same complaint to more than one organization; (3) another reason is that no single organization or combination of organizations collects and compiles all complaints into one database; (4) also, each organization can have its own way of compiling and maintaining complaint information, which would confound efforts to compile and analyze aggregate complaint data; (5) although the organizations GAO contacted were able to provide some data, the number of complaints about death care was generally low compared to complaints about other categories of consumer issues; (6) FTC's Funeral Rule requires that funeral providers give consumers accurate, itemized price information and various other disclosures about funeral goods and services; (7) over the last 5 years, FTC has taken steps, including distributing compliance guides and working with the funeral home industry, to promote compliance with the Funeral Rule; (8) FTC took these steps because it was concerned about what it perceived as a relatively low level of compliance--about one-third--among funeral homes in the late 1980s; (9) FTC maintains that compliance among providers covered by the Rule has increased substantially over the years; (10) however, FTC does not have a systematic or structured process for measuring funeral homes' compliance so that overall conclusions can be drawn about their actual compliance with the Rule; (11) FTC's efforts to measure compliance have been limited to narrowly scoped test-shopping sweeps in selected areas; (12) GAO analyzed the available records of funeral homes FTC test-shopped in fiscal years 1997 and 1998; (13) GAO's analysis indicated that among the limited sample of homes visited, compliance indeed was high for the Funeral Rule's core requirement and somewhat lower for other elements of the Rule GAO reviewed; and (14) the five selected states differed in their approaches to protecting consumers who deal with funeral homes and cemeteries and make preneed arrangements. |
Although there are numerous disclaimers indicating that the tests we purchased do not diagnose disease, the 14 results we received predicted that our fictitious consumers were at risk of developing a myriad of medical conditions. These predictions were similar for all of our fictitious consumers, no matter which DNA or lifestyle description we used. Results from the tests we purchased from Web site 4 also stated that our fictitious consumers were at below average risk for developing certain diseases. However, after consulting with outside experts, we determined that these predictions cannot be medically proven at this time. Even if the predictions could be medically proven, the results use ambiguous language to describe the supposed health risks, rendering them meaningless. As shown in table 1, the results we received from the tests we purchased from all four Web sites contain statements indicating that the information they provide is not intended to diagnose disease or predisposition to disease. The results also contain language stressing that the tests do not screen for genetic disorders and advising consumers to consult with a physician if they feel that they might be ill. Despite these statements, the results we received from the tests we purchased from all four Web sites do contain medical predictions that a consumer may interpret as diagnoses. The overriding impression from all the results is that the 14 fictitious consumers we created are at risk for developing a variety of medical conditions, as shown in figure 2. Furthermore, the results from the tests we purchased from Web site 4 even suggested that our fictitious consumers with the female DNA were at below average risk for developing certain conditions. As comparison, the 2 results we received from Web sites 1 and 3 for the fictitious consumers with the male DNA contained similar predictions, despite having different DNA variants from the female sample. Specific predictions from each test are discussed in further detail below. With regard to the tests we purchased from Web site 1, the 3 results we received stated that the DNA sample from the female displayed an “increased risk of reduced calcium and Vitamin D absorption,” meaning that she “may be at increased risk of developing osteoporosis.” Results from the same tests contained similar predictions with regard to risks for developing high blood pressure, type 2 diabetes, and heart disease. The DNA sample from the male that we submitted for this test showed the exact same risks, despite having different DNA variants from the female, as shown in figure 3. As shown in figure 4, the 3 results from the tests we purchased from Web site 2 stated that the DNA sample from the female showed “gene variations that may alter the body’s ability to metabolize cholesterol” and variations that may affect “mineral absorption and bone metabolism.” These results also suggested that “certain protective systems” in the body “may have altered activity.” Of the 5 tests we purchased from Web site 3, 3 focused on detoxification, 1 focused on heart health, and 1 focused on bone health. The 5 results thus showed a range of predictions, including that the DNA from the female contained gene variations that “may lead to a reduced ability to clear toxins” and that her “natural antioxidant defenses are less efficient at the removal of free radical damage.” The results also showed increased risk of high blood pressure and osteoporosis. The DNA we submitted from the male showed similar risks with regard to toxins and removal of free radicals, despite having different DNA variants from the female sample. See figure 5. As shown in figure 6, the 3 results from the tests we purchased from Web site 4 showed that the DNA sample from the female revealed “faulty methylation patterns” which may lead to “an above average risk for developing cardiac aging, brain aging, and cancer” and “sub-optimal glycation,” which can lead to diabetes and increased body fat. These same results also stated that the DNA displayed a “significant risk of developing the age related conditions associated with elevated levels of DNA damage.” Results from the tests we purchased from Web site 4 also contain predictions that the DNA sample from the female shows relatively low risk for developing some diseases. For example, all the results from these tests note that the DNA displayed a “below average risk” of developing “the age related” conditions associated with “oxidation” and “inflammation.” According to the results, oxidation can lead to diabetes, heart disorders, and Alzheimer’s disease and inflammation can lead to diabetes, heart failure, and fragile bones. Despite the implication that these predictions are based on the DNA submitted, none of the results we received contained scientific support to assist the consumer in evaluating their credibility, and there is no evidence to suggest that the tests have been evaluated by independent experts. Furthermore, the genetic experts we spoke with informed us that even though it is possible to make a definitive diagnosis of disease by looking at certain genes, none of the predictions contained in any of the results we received can be medically proven at this time. According to the experts, cystic fibrosis and Huntington’s disease are examples of illnesses that can be diagnosed based on an analysis of only one gene. In contrast, the diseases and conditions identified in the test results we received involve complex bodily processes. According to the experts we spoke with, although genes are known to be associated with these processes, scientists have very limited understanding about the functional significance of any particular gene, how it interacts with other genes, and the role of environmental factors in causing disease. With regard to the specific predictions of heart disease, diabetes, osteoporosis, cancer, altered ability to metabolize cholesterol, and reduced ability to clear toxins, the experts informed us that research proving a genetic connection to the development of these conditions is at a very early stage and there are many issues yet to be resolved. In addition, the experts we spoke with also stated that the types of tests we purchased cannot be used to confirm that an individual has a reduced risk of developing these types of diseases. Therefore, the claims that a person may be at “below average risk” of developing certain “age related conditions” based on the analysis of a few genetic variants is misleading. There could be other genetic variants not tested for that confer risk or other environmental factors not assessed. Even if the predictions could be medically proven, the way the results are presented—using ambiguous language—renders them meaningless. For example, it is unclear what is meant by a “damaged” gene. According to the experts we spoke with, although a specific gene can be “damaged” in that it contains a variation that causes a loss of function or impaired function, the results do not clearly explain what this means. The experts also told us that informing someone that they may be at increased risk for heart disease or that they have “high levels of DNA damage,” “faulty methylation patterns,” or “altered activity” in certain genes are all statements that are so ambiguous as to be meaningless. In fact, these types of predictions could apply to any human that submitted DNA. For example, according to the experts, many people “may” be “at increased risk” for developing heart disease because of known and unknown genetic risk factors; environmental and behavioral risk factors such as obesity, smoking, and high cholesterol; and the interaction between these genetic, environmental, and behavioral factors. Results from the tests that we purchased from Web sites 1 and 4 further mislead the consumer by recommending expensive supplements. The 3 results we received from the tests we purchased from Web site 1 recommend a supplement that is supposedly based on an individual’s unique DNA; in reality, the supplements are not unique and are simply a grossly overpriced version of a typical multivitamin. The 3 results we received from the tests we purchased from Web site 4 similarly recommend expensive supplements that are supposedly unique to the consumer; these results also contain medical claims about the supplements that cannot be proven at this time. Finally, the experts we consulted informed us that, in some instances, taking certain supplements may be harmful. The results from the tests we purchased from Web site 1 recommended a 90-day supply of a “personalized, custom” nutritional formula for $295, or approximately $1,200 per year. According to the product information, this formula is based on “what your genetic profile reveals as areas in your body that may need special support.” Despite this claim, when we examined the listed ingredients, we found that we were recommended the same product for all 3 of the fictitious consumers we created for this test—2 of these consumers actually had the DNA from the female, 1 had the DNA from the male, and all 3 had different lifestyle descriptions, as previously shown in figure 1. However, when we compared the contents of the supplements recommended for the 2 fictitious consumers with DNA from the female with the supplement recommended for the fictitious consumer with DNA from the male, we found that the ingredients were the same. Moreover, the experts we spoke with confirmed that the supplements themselves are not unique; they contain vitamins that can be found in any pharmacy or grocery store. To find a comparable product, we went to a local drug store and found a generic multivitamin with the same ingredients, though with different amounts, as those in the recommended supplement. In contrast to the exorbitant price requested for the supplement, we paid just under $10 for a 100-day supply of this multivitamin—or about $35 per year, as shown below. Although these products are not identical, the experts we spoke with said that both the supplement and the generic vitamin would probably provide the same nutritional benefits for most people. However, they also cautioned that the elevated amounts of certain vitamins in the supplement may be harmful, as discussed later in this testimony. The results from the tests we purchased from Web site 4 recommended a “personalized” supplement “regimen” costing over $1,880 per year. According to the results, these supplements are personalized based on the DNA submitted and lifestyle descriptions provided on the questionnaires, and they are supposed to help “compensate” for “genetic deficiencies.” Specifically, the product information accompanying the test results claims that the regimen will repair damaged DNA through the consumption of 7 pills per day, including 4 tablets per day of a supplement containing over “70 vitamins, minerals, and enzymes combined with “CAEs”, a proprietary extract from the Tropical Rainforest botanical Uncaria tomentosa, known as Cat’s Claw, which has been clinically shown to promote DNA repair in the body.” A 60-day supply costs $160. 1 tablet per day of a supplement designed to “enhance the body’s ability to repair damaged DNA.” A 60-day supply costs $50. 1 tablet per day of a supplement to control blood sugar and body fat. A 60-day supply costs $50. 1 tablet per day of a supplement designed to manage the process “whereby certain genes are activated and deactivated.” A 60-day supply costs $50. As with the other products we were recommended, these supplements are not unique to the consumer. Although the 3 fictitious consumers we created for this site in reality all had the female DNA, they all had varying lifestyle descriptions, as previously shown in figure 1. However, we received the same product recommendation for all 3 consumers. For example, our fictitious 72-year-old female nonsmoker with a diet high in protein was recommended the same supplement regimen as our fictitious 45-year-old male smoker with a diet high in fats, which seems illogical given that the supplements are supposedly developed based in part on the submitted lifestyle information. Furthermore, although the regimen touts “Cat’s Claw” as being the ingredient primarily responsible for DNA repair, the experts we spoke with told us that these claims are not medically proven at this time. According to the experts, Cat’s Claw is a plant whose pharmacological properties are being studied for a wide variety of biological effects, but the experts were aware of no reports in peer-reviewed scientific literature that have demonstrated the ability of Cat’s Claw to repair DNA. Furthermore, although there is some research indicating that taking antioxidants may help with DNA repair, no pill has yet been proven to repair damaged DNA. In fact, manufacturers of supplements are prohibited from claiming that their products can treat, cure, or prevent disease; products that make these claims are considered drugs and must be approved by the FDA before they can be sold. The FDA has already sent Warning Letters to several dietary supplement manufacturers who explicitly claimed that Cat’s Claw could help treat cancer and arthritis. However, we do not know whether the FDA would consider a claim of “DNA repair” to render Cat’s Claw an unapproved drug. Regarding safety, the nutritionists we spoke with said that it is possible that improper use of dietary supplements can be harmful. For example, the nutritionists said that taking levels of some vitamins and nutrients that far exceed the recommended daily allowance may promote cancers and chronic diseases. A recent statement issued by the National Institutes of Health also notes that taking more than the recommended daily intake of certain vitamins and minerals may cause adverse health effects. For example, smokers who consume excessive amounts of beta-carotene may be at increased risk for developing lung cancer, while consumption of excessive amounts of vitamin D and calcium may increase the risk of kidney stones. Furthermore, we were told that all nutrients or “food components” can be toxic if provided in sufficient quantities, but the susceptibility to toxicity varies among the population. For example, there is evidence that some people may be at risk because of excessive intakes of vitamin E, folic acid, calcium, or selenium. When we asked the nutritionists about the safety of specific ingredients in the supplements recommended for our fictitious consumers, they generally believed that the supplements were comparable to typical multivitamins, as previously stated. However, they also expressed a variety of concerns. For example, one of the nutritionists we consulted characterized the levels of vitamin B-6 in both products as “disturbing.” Another felt that the levels of Vitamin A in both were “high,” and that the supplements from Web site 1 contained excessive amounts of iron, because iron stays in the blood and could become toxic. Other experts told us that the supplements could be harmful if taken in combination with certain medications. For example, Cat’s Claw may have an adverse interaction with a medication prescribed for people who are at increased risk for forming blood clots, and individuals taking this medication are advised to avoid all supplements unless a physician approves. Results from the tests that we purchased from Web sites 1, 2, and 3 promise recommendations based on the consumer’s unique genetic profile. However, the 11 results we received from these three sites suggest that the DNA submitted was not a factor in determining the recommendations. Rather, the results simply provide a number of common sense health recommendations based on information we submitted on the lifestyle questionnaires. Although Web sites 1, 2, and 3 acknowledge that information submitted on the questionnaires is taken into consideration when determining diet and lifestyle recommendations, the overall implication to the consumer is that the information derived from the DNA analysis is the most important factor, as shown in table 2. Despite these claims, the recommendations we received are simply common sense regimens directly linked to the information we submitted on the questionnaires included with each test. For example, 9 of the 11 consumers we created for Web sites 1, 2, and 3 had the female DNA. If the recommendations were truly based on the consumer’s unique genetic profile, then these 9 consumers should have received the same recommendations because their DNA came from the same source. Instead, they received a variety of different recommendations, depending on the fictitious lifestyles we provided for them. For example, when we said that a fictitious consumer with the female DNA smoked and ate a lot of fatty foods, we received recommendations to stop smoking and eat fewer fatty foods. In contrast, when we said that another fictitious consumer with the female DNA never smoked and did not eat a lot of fatty foods, we received recommendations to continue to avoid both smoking and eating foods high in fat. Similarly, when we said that fictitious consumers with the female DNA did not eat a lot of fruits and vegetables, we received recommendations to eat more of these foods. However, if we said that the consumer had a diet rich in fruits and vegetables, we were told to continue this high level of consumption. We received similar recommendations with regard to the 2 remaining consumers we created using the male DNA. For example, for one of the fictitious consumers with this DNA, we provided a lifestyle description stating that the consumer ate only moderate levels of leafy green vegetables, cantaloupe, and eggs—foods that are rich in antioxidants. In this case, the consumer was told to eat more foods rich in antioxidants. In contrast, we said that the other consumer with the male DNA ate a lot of antioxidant-rich foods. This time, we received recommendations to continue high consumption of these foods. Figure 8 provides further examples of the relationship between the lifestyle information we submitted on the questionnaires and the recommendations we received. These results lead us to conclude that we could have invented any type of lifestyle description for the DNA we submitted and the recommendations would simply echo this information. Although these recommendations may be beneficial to consumers in that they constitute common sense health and dietary guidance, DNA analysis is not needed to generate this advice. During the course of our investigation, we found other information that raises concerns for consumers purchasing these tests. For example, we discovered that Web sites 1, 2, and 3 were in fact selling the same genetic test developed by the same company and that this company was pressured by consumer groups in the United Kingdom to stop selling the test in that country. The company now sells the same type of test in the United States. In addition, we found evidence suggesting a lack of quality control by the laboratory actually conducting the DNA analysis for Web sites 1, 2, and 3. For example, even though all of the genetic information contained in the test results based on a single source should be identical, we received disparate results from the tests we purchased from Web site 1. We also found that the laboratory used by Web site 4 is not approved under CLIA. Nutrigentic Testing in the United Kingdom: The company that manufactures the tests used by Web sites 1, 2, and 3 used to sell the same type of test in the United Kingdom—consumers provided DNA samples and filled out a lifestyle questionnaire, and the company provided advice on what consumers should do to improve their health with diet and lifestyle changes. The Human Genetics Commission, the U.K.’s strategic advisory body on developments in human genetics, and GeneWatch UK, a consumer protection group, alleged that the company’s tests were misleading because no scientific evidence validated their clinical claims. Other scientists and consumer protection groups also cited numerous problems with the tests, including that the claims were exaggerated, the service should not be offered without adequate counseling, and that they provided advice which differed little from standard guidance on diet and exercise. Eventually, the tests were subjected to assessment by a team of three experts—a clinical geneticist, a scientist leading a program of research in nutritional genomics, and the chief dietitian of a leading teaching hospital. They published the findings in a detailed report that concluded that there was no value in the genetic tests being offered. Subsequently, GeneWatch U.K. raised these concerns with major retail chains and pharmacies carrying the tests and urged them to stop selling the tests. By July 2002, the company was no longer attempting to sell their test directly to the consumer in the United Kingdom, either over the Internet or through retailers. In 2003, the company moved its operations from the United Kingdom to the United States. Despite the findings of the British experts, the company now sells the same type of test to American consumers. Contradictory DNA Analysis: The results we received from the tests we purchased from Web site 1 appear to be contradictory and reflect inaccurate lab results. Specifically, the results we received from these tests contained a listing of the genes being analyzed and any “variations” found in those genes. When we compared the two results we received based on the DNA from the female, we found that the gene variations listed were not exactly the same: one result said that the DNA showed a variation in the “eNOS” gene, but the other result said that there was no variation in this gene. According to the experts we spoke with, because the DNA sample was taken from the same individual, any gene variations should be identical. The experts also stated that a competent laboratory should reliably be able to detect the presence or absence of a particular gene variant. Consequently, concerns exist about whether this laboratory has basic quality control procedures in place to identify and prevent mistakes. Lack of CLIA Approval: As noted in the introduction to our testimony, laboratories performing genetic tests for medical purposes must be approved under the Clinical Laboratory Improvement Amendments of 1988 (CLIA). In general, CLIA regulations address personnel qualifications, quality control and assurance, recordkeeping requirements, and also require laboratories to conduct proficiency testing. All laboratory tests performed to provide information about an individual’s health must be conducted by law in approved laboratories. During the course of our work, when we interviewed a representative from a laboratory conducting tests for Web site 4, we were told that this lab is not approved under CLIA. The current regulatory environment provides only limited oversight to those developing and marketing new types of genetic tests. Consequently, companies that sell nutrigenetic tests like the ones we purchased may mislead consumers by promising results they cannot deliver. Further, the unproven medical predictions these companies can include in their test results may needlessly alarm consumers into thinking that they have an illness or that they need to buy a costly supplement in order to prevent an illness. Perhaps even more troubling, the test results may falsely assure consumers that they are healthy when this may not be the case. With further advances in science, nutrigenetic tests like those we purchased may in the future be valid, allowing consumers to use DNA- based analysis to make diet and lifestyle changes that will actually prevent the development of disease. However, as demand for these new tests continues to rise, it will become increasingly important for consumers to have reliable information in order to determine which tests are accurate and useful. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. 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. | Scientists increasingly believe that most, if not all, diseases have a genetic component. Consequently, genetic testing is becoming an integral part of health care with great potential for future test development and use. Some genetic tests are sold directly to the consumer via the Internet or retail stores, and purport to use genetic information to deliver personalized nutrition and lifestyle guidance. These tests require consumers to self-collect a sample of genetic material, usually from a cheek swab, and then forward the sample to a laboratory for analysis. Companies that market this type of test claim to provide consumers with the information needed to tailor their diet and exercise programs to address their genetically determined health risks. GAO was asked to investigate the "legitimacy" of these claims. This testimony reflects the findings of GAO's investigation of a nonrepresentative selection of genetic tests. Specifically, GAO purchased tests from four Web sites and created "fictitious consumers" by submitting for analysis 12 DNA samples from a female and 2 samples from an unrelated male, and describing this DNA as coming from adults of various ages, weights, and lifestyle descriptions. GAO also consulted with experts in genetics and nutrition. The results from all the tests GAO purchased mislead consumers by making predictions that are medically unproven and so ambiguous that they do not provide meaningful information to consumers. Although there are numerous disclaimers indicating that the tests are not intended to diagnose disease, all 14 results predict that the fictitious consumers are at risk for developing a range of conditions, as shown in the figure below. However, although some types of diseases, such as cystic fibrosis, can be definitively diagnosed by looking at certain genes, the experts GAO spoke with said that the medical predictions in the tests results can not be medically proven at this time. Even if the predictions could be medically proven, the way the results are presented renders them meaningless. For example, many people "may" be "at increased risk" for developing heart disease, so such an ambiguous statement could relate to any human that submitted DNA. Results from the tests that GAO purchased from Web sites 1 and 4 further mislead the consumer by recommending costly dietary supplements. The results from the tests from Web site 1 suggested "personalized" supplements costing approximately $1,200 per year. However, after examining the list of ingredients, GAO found that they were substantially the same as typical vitamins and antioxidants that can be found in any grocery store for about $35 per year. Results from the tests from Web site 4 suggested expensive products that claimed to repair damaged DNA. However, the experts GAO spoke with stated that there is no "pill" currently available that has been proven to do so. The experts also told us that, in some circumstances, taking supplements such as those recommended may be harmful. In addition, results from the tests that GAO purchased from Web sites 1, 2, and 3 do not provide recommendations based on a unique genetic profile as promised, but instead provide a number of common sense health recommendations. If the recommendations were truly based on genetic analysis, then the 9 fictitious consumers that GAO created for these sites using the female DNA should have received the same recommendations because their DNA came from the same source. Instead, they received a variety of different recommendations, depending on their fictitious lifestyles. For example, when GAO created lifestyle descriptions stating that the consumers smoked, they received recommendations to stop smoking. In contrast, if GAO said the consumers never smoked, they received recommendations to continue to avoid smoking. |
The National Park System is a network of natural, historic, and cultural treasures. The system’s 385 park units include 56 areas that are formally titled “national parks,” as well as many other designations. As the network’s federal manager, the National Park Service is charged with conserving “the scenery and the natural and historic objects and the wild life therein and to provide for the enjoyment of the same in such manner and by such means as will leave them unimpaired for the enjoyment of future generations.” In short, the agency has the difficult task of balancing resource protection with providing for appropriate public use, including meeting the needs of nearly 300 million park visitors each year— responsibilities that entail considerable management and financial challenges. To manage this diverse system, the 385 park units are arranged within seven regional offices. These offices offer administrative or specialized support not always available at the local parks. However, the true hub of the system’s management is the park superintendent. Superintendents oversee each park unit, and the agency relies heavily on their judgment for most decisions affecting local park operations. For financial support, the Park Service depends primarily upon federal funding. The agency’s fiscal 2003 annual appropriation totaled over $2 billion, supplemented by financial support from admission and user fees collected at park sites, franchise fees paid by over 600 park concessioners, and private donations. Nonetheless, federal funding has not kept pace with increasing responsibilities. Accordingly, the Park Service has launched several initiatives seeking expanded supplemental support, including one promoting increased partnering with nonprofit and other private organizations. Nonprofit organizations have a long history of partnering with the Park Service. Since the agency was created in 1916, the Park Service has developed partnerships with nonprofit organizations, as well as for-profit concessioners, to help serve its mission. These partners supply important financial and nonfinancial assistance, in effect, supplementing congressionally appropriated funds available for park use. The Park Service is authorized by statute to accept donations and to enter into agreements with nonprofit organizations and other fundraising partners. The two types of nonprofit partners discussed in this report are cooperating associations and friends groups. Cooperating associations are corporate entities with boards of directors and an executive director responsible for day-to-day management. The Park Service requires that cooperating associations operate as tax-exempt organizations and employs a standardized cooperating association agreement identifying the specific federal statutes (see app. II) and agency policies that govern agency and association responsibilities. There is no specific legal definition or federal statute for friends groups; most are local volunteers organized for a specific purpose or interest in a particular park. The Park Service does not require friends groups to operate as tax-exempt entities or to have formal partnership agreements with the agency, unless these groups raise funds for the parks. Moreover, the Park Service does not have a standard agreement governing friends group operations or specific policy guidance for friends groups. Guidelines for park fund-raising activities are the primary source of park policy covering friends group activities. Although other nonprofit organizations also provide services and conduct commercial activities, such as guided hiking and rafting trips at park sites, these organizations are not included in this review. Park concessioners are a third type of Park Service partner discussed in this report. Concessioners provide such services as lodging, food, and guided services, and sell merchandise at park stores. Generally, concessioners are private, for-profit entities. Concessioners operate under Park Service contracts or permits that require them to pay a franchise fee to the park where they operate and that specify agency oversight functions and concessioner responsibilities. Cooperating associations and friends groups support 90 percent of the nation’s 385 national parks. Parks are increasingly reliant on support from these organizations; contributions from these organizations went from about $27 million in fiscal year 1997 to over $47 million in fiscal year 2001, totaling over $200 million during this period. In addition, cooperating associations and friends groups have accumulated funds and other assets—such as land, buildings, and equipment—worth more than $200 million that could become available for future park donations. Nonprofits also provide considerable nonfinancial assistance such as volunteer services. A cooperating association or a friends group supports park programs and operations in 347 (90 percent) of the nation’s 385 national parks. Of the 347 parks, 136 have both types of nonprofit organizations, 187 have only a cooperating association, and 24 have only a friends group (see table 1). Thus, cooperating associations support about 84 percent of the nation’s parks and friends groups support about 41 percent. The Park Service does not maintain an accurate database of friends groups or complete financial information on cooperating associations working with the parks. As a result, we constructed a database using existing Park Service data, tax records that are available on nonprofit organizations, and friends group responses to a GAO survey. Appendix III lists each national park that is affiliated with a cooperating association and/or friends group. Since 2001, an estimated 215 nonprofit groups—66 cooperating associations and 149 friends groups—have worked with 347 parks across the country. Cooperating associations often serve multiple parks while friends groups are typically associated with a single park. Table 2 shows the number of each type of organization and the number of parks served. Moreover, much of the support provided by nonprofit organizations is concentrated in a few large cooperating associations that serve many different parks. As table 3 shows, 5 cooperating associations serve about 58 percent of all 385 national parks, or 70 percent—225 of 323—of all parks served by cooperating associations. One of the key characteristics of these large cooperating associations that serve multiple parks is that they have the ability to serve smaller, less visited park units that might not be able to otherwise provide bookstores or educational services. For example, Eastern National operates some bookstores as an educational service to visitors even though the stores are not profitable. Eastern National can do so because it operates at 127 parks and shares money from its more profitable locations with its less profitable locations. This shared donation approach allows the association to operate bookstores at small locations like the Charles Pinckney National Historic Site (29,272 visitors in 2001) that are not as commercially viable as other parks. On average, as table 4 shows, the five large cooperating associations operate in parks with lower visitation and operating budgets than other associations. Nonprofit contributions to the park system doubled from fiscal years 1997 through 2000, before dropping in 2001. Specifically, as table 5 shows, the total contributions by cooperating associations and those friends groups for which we were able to obtain data rose from about $27 million in 1997 to about $53 million in 2000, before dropping to about $47 million in 2001. Cumulatively, these contributions are substantial. Cooperating associations and friends groups contributed over $200 million to support park programs and projects from 1997 through 2001. Table 5 also shows that revenues from both types of nonprofit organizations followed a pattern similar to that of contributions, increasing from about $110 million in 1997 to about $178 million in 2000, but dropping to $148 million in 2001. The decrease in contributions and revenues in 2001 may be related to decreased park visitation or other negative commercial effects following the terrorist attacks of September 11, 2001, as agency officials speculate, or to the general economic downturn and corresponding reduction in charitable giving that has occurred across the United States. In addition, during the 1997-2001 fiscal year period, the Golden Gate National Parks Association made large contributions. These varied considerably from year to year and help explain the fluctuation in cooperating association contributions (see app. IV). Although contributions and revenues from both cooperating associations and friends groups increased considerably over the 5-year period, the increase in friends group contributions and revenues is most dramatic. This increase may be explained by recent increases in the number of friends groups as well as by the relative newness of friends groups compared to cooperating associations. According to Park Service data, the number of cooperating associations changed little from 1996 to 2001, rising from 64 to 66 and then dropping to 65 as 2 associations merged. In contrast, friends groups are recent additions to the park scene and are expanding more rapidly throughout the park system. While the Park Service does not have historical data on friends groups, in the six parks we visited the years of incorporation for friends groups operating in these parks generally ranged from 1988 to 2001, with only one dating to 1959. By comparison, the years of incorporation for cooperating associations ranged from 1923 to 1961 (see table 6). Moreover, while the median date of incorporation for associations also is 1941, the median incorporation date for the friends groups is 1995. Contributing to the establishment of new friends groups is recent legislation that directed the National Park Foundation to design a program fostering fund-raising at individual park units and specified that program implementation include assisting in the creation of local nonprofit groups. The importance of nonprofit support varied considerably across parks. For example, Golden Gate NP received over $10 million in aid in fiscal year 2001, the highest contribution by a cooperating association that year, while Voyageurs NP received $3,233 from its cooperating association, the lowest financial contribution to a park that year. Similarly, one friends groups affiliated with the Statue of Liberty NM contributed over $8 million to the park, while 34 friends groups reported zero financial contributions to their affiliated parks in fiscal year 2001. Appendixes IV and V provide detailed revenue and contribution information for cooperating associations and friends groups, respectively. In addition to the financial contributions they make to parks each year, cooperating associations and friends groups also hold over $200 million in accumulated net assets that are potentially available for future contributions to parks. According to tax data for 2001, friends groups retained over 60 percent of these accumulated assets. More precisely, the net assets of friends groups totaled $125 million in 2001, according to data collected for over two-thirds of the groups, including the largest friends groups (see app. V). In comparison, net assets held by cooperating associations, according to 2001 tax data, were $78 million (see app. IV). These assets represent the accumulated monetary assets (such as cash, stocks, or bond investments) and nonmonetary assets (such as land, buildings, and equipment) of the organizations. The monetary component of these assets often consists of restricted and unrestricted accounts. Restricted accounts typically represent funds that have been earmarked for specific future projects, such as a park construction project or an endowment to fund future maintenance costs of a capital project. Unrestricted accounts usually represent funds that are currently available for any expenses related to a park project. For example, the friends group associated with Acadia NP has net assets of about $14 million, including $13 million in restricted accounts for 2001. The funds in the restricted accounts are for such things as an endowment to fund future maintenance of the carriage road in Acadia NP and an endowment to support future Acadia Youth Conservation Corps activities in the park. Further, information we obtained based on available tax records from 1998 through 2000 indicates that friends groups are adding substantial amounts to their accumulated assets each year. Specifically, they retain about 40 percent of their revenue or about $20 million annually. In addition to contributions of funds, buildings, equipment, and other assets, cooperating associations and friends groups also provide volunteer services that are of considerable value. Nonprofit members of both cooperating associations and friends groups recruit and organize volunteers for park projects and promote support for parks in local communities. Some friends groups, such as the Appalachian Trail Conference, make little if any direct financial contributions but have a substantial volunteer base engaged in volunteer stewardship programs at the parks. The Appalachian Trail Conference reported that its 4,500 volunteers contributed 187,475 hours to trail work in fiscal year 2000. The exact number of volunteers for all park-affiliated nonprofit organizations is not known. However, many groups have thousands of members and volunteers. Of these, the Statue of Liberty-Ellis Island Foundation, Inc., is the largest friends group donor within the national park system and has close to 160,000 members; other groups responding to our friends group survey averaged 3,700 members and volunteers. Table 7 provides examples of nonfinancial contributions made by selected nonprofit organizations. In addition to volunteer service, at least two nonprofit organizations are legislatively authorized to provide operational and management services in parks. Specifically, the Theodore Roosevelt Inaugural Site Foundation was authorized in 1980 to assist the Secretary of the Interior in “the operation, maintenance, management, development and interpretation of the Theodore Roosevelt Inaugural National Historic Site.” More recently, The Island Alliance, a private nonprofit organization, was designated by the Congress as a financial support partner for the Boston Harbor Islands Recreation Area, a unit of the national park system established in 1996. The primary revenue-generating activities of cooperating associations are selling educational materials in park bookstores and providing educational services to park visitors. These activities, together with growing association sales of visitor convenience items such as film and disposable cameras, are responsible for 90 percent of association revenue. At many of the parks with cooperating associations, concessioners also provide park-related merchandise for visitor consumption, as well as visitor services and convenience items. Generally, the educational attributes associated with association sales and services distinguish them from concessioner sales and services. However, this is not always the case. In fact, in three of the six parks we visited, competition between cooperating associations and concessioners or local businesses led to conflicts. In contrast, friends groups generally do not compete with concessioners because they rely primarily on donations and membership dues to generate revenue. Cooperating associations exist to support the educational, scientific, historical, and interpretive activities of the National Park Service. Accordingly, association activities are intended to provide the public with educational materials related to the parks and to generate revenue for other association programs and activities that support the agency. Associations support park programs by making direct purchases on behalf of the parks and by providing funds for use by park staff. Typically, each park has a standard agreement with an affiliated cooperating association. This agreement documents and clarifies the association’s scope of responsibility and permitted activities and is often supplemented to address association services specific to a park. Local park managers are responsible for overseeing association activities including ensuring that sales and services are consistent with the terms of the agreement and assuring that association support is appropriately targeted. Cooperating association activities focus on supporting parks by providing visitors with educational materials and services. The main revenue- generating activity of associations is operating bookstores that sell educational and other merchandise, often at park visitor centers. Cooperating associations reported generating revenue of $109 million in fiscal year 2001. As figure 1 shows, of this amount, 90 percent came from sales and services to park visitors. Over $84 million (78 percent) was raised through the sale of educational materials—primarily books. About $10 million (9 percent) was from educational program services such as audio tours and organized backcountry hiking and camping activities. Association operated “field institutes” frequently provide these educational program services. Field institutes are a part of cooperating associations that focus on providing visitors with active learning experiences within a park. Another $3 million (3 percent) came from sales of visitor convenience items—items that are not educational and that the Park Service describes as necessary for the comfort and convenience of visitors. These items include beverages, aspirin/antacids, insect repellent, sun screen, film, disposable cameras, and stamps. The remaining 10 percent of association revenues came from fund-raising, membership fees, and park donation boxes. In addition, some associations support the needs of the parks they serve in other, nontraditional ways. For example, associations may act as concessioners, generating income by operating park concession contracts. This is the case at Mt. Rushmore NM, where the cooperating association has a 20-year concession contract for constructing and operating a parking facility at the site. Under these circumstances, associations are required to report this revenue to the park service as concession contract revenue. As such, these revenues are not included in figure 1. However, these circumstances are exceptional and do not occur frequently. A description of the sales and services offered by cooperating associations at the six parks we visited will help clarify the revenue-generating activities that occur throughout the system. Associations at each of the six parks operated a bookstore, and five of the six associations also sold merchandise via a park-affiliated Web site. At three parks, a field institute was a significant part of the association’s educational service program. At Grand Canyon NP, for example, the Grand Canyon Field Institute offered exploratory tours where visitors could learn about the canyon’s geology, ecology, and Native American and pioneer history. This institute also provided park-related educational materials to elementary classrooms across the United States. Two of the six associations provided other services—one provided a guided park tour and one operated the park’s wilderness reservation system. Except for visitor convenience items, we found that the merchandise sold and the services provided at each of the six parks visited were generally related to the educational mission of the cooperating associations and to park themes. Cooperating association bookstores carried a wide variety of park-related publications, maps, videos, and theme-related merchandise intended to enhance visitor understanding, appreciation, and knowledge of parks. For example, at areas managed by Fort Sumter NM staff, the cooperating association operated four bookstores with educational books and items related to Civil War occurrences in the Charleston, South Carolina area. At Yosemite NP, the association sold books, Native American artifacts and jewelry, and CD-ROMs that were generally consistent with its educational mission and park themes. Cooperating association Web sites generally offered the same merchandise as the bookstores. Although our examination of the items being sold at association bookstores and Web sites at the six parks we visited revealed a few items that were not clearly related to the association’s educational mandate, these were low volume and low cost items that were not financially significant. For example, the association sold magnets at Ft. Sumter, and slinkys and hula hoops at the Eisenhower National Historic Site. In commenting on our report, the association’s executive director noted that magnet sales were discontinued at this store. The director stated that hula hoops and slinkys are sold with interpretive text and help connect visitors to the lifestyle of the 1950s, which is a park interpretive goal. Like merchandise sales, we found that the services provided by cooperating associations at the six parks we visited were educational and consistent with park themes. Some of these services generated substantial revenue for individual parks. For example, at Gettysburg NMP, the local association operates the “Electric Map” and “Cyclorama” mural painting. The Electric Map orients visitors to the park by depicting the progress of the 3-day Gettysburg battle, while the historic mural depicts the cavalry battle known as “Pickett’s Charge” in a 360-degree panorama. In fiscal 2000, these operations generated revenue of $758,183 and $320,475, respectively, of which the association donated about 40 percent to the park. Associations, however, also provide services that generate little or no revenue or profit. At Yosemite NP, for example, the cooperating association operated the park’s backcountry reservation program and worked with concessioners to rent bear-resistant food canisters to visitors having backcountry reservations. All association receipts from this program were used to purchase more canisters. The park received no revenue from this activity. Generally, the educational and thematic attributes of association sales items and services distinguish them from concessions sales items and services. However, this is not always the case. Sometimes the sales and services of associations and concessioners as well as other for-profit businesses are in direct competition with one another. At three of the six parks we visited, sales and services by associations and for-profit concessioners and other businesses were not clearly distinguished and this led to conflicts among these organizations. At the other three parks we reviewed, there were no apparent conflicts between associations and concessioners or other for-profit businesses. The three parks with conflicts were Grand Canyon NP, Fort Sumter NM, and Gettysburg NMP. In each instance, the conflicts resulted from local park managers’ decisions to permit associations to sell goods or services that had been traditionally provided by concessioners or other for-profit businesses. At Grand Canyon and at Fort Sumter, the conflicts involved association and concessioner sales. At Gettysburg, the conflict involved services provided by the association and a local business that, like concessioners, depended on park visitors for its survival. At Grand Canyon NP, three concessioners operated stores throughout the park that sold, among other things, film, disposable cameras, and a variety of other visitor convenience items to the millions of people that annually visit the park. These items were traditionally sold by the concessioners and were an important part of their business. However, in 2001, park managers began allowing the Grand Canyon Cooperating Association to sell visitor convenience items, including film and disposable cameras, at the association’s new bookstore. As a result, the association’s sales of these items went from zero in 2000 to over $50,000 during a 7-month period in 2001. This change caused considerable concern among park concessioners, whose collective film sales total over $1.5 million. Representatives of each of the three park concessioners believe that park management’s decision allowing association sales of visitor convenience items resulted in unfair competition that would adversely affect their profitability. At the time of our review, each concessioner estimated that film sales had decreased considerably. One concessioner told us that film sales decreased by $140,000 and another stated that, while overall sales declined by 9.5 percent, film sales deceased by 10.5 percent. The concessioners’ concerns were based on three factors. First, the association’s point of sale is located at the initial gathering place for most park visitors, which provides a marketing advantage that concessioners believe reduces their business. Second, because visitor convenience items are neither educational nor characteristic of a Grand Canyon theme, concessioners view these items as inconsistent with an association’s traditional scope of sales and educational mission. And third, because concessioners could not compete for operating the new bookstore at this location, they believe the association received favorable treatment that placed them at a competitive advantage. On the other hand, park managers and the cooperating association Executive Director pointed out that locating the association bookstore at the visitor center area was consistent with the park’s General Management Plan. Further, park officials told us that bids were not solicited on the bookstore operation because the bookstore was intended to serve an educational purpose—an activity consistent with the association’s mission and its agreement with the Park Service. They also noted that the cooperating association was willing to fund the building’s construction. In commenting on a draft of this report, the new association executive director stated that the conflict with concessioners was overstated and that the association has a strong working relationship with park concessioners. The situation at Fort Sumter NM is similar to that at Grand Canyon NP. At Fort Sumter there are two locations where merchandise is sold. The largest of these is a bookstore operated by the cooperating association in the recently opened visitor center in Charleston, South Carolina. Because this center is the main departure point for visiting Fort Sumter, it has generated considerable increases in association sales revenue. Moreover, according to park plans, in the future it may be the only commercial location serving Ft. Sumter visitors. The other sales location is a small store at the fort (see fig. 2). When the bookstore in the Charleston visitor center opened in 2001, the park manager permitted sales of educational and theme-oriented merchandise traditionally sold by associations as well as visitor convenience items. Prior to the opening of the new bookstore, visitor convenience items were sold by the store at the fort. This store was operated by a concessioner during the peak season—March 15th through Labor Day—when the park gets about 65 percent of its visitors, and by the cooperating association during the remaining months. Park plans envisioned this store closing when the new visitor center opened in Charleston and, in August 2000, several months before the new bookstore opened, the park discontinued all concessioner sales operations at the fort. However, the park manager subsequently decided that there was a need for educational and theme-related merchandise at the fort and determined that the association would operate the store at the fort on a year-round basis, including selling visitor convenience items. The concessioner questioned the decision to close the concession store at the fort because the association store remains open there and sells items similar to what the concessioner sold. The concessioner also believed that park officials should have afforded for-profit businesses an opportunity to compete for the bookstore operation in the new visitor center. This situation has contributed to conflict between the concessioner and park management. From park management’s perspective, the decision to have the association provide all of the sales at both the fort and the Charleston visitor center was consistent with the long-term plans for the park and the association’s educational agreement. According to park plans, these decisions were made to de-emphasize commercial activities at the park, to reduce the time spent by staff in supervising concession sales operations, and to focus merchandise sales on the park’s educational and interpretive goals. Because the conflicts at both the Grand Canyon and Fort Sumter involved increased association sales of visitor convenience items, we examined convenience item sales data for the 323 parks with cooperating associations to determine if the increases at these parks were part of a trend throughout the national park system. As table 8 shows, revenue from the sales of visitor convenience merchandise is expanding more rapidly than other sources of association revenue. These sales increased by 55 percent (from $2.06 to $3.19 million) between 1997 and 2001, while revenue from other sources increased only about half as much—about 21 percent. These data indicate that this sales trend is occurring nationwide. In addition, five of the seven regional directors in the Park Service told us that cooperating associations were expanding sales of visitor convenience merchandise in their regions. Table 9 provides some contextual information on the potential scope of conflicts that could occur between cooperating associations and concessioners at the parks. Specifically, the table provides national data on parks where both associations and concessioners sell merchandise to visitors. Table 9 shows that 84 of 91 parks having at least one concessioner that sells merchandise to visitors also have cooperating associations that sell merchandise and provide services to visitors. The table also shows that merchandise concessioners typically operate in parks with high visitation. Accordingly, competition is more likely in the largest parks. Appendix III provides a complete list of parks that have cooperating associations and merchandise concessioners. The third park we visited where a conflict was evident was Gettysburg NMP. This conflict involved the cooperating association and a local for-profit business that, like concessioners, derived its revenue from visitors to the park. In contrast to the conflicts at Grand Canyon and Fort Sumter, the conflict involved competition over providing tour bus service, not the sale of merchandise. Specifically, with the approval of park management, the cooperating association initiated a bus tour in 2001 that directly competes with locally operated bus tours. Further, because the association is affiliated with the park, this tour is permitted to pick up and drop off its customers at the park’s main visitor center—unlike the privately run for-profit tours. Neither of the local businesses that provided battlefield tours is permitted to pick up or discharge at the visitor’s center. Instead, their tours operate primarily from their offices in the commercial district of the town of Gettysburg—a few blocks from the visitor center. One of the local businesses contends that the association-administered bus tour service was unnecessary because similar tour services were already available to visitors. This business owner also was concerned because the association tour originates at the park visitor center and, as a result, has an important competitive advantage. Further, although park officials informally discussed the tour service with this business owner, the owner is concerned because the Park Service did not advertise and solicit bids for this new service and, thus, denied the business the opportunity to bid and compete for providing the service. Finally, this owner asserts that his business has already experienced adverse financial consequences as a result of the association tour, but because of difficulty in isolating the effects of this new service, cannot provide documentation supporting his assertion. In contrast, two other parks we visited, Yellowstone and Fort Sumter, also offered guided tours for visitors. In both instances, the tours were operated by for-profit businesses—concessioners—under contract with the respective parks. According to the park manager at Gettysburg, the association began operating the tour service at his request in order to enhance the educational and interpretive services offered to park visitors. Park managers told us that they require the cooperating association to use licensed park guides to provide narration and interpretation for customers on these tours and that this arrangement improves the quality of service provided to park visitors. Because park officials believed the tour service was consistent with the association’s agreement with the park, they decided that a concession contract and bid solicitation process was not necessary. While conflicts between cooperating associations and concessioners and similar for-profit businesses existed at some of the parks we visited, they did not exist at others. In fact, at two of the six parks we visited—Yosemite NP and Yellowstone NP—these organizations worked collaboratively to enhance visitor service. At a third park, Badlands NP, the association operated a small bookstore. Both association and park officials stated that the concessioner at Badlands had minor concerns about this association’s sales. Yosemite is a good example of where competing entities work together to serve overall park interests. Although the association and concessioner sometimes sold competing merchandise, officials of these entities agreed that there was a good understanding of their respective roles at the park and there were no noteworthy problems among the entities. In fact, there were a number of coordinated efforts between the association and concessioner. The following activities demonstrate collaborative activities at the park: The concessioner’s chief operating officer is also a member of the cooperating association board of trustees. The association arranges for artists to provide classes for visitors at an art activity center operated by a concessioner. At park wilderness centers the association issues permits and sells several visitor convenience items that are useful in the park’s backcountry—backpacking stoves, fuel canisters for the stoves, water filters, and spades. The association buys these items from the concessioner. The association and the concessioner are involved in providing backcountry visitors with bear-resistant food canisters. Previously, bear- resistant canisters were available only by purchase from a concessioner. The association and concessioner reached an agreement that provides for canister rentals from either the association or the concessioner and allows visitors to return canisters rented at a concession store to locations operated by the association. According to the association’s Executive Director, the concessioner is the biggest wholesale purchaser of the association’s publications. Because soliciting donations from individuals, corporations, and foundations is their chief revenue-generating activity, friends groups typically do not sell goods or services within the national park system. Accordingly, these groups generally do not compete for business with concessioners or other for-profit businesses that serve the parks. However, there are some exceptions where the boundaries distinguishing these two kinds of organizations are indistinct. Typically, friends groups raise revenue through fund-raising campaigns to support a local park project. To raise funds on behalf of the Park Service, agency policy requires that friends groups have an agreement signed by a local park manager, usually the park superintendent, and the president or chief executive officer of the friends group. Under this policy, national fund-raising campaigns or fund-raising campaigns with a goal of $1 million or more require the approval of the Park Service Director. Fund-raising campaigns also require an approved fund-raising plan detailing techniques, timing, staff needs, strategy, and costs. Park Service policy states that fund- raising plans will not be approved if overhead costs—which include fund- raising and administrative expenses—are projected to exceed 20 percent of revenues over the life of the campaign. The primary sources of friends group revenue are Federal & State Grants The precise proportion of revenue that friends groups derive from these various sources is not known. The Park Service does not collect such data, and available federal tax data do not provide detailed information related to these revenue sources. However, the tax data that are available suggest that fundraising is by far the most important source of friends group revenue. A prominent ongoing fund-raising effort is the National Park Foundation’s Proud Partner of America’s National Parks campaign. The foundation recognizes in numerous publications that five corporations— American Airlines, Discovery Communications, Inc., Ford Motor Company, Kodak, and TIME magazine—are “Proud Partners of the National Parks”. In return, these corporations have committed $85 million in cash and resources over a 3-year period. Friends group tax reports show that several have received federal or state grants. The Theodore Roosevelt Inaugural Site Foundation, for example, reported a federal grant in connection with its legal mandate to support management functions at the Theodore Roosevelt Inaugural National Historic Site. Similarly, the Friends of the National Parks at Gettysburg received a $1 million grant from the Commonwealth of Pennsylvania to restore a state memorial in Gettysburg. One friends group’s tax report recorded revenue from the sale of personalized state license plates as a government grant. Park Service policy allows friends groups to sell items within a park with the approval of the cooperating association and park superintendent. Cooperating associations also may sell items on behalf of friend groups. However, such arrangements are infrequent. provide a service in return. More typical of friends group sales are those by the group at the Virgin Islands NP, which offers T-shirts, license plates, and park-related merchandise at its office outside the park, on its Web site, and through local stores in St. John, Virgin Islands. Similarly, the friends group at Great Smoky Mountains NP reported selling items such as hats, T-shirts, specialty license plates, and other merchandise with its logo outside park boundaries, at its offices in Tennessee and North Carolina, through its Web site, and at festivals. Friends groups also generate revenue membership fees, through special events, and park donation boxes. Many friends groups offer fee-based memberships that provide member benefits. For example, at Yellowstone NP, a friends group offers memberships beginning at $25; it reported having over 8,000 members or volunteers. Paying members receive a free subscription to the group’s biannual newsletter, a copy of the annual report, and have their names displayed in the Yellowstone NP Honor Book at the Old Faithful Visitor Center for 1 year. Special fund-raising events hosted by friends groups usually consist of a one-time entertainment for which attendees are charged a fee. For example, in 2000, a friends group at Great Smoky Mountains NP raised over $133,000 through special events that included dinners, concerts, and hikes. Similarly, at Acadia NP the friends group netted about $250,000 through a special auction held in 2001. The development of data on friends group revenues is complicated by a blurring of the functional and organizational boundaries between some friends groups and associations. Although both types of organizations work to help the Park Service meet its mission, distinctions between cooperating associations and a friends groups are not always clear as evidenced by several “hybrid” groups that serve the parks. For example, the association at Golden Gate NP combines cooperating association and friends group functions under the same organization. The nonprofit organization at Mt. Rushmore NM created a subsidiary group to allow distinct bookstore and fund-raising and concession contract operations. And at Rocky Mountain NP, one nonprofit organization conducts fund-raising activities and a second operates a bookstore. These distinct nonprofit organizations are administratively linked, however, sharing the same Board of Directors. Three primary factors contribute to competition and conflicts between cooperating associations and concessioners and other for-profit businesses that serve the parks. First, Park Service policies intended to increase association support for parks lead to expanded association sales and services that compete with for-profit businesses for sales and services. Second, park managers have broad discretion in deciding the scope of park sales and services as well as whether cooperating associations and/or for- profit businesses operate in a park. In some cases, the rationale for expanding cooperating associations’ operations was not clear and contributed to conflicts among park management, cooperating associations, and concessioners. Third, cooperating associations return a higher percentage of their sales and service revenue to the parks compared to for-profit businesses, giving park managers a financial incentive to expand association operations. The Park Service recognizes the balancing act that is needed to manage the roles of cooperating associations and businesses that serve parks visitors, and agency policy encourages park managers to develop and implement plans addressing these roles. Among other things, these plans—called Commercial Services Plans—are intended to reduce conflicts in parks by clarifying the roles and competitive relationships of associations and concessioners and providing a more predictable business environment for them. However, these plans are rarely developed or used. Park Service policies and plans encourage park managers to generate increased financial support from cooperating associations and concessioners. The Park Service’s strategic and annual performance plans set programmatic and financial goals designed to substantially increase donations from cooperating associations as well as the amount of franchise fees from concessioners. For cooperating associations to provide increased financial support to parks, they must expand profit-making activities including the sale of merchandise. This promotes increased competition between cooperating associations and concessioners for park visitor dollars. The Park Service has set a goal of increasing cooperating association support by 35 percent between 1997 and 2005. As table 10 illustrates, between fiscal years 1997 and 2001 revenues increased about 22 percent— from about $89.36 million in fiscal year 1997 to about $108.78 in fiscal year 2001. Table 10 also shows that $18.37 million (about 95 percent) of this revenue increase has come from activities that are most like those of concessioners—merchandise sales of educational materials and visitor convenience items. Accordingly, this trend contributes to increased competition with concessioners. This trend is likely to continue as the Park Service and cooperating associations try to meet their increased revenue goals for 2005. Park Service policies and plans also have established goals for increasing revenue from concessioners. Specifically, the agency’s goal is to increase franchise fees paid by concessioners from about 4 percent of gross revenue in fiscal year 2000 to about 10 percent by 2005. While the mechanisms for concessioners achieving this goal are varied and complex, getting this done could involve increased concessioner offerings of their most profitable merchandise to park visitors. To the extent that concessioners and the associations are each vying for visitor dollars or offering similar merchandise, this would lead to increased competition. Further, the Park Service encourages concessioners to sell merchandise that is educational and consistent with park-related themes. Although there is no agencywide list of preferred merchandise, the Park Service’s Management Policies 2001 encourages concessioners to offer items for sale that foster awareness and understanding of a park. In this regard, the 2001 policy directs each park with a concessioner to have a gift shop mission statement that ensures concessioners sell merchandise reflecting information about the park. For example, at the Grand Canyon, one concessioner’s gift shop mission statement states that “to the greatest extent possible, merchandise will have an identifiable relationship to Grand Canyon National Park” and identifies several park themes, such as the park’s geology and history, that serve as a guide for implementing this objective. While this increased emphasis on concessioners selling more educational and theme-related merchandise may help provide visitors with a better park experience, it also promotes greater competition among associations and concessioners. According to some concession officials at the parks we visited, this emphasis by the Park Service makes concessioner sales venues more like those of cooperating associations. On the other hand, concession officials at other parks we visited stated that this change did not pose serious competitive issues. In a broader context, the issue of competition between for-profit and nonprofit organizations is a long-standing one that is not limited to the Park Service. As we have previously reported, representatives of for-profit businesses believe that the revenue-generating activities of nonprofit organizations exceed the traditional role of these organizations, and that the nonprofits receive a competitive advantage by virtue of their nonprofit tax status and other benefits. On the other hand, representatives of nonprofits believe certain nontraditional activities further their nonprofit purposes by generating additional revenue to fund these purposes. Although the Congress has attempted to address this issue in the past, it remains contentious. Park Service policy recognizes that a “delicate balance” exists between associations that have traditionally served an educational mission and concessioners that provide “necessary and appropriate” visitor services. Concessioners at two of the parks we visited, a local business at a park without a merchandising concessioner, and officials from the national organization representing park concessioners, contended that this delicate balance has become unsteady, and expressed concern that cooperating association operations are expanding into areas traditionally served by concessioners or for-profit businesses. They were unsure of the bounds on association sales activity and believed some association merchandise and services duplicated or replaced merchandise and services available in or near parks, were inconsistent with nonprofit educational mandates, and placed for-profits in increased financial jeopardy. Park Service regional directors generally agreed that the roles of both associations and concessioners are changing and that the distinction between what associations and concessioners sell has become less clear. In practice, park managers determine whether a cooperating association or concessioner will operate in a park. They also determine the scope, mix, and appropriateness of the sales and services that are provided. In this regard, local managers are also responsible for monitoring nonprofit operations, ensuring that association sales and services do not conflict with the contractual rights of concessioners, and minimizing potential conflicts with concessioners. However, the rationale for decisions on these matters was not always transparent, which contributed to conflicts among park management, cooperating associations, and concessioners. At each of the three parks we visited where there were conflicts—Grand Canyon, Fort Sumter, and Gettysburg—cooperating associations merchandise sales or services were expanded without concessioners or other local for-profit businesses having an opportunity to compete to provide these operations. Further, in each instance, the sales and services at the center of these conflicts were to be provided at prime locations within each park and the decision was made without providing a transparent rationale. In two cases, park officials decided to allow associations to provide new sales or services without addressing the decision in park plans. The following paragraphs provide a snapshot of the circumstances at each of these three parks. At the Grand Canyon, park officials requested that the association construct a bookstore adjacent to a new visitors center on the South Rim of the Canyon—by far, the most popular and heavily visited area of the park. The association raised $1.8 million for the project, gave the store property to the Park Service, and assumed responsibility for operating the store. As previously discussed, park managers permitted the association to sell traditional, park-related educational merchandise as well as visitor convenience items. Concessioner officials at the Grand Canyon told us that, in their opinion, providing them an opportunity to compete to operate the bookstore would have been a more balanced approach. Further, the officials told us that a double standard is applied by park managers that is advantageous to the cooperating association. As evidence of this concern, the concessioners cited how signage restrictions are applied differently for concessioners than for the cooperating association. On the south rim of the canyon, a store operated by the concessioner was not permitted to post any outside signage or displays, while an adjacent store operated by the cooperating association was permitted to do so (see figs. 3 and 4). In commenting on these pictures, the current cooperating association executive director stated that the signage outside the association’s bookstore was justified because, unlike the concession store, the bookstore was not visible from the major visitor contact area. However, in our view, this does not justify different signage standards for concessioners and associations. Moreover, these displays do not make the store visible from where it was previously invisible. Finally, the sandwich board displayed outside this store, advertised an association bookstore that is located elsewhere in the park. At Fort Sumter, the long-term plan for the development of the park specified that the concessioner-operated sales facility at the Fort would be relocated to a new visitor’s center. In a commercial services plan designed to implement the long-term plan, park officials decided that the cooperating association would operate the new sales facility at the visitor’s center, that the cooperating association could sell visitor convenience items as well as educational merchandise, and that no other merchandise facilities would be permitted. In accordance with the park’s commercial services plan, park managers did not provide the existing park concessioner an opportunity to operate the new sales facility. However, although both the long-term and implementation plans envisioned closing the sales facility at the Fort, this has not happened and the association operates two stores—one at the new visitors center and a second at the Fort. The park concessioner believes there should have been a bid solicitation process for operating the new facility—particularly since the cooperating association is selling noneducational visitor convenience items that had been sold by the concessioner. At Gettysburg, the local park manager permitted the association to manage a new, narrated bus tour for park visitors without giving for-profit businesses an opportunity to compete to provide this service. According to the owner of a competing local for-profit business near the park’s visitor center, the association-managed tour presents unfair competition because there was no public advertisement or discussion of the park’s proposal to initiate the association tours, nor was there a bid solicitation process that afforded for-profit businesses an opportunity to contract to provide this service. According to park officials, their decision to allow the cooperating association to manage a new tour from the visitor’s center instead of a concessioner or other for-profit business was made for several reasons, including their belief that the association would provide the best educational service to visitors; and that associations require less park resources to administer and allow changes that are responsive to the needs of park management. Cooperating associations can provide a much higher return to parks than concessioners. This ability is not surprising since, as nonprofit organizations, they enjoy a number of important financial advantages over for-profits. Most park officials that we spoke with said that financial advantage was not a factor in deciding whether an association or a concessioner provides sales and services. Rather, they described service to park visitors as the most important criterion. However, park officials at Gettysburg did tell us that associations’ higher financial return to parks was a factor in their decision to allow a cooperating association to operate a new bus tour. In commenting on a draft of this report, nonprofit organizations stated that although associations provide a higher return to the parks, this provides only a minimal incentive for park superintendents to select a cooperating association over a concessioner. Park Service data show that cooperating associations contribute a considerably higher percentage of total revenue to the parks than concessioners. Over 5 fiscal years, 1997 through 2001, association contributions averaged 26 percent of revenue. In contrast, the concessioners that sold merchandise paid the Park Service an average of about 4 percent of revenue over the same period (see table 11). For example, the cooperating association at the Grand Canyon NP gave about 36 percent of its gross revenue to the park. The concessioners paid about 4 percent of sales revenue to the park during this period. Also, local parks retain 100 percent of association contributions, but keep only 80 percent of concession payments, consistent with legislation that was enacted in 1998. Cooperating associations generally provide a higher return to parks than concessioners owing, in large part, to associations’ nonprofit status and charitable mission as well as to park policies that support association operations. The following factors provide associations with a considerable financial advantage when providing sales or services compared with concessioners: All cooperating associations are tax-exempt organizations under the Internal Revenue Code. Thus, they do not pay federal income taxes on funds collected to meet their nonprofit purpose. In most states, associations that are exempt from federal taxes do not have to pay state income tax on funds collected to meet their nonprofit purpose. Associations that are exempt from federal taxes may obtain exemptions from state and local sales taxes. Such exemptions apply to the purchases of the association. In a few states, associations also may be exempted from collecting state and local sales taxes on the sale of merchandise. Association sales and service revenues are substantially enhanced through donations and memberships fees from individuals and organizations wishing to support park activities. Volunteers often provide association services and may staff bookstore operations, thereby reducing association salary expenses. Association profits must be used to support the parks and are not shared with stockholders or company owners. Association Boards of Directors generally are not salaried. Parks routinely provide free sales areas and other facilities to the associations. For example, the parks provide bookstore space within visitor centers and support association field institutes by providing free facility space for classrooms and for instructor and participant housing. Parks provide free services that reduce overall association operating costs and overhead expenses. These services may include routine maintenance, garbage collection, interior work, repair services, and such utilities as water, heat, and air conditioning (to the extent these are required for the operation of the building for government purposes). Park staff sometimes assist in operating association bookstores. This assistance occurs after regular association operating hours, during off- season periods when the association may not have full-time staff, and at locations with low visitation where the association cannot afford to employ full-time staff. We did not attempt to quantify the value of tax-exempt status and park assistance to associations. However, Park Service, association, and concessioner officials agree that the nonprofit tax-exempt status is an association’s paramount financial advantage. Although cooperating associations usually enjoy financial advantages in competing with concessions, not all associations are profitable. For example, according to Park Service officials, the cooperating association that serves the 14 Park Service sites in Washington, D.C., has had serious financial problems. This association provides educational materials to visitors at facilities like the Washington Monument and Lincoln Memorial and has estimated debts exceeding $800,000. Further, according to its new executive director, the association lost money in 8 of the past 10 years. While other factors contributed to these losses, the director told us that one reason the association has not made money is that it could not sell many profitable items in its bookstores because Park Service officials viewed the items as competing with the sales of park concessioners. The Park Service is aware of the competitive tensions and potential conflicts that can exist between cooperating associations and concessioners within a park. To minimize conflicts, help ensure that agency policies are consistently followed, and provide a more systematic basis for making decisions about commercial sales and services in parks, Park Service guidance suggests that individual park managers develop Commercial Services Plans. Essentially, Commercial Services Plans are publicly available documents that, among other things, are intended to establish a predictable business environment in parks by better defining the roles of cooperating associations, concessioners, and other for-profit businesses in providing sales and services to park visitors. These plans also are intended to clarify what kind of sales and services are to be provided by the various commercial interests in a park. In brief, the plans rationalize a park’s approach to providing visitor sales and services and provide a decision-making framework that is transparent to the public, visitors, and commercial stakeholders at the park. To facilitate the development of this planning tool, the Park Service provides local park managers with guidelines, standards, and assistance. However, despite agency guidance and the benefits associated with Commercial Services Plans, they are rarely used. Data gathered from Park Service regional offices show that these plans were developed at only 3 of 84 parks (4 percent) where both cooperating associations and concessioners provide sales and services (app. VI has a complete list of these parks and the status of their plans). Moreover, we visited two of the six parks that had developed plans—Fort Sumter and Yosemite—and found that the plans did not meet the agency’s standards. At Yosemite, the plan was more than 10 years old and was based on an outdated management plan for the development of the park. Moreover, the plan did not describe the commercial activities of the cooperating association. The Fort Sumter plan, developed in 2000 and containing considerable detail, did not address the current scope of cooperating association operations because these had expanded beyond what the plan envisioned. Park Service officials told us that the primary reason Commercial Services Plans were not developed or up to date was because park resources are limited and preparing the plans is not among the agency’s highest priorities. At Yosemite NP, for example, park officials believed an updated plan would be helpful but that the plan also would require an Environmental Impact Statement (EIS). They expected that preparing the EIS would cost extensive park resources and viewed this cost as a major obstacle. Further, Commercial Services Plans must be consistent with the long-term management plans for the parks. These long-term plans—known as General Management Plans—are frequently out of date. In fact, over 25 percent of parks either do not have a General Management Plan or have a plan that is more than 20 years old. As a result, developing or updating Commercial Services Plans could also require that General Management Plans be updated. For example, at two of the six parks we visited the General Management Plans were more than 20 years old and needed updating. Updating and developing these plans would require a major resource commitment by the agency. Appendix VI provides a complete list of the status of General Management Plans. The Park Service does not have an effective process for holding local park managers accountable for meeting nonprofit contribution goals, even though one of the agency’s strategic goals is to increase the amount of contributions it receives from nonprofit organizations. The Park Service’s Strategic Plan FY 2000–FY 2005 establishes contribution goals for cooperating associations and friends groups. The agency has identified these goals as critical to accomplishing the mission of the Park Service. For cooperating associations, the agency’s goal is to increase the amount of donations and services by 35 percent from $19.0 million in the fiscal 1997- baseline year to $25.6 million by 2005. For friends groups and other sources, the goal is to increase cash and in-kind donations from $14.5 million in fiscal 1998 to $50.0 million by 2005. These long-term strategic goals are broken into annual agencywide performance targets and used to establish contribution goals for each park unit. However, the Park Service does not collect the information needed to determine whether these goals are being met and to accurately measure nonprofit support. For cooperating associations, the Park Service collects only aggregate information on the amount of association contributions. Consequently, agency managers cannot always track contributions on a park-by-park basis because, as discussed previously, cooperating associations usually serve multiple parks. Specifically, about 40 percent of all cooperating associations operate in more than one park and six of the 10 largest revenue-generating cooperating associations operate in more than one park. Table 12 lists the 10 largest associations and the number of parks served. As table 12 shows, the Eastern National cooperating association serves 127 parks. However, the Park Service collects information only on the total contributions made by Eastern National and not on the amount of contributions made to each of the 127 park units it serves. Accordingly, collecting and reporting only aggregate contribution information for Eastern National and other associations that serve multiple park units precludes the agency from establishing meaningful performance goals, evaluating the performance of local managers against the goals, and holding managers accountable for meeting established contribution goals. Although the Park Service collects some information on the contributions made by cooperating associations, it does not routinely collect any information on the amount of contributions made to parks by friends groups—either in the aggregate or on a park-by-park basis. In fact, the Park Service does not maintain an accurate, up-to-date list of friends groups currently working with the agency or of the specific parks they serve. Lacking this basic management information, the agency is unable to establish meaningful goals for local park managers or to monitor friends group contributions on an agencywide or park-by-park basis. According to Park Service and nonprofit officials, more complete information on cooperating associations and friends groups is not collected and reported for two key reasons. First, because nonprofits are voluntary partners in assisting the agency in performing its mission and already must meet a wide range of administrative requirements, both agency and nonprofit officials are reluctant to initiate additional requirements for collecting and reporting information. Second, both agency and nonprofit officials are concerned that collecting and reporting detailed information on the amount of contributions could lead to offsetting reductions in the amount of congressional appropriations made available to the agency. Between 1997 and 2001 cooperating associations substantially increased their financial support to parks. A major reason for this increased support is the additional revenue that cooperating associations generated from expanded sales of educational materials, services, and visitor convenience items. Friends group contributions also have dramatically increased, in large part because the number of these groups rose as did the scope of their fund-raising activities. These increased nonprofit donations are good news for the Park Service and the national park system because they supplement the appropriated funds provided by the Congress. However, the expanding presence and scope of cooperating association sales and service activities is causing some conflicts at parks where concessioners or other local, for- profit businesses are competing for similar sales and services. Given the conflicts we found at three of six parks we reviewed and the agency’s continuing emphasis on increasing the amount of nonprofit support for the national park system, we believe these conflicts will become more common. Several other factors add to the likelihood of increased conflict, especially at parks having both association and concessioner sales and services. Specifically, agency policies that encourage concessioner sales and services that are related to park themes, and agency decisions permitting increased visitor convenience item sales by cooperating associations, blur the distinction between concessioner and association activities. Local park managers’ broad discretion in determining whether concessioners or cooperating associations provide needed sales and services and the substantial financial incentive for using cooperating associations also heighten the likelihood of conflict. In light of these circumstances, it is not surprising that park managers are expanding cooperating association roles. In the final analysis, these decisions may be in the best interest of the parks; however, the process for making these decisions does not serve to minimize conflicts because it does not provide a transparent rationale or give concessioners or other local for-profit businesses an opportunity to compete for new sales and services. The Park Service understands the competitive tensions that exist between concessioners and cooperating associations. To help minimize conflicts, park managers are advised to develop Commercial Services Plans. These plans are intended to provide a logical and consistent basis for decisions, reflect public comments, and provide a more predictable commercial environment in the parks, which would give businesses greater confidence in their long-term decisions. However, these plans are only rarely developed or used. As a result, the basis for park decisions is not always clear, and public accountability is diminished. Moreover, because the Park Service does not collect accurate or complete information on the contributions it receives from its nonprofit partners— either agencywide and on a park-by-park basis—it cannot hold park managers accountable for meeting strategic contribution goals. Further, without better and more complete information the agency cannot establish meaningful performance goals or monitor progress against these goals. In order to (1) minimize conflicts among the Park Service, cooperating associations, and concessioners, (2) better ensure that decisions about providing commercial sales and services are made more consistently and that logical criteria are followed, (3) provide a predictable commercial environment in the parks, and (4) enhance public accountability for its decisions, we recommend that the Secretary of the Interior require the Director of the National Park Service to revise its policy regarding Commercial Services Plans so that all parks offering visitor sales and services are required to develop these plans and ensure that Commercial Services Plans include (1) an explanation of the roles and responsibilities of both concessioners and cooperating associations in providing visitor sales and services in a park unit and (2) rationale for decisions that specify associations or other nonprofits will provide new visitor sales or services and that do not afford concessioners and other local, for-profit businesses an opportunity to compete. To establish meaningful contribution goals and to improve the accountability of park managers in meeting agency goals, we recommend that the Secretary of the Interior require the Director of the National Park Service to develop and maintain an accurate and up-to-date list of friends groups on a park-by-park basis and require cooperating associations and friends groups to report key financial information on a park-by-park basis. We provided the Department of the Interior, the Association of Partners For Public Lands (representing park cooperating associations and friends groups), and the National Park Hospitality Association (representing park concessioners), with copies of a draft of this report. The Association of Partners For Public Lands and the National Park Hospitality Association generally agreed with the recommendations and contents of this report. The Association of Partners For Public Lands’ comments are included in appendix VII. In addition, the Association provided technical and clarifying comments that we incorporated into the report as appropriate. The National Park Hospitality Association’s comments are in appendix VIII. The association suggested additional recommendations. However, we believe these are not warrented based on the information and analysis in the report. The Department of the Interior did not provide comments on the report. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to appropriate congressional committees and other interested parties. We will also make copies available to those who request them. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me or Cliff Fowler at (202) 512-3841. Key contributors to this report were Michael Krafve, Paul Lacey, Peter Oswald, and Mona Sehgal. We examined activities of two types of nonprofit organizations commonly found at parks: (1) cooperating associations and (2) friends groups. Although other nonprofit organizations also provide services and conduct commercial activities such as guided hiking and rafting trips at park sites, based on the subcommittee’s letter and discussions with subcommittee staff, these organizations were not included in the scope of this review. To identify the number of parks supported by nonprofit organizations and these organization’s contributions, we obtained annual reports of cooperating association’s aid and revenue from the National Park Service’s Division of Interpretation and Education. We obtained the National Par Service’s most recent directory of friends groups (1998-1999) from the Park Service’s Partnership Office and contacted groups listed in the directory. To determine which groups were active, we telephoned all groups listed in the directory. For groups that could not be reached, we confirmed with the associated parks whether the group was still active. We also obtained organizational information from representatives of nonprofit groups, including the National Park Foundation, and National Park Service officials. We identified 149 friends groups, although it is possible that there are other groups that we were not able to identify. Contribution amounts and other nonprofit financial information used in this report are based on several sources. We received data on cooperating associations for 1997-2001 from the Park Service; these data are based on annual reports that all cooperating associations are required to submit to the Park Service. Tax data for 1998-2000 were purchased from the Urban Institute, which contracts with the Internal Revenue Service to digitize data on tax-exempt organizations; these data were based on tax returns submitted by nonprofit organizations with revenues over $25,000. Tax data were also obtained from the GuideStar Web site operated by Philanthropic Research Inc.; these data consisted of electronically scanned tax reports for friends groups and cooperating associations with revenues over $25,000. We also surveyed identified friends groups, as described below. We did not verify that information in the annual reports and tax returns was correct. We relied heavily on self-reported donation and tax data from tax- exempt organizations; however, we previously reported that because potential donors look at what percentage of expenses go to the charitable purpose rather than management and fund-raising, nonprofit organizations have an incentive to report management and fund-raising costs as charitable expenses. Thus, there may be some over reporting of charitable contributions and underreporting of management and fund-raising costs. In this regard, we noted significant differences in reported tax information by two of the largest cooperating associations, Eastern National and Parks and History. Eastern National reports that about 20 percent of its expenditures are for charitable purposes and about 80 percent is used to cover the costs of materials, selling, and administrative expenses; Parks and History reports that about 90 percent of its expenditures are charitable expenses. Data from the Park Service on cooperating associations were not comparable with tax data from the Urban Institute and GuideStar because of differences in reporting periods and accounting practices. We assessed the reliability of the electronic data we received from the Park Service and the Urban Institute through tests to determine obvious problems with completeness or accuracy. We determined that the data were reliable enough for the purposes of this report. In addition, we conducted a survey of active friends groups regarding their financial information. We mailed the survey to all 149 identified groups in June 2002 and conducted several follow-ups by telephone and e-mail to encourage responses; we completed data collection in November 2002. Of the 149 groups surveyed, 79 returned responses (53 percent). Survey data were supplemented with tax data for an additional 23 groups, resulting in 102 of 149 groups (68 percent) with available financial data. Where possible, survey data were compared to tax data and any discrepancies were resolved through discussion with the groups. Figures presented in this report represent the two-thirds (68 percent) of identified friends groups for which we had either tax data or survey data, and dollar amounts should be considered a minimum estimate of the totals for all friends groups. To identify the revenue-generating activities of nonprofits in the parks, and factors that contribute to cooperating association and concessioner competition and conflicts, and to assess how park managers are held accountable for meeting park service goals for nonprofit contributions, we (1) reviewed Park Service documents, plans, and policies; (2) obtained information from each of the Park Service’s seven regional offices; and (3) met with National Park Service officials, the Association of Partners For Public Lands the National Park Foundation, the National Park Hospitality Association, and the Friends Alliance. We also met with park, nonprofit, and concessioner officials at Gettysburg NMP, Fort Sumter NM, Grand Canyon NP, Badlands NP, Yosemite NP, and Yellowstone NP and discussed a nonprofit-managed concession contract with park and association officials at Mt. Rushmore NM. We chose to visit Grand Canyon, Yosemite, and Yellowstone national parks because their cooperating association and concession operations were among the largest in the park system; Gettysburg NMP and Fort Sumter NM to explore concessioner and local business concerns about nonprofit activities in these parks; and Badlands NP for perspective on a smaller nonprofit operation. Because these parks were not a random sample, they may not be representative of the system as a whole. We obtained data identifying merchandising concessioners, along with fees paid to the parks, from the Park Service’s Concession Management Division., We conducted our work from October 2001 to April 2003 in accordance with generally accepted government auditing standards. Establishes the National Park Service and the basic mission of the agency: “to conserve the scenery and the natural and historic objects and the wild life therein and to provide for the enjoyment of same in such manner and by such means as will leave them unimpaired for the enjoyment of future generations.” Authorizes the Secretary of the Interior to enter into contracts, including cooperative arrangements, with respect to conducting living exhibits, interpretive demonstrations, and park programs. Authorizes the Secretary of the Interior to provide, on a reimbursable basis, supplies and equipment to persons that render services or perform functions that facilitate or supplement the activities of the Park Service. Authorizes the Park Service to enter into cooperative agreements that involve the transfer of Park Service appropriated funds to state, local and tribal governments, other public entities, educational institutions, and private nonprofit organizations for the public purpose of carrying out National Park Service programs pursuant to 31 U.S.C. § 6305. Authorizes the Secretary of the Interior to issue rules and regulations for use and management of park areas. Authorizes the Secretary of the Interior to accept donations of lands, other property, and money for the purposes of the National Park System. Authorizes the use of Park Service appropriations for the services of field employees in cooperation with nonprofit scientific and historical societies engaged in educational work in the parks. Authorizes the Secretary of the Interior to accept donations and bequests of money or other personal property, and use and administer these for the purposes of increasing the public benefits from museums within the National Park System. Establishes the National Park Foundation, a charitable and nonprofit corporation, to accept and administer gifts of real and personal property for the benefit of, or in connection with, the National Park Service, its activities, or its services. Authorizes the Secretary of the Interior to accept donations of money or services to meet expected, immediate, or ongoing response costs concerning destruction, loss, or injury to park system resources. Authorizes the Park Service to enter into contracts and cooperative agreements with associations and others to protect, preserve, maintain, or operate any historic or archaeologic building, site, object, or property in the National Park System. Authorizes the Secretary of the Interior, in administering historic sites, buildings, and objects of national significance, to cooperate with and seek and accept the assistance of any federal, state, or municipal department or agency; any educational or scientific institution; or any patriotic association or individual. Authorizes federal agencies to use cooperative agreements when (1) the principal purpose is to transfer a thing of value to the recipient to carry out a public purpose and (2) substantial involvement is expected between the agency and the recipient when carrying out the activity contemplated in the agreement. Cooperating association Cooperating association donations (1997-2001) and net assets83,785 (166,087) Chesapeake and Ohio Canal Association, Inc. Fire Island Lighthouse Preservation Society, Inc. Friends of the Chickamauga & Chattanooga NMP (14,511) Friends of Fort Vancouver National Historic Site Friends of Harpers Ferry National Historical Park Friends of Independence National Historical Park Friends of Perry’s Victory and International Peace Memorial, Inc. Friends of Stones River National Battlefield Friends of the Claude Moore Colonial Farm at Turkey Run, Inc. Friends of the Cape Cod National Seashore, Inc. Friends of the Gateway Parks Foundation, Inc. Indiana Dunes Environmental Educational Consortium Rocky Mountain National Park Association Statue of Liberty—Ellis Island Foundation, Inc. Friends group donations (1997-2001) and net assetsChesapeake and Ohio Canal Association, Inc. Fire Island Lighthouse Preservation Society, Inc. (32,935) Friends of Fort Vancouver National Historic Site Friends of Great Smokey Mountains National Park Friends of Harpers Ferry National Historical Park Friends of Independence National Historical Park Friends of Perry’s Victory and International Peace Memorial, Inc. Friends of Stones River National Battlefield Friends of the Claude Moore Colonial Farm at Turkey Run, Inc. Friends of the Cape Cod National Seashore, Inc. Friends of the Gateway Parks Foundation, Inc. Friends of the William Howard Taft Birthplace Indiana Dunes Environmental Educational Consortium Rocky Mountain National Park Association Statue of Liberty—Ellis Island Foundation, Inc. Voyageurs Region National Park Association (33,809) General Management Plans (GMP) Plans (CSP) (complete/due) Abraham Lincoln Birthplace National Historic Site Alibates Flint Quarries National Monument Allegheny Portage Railroad National Historic Site Appomattox Court House National Historical Park Arlington House – The Robert E. Lee Memorial Big South Fork National River & Recreation Area Black Canyon of the Gunnison National Monument 1997 General Management Plans (GMP) Plans (CSP) (complete/due) Boston African American National Historic Site Boston Harbor Islands National Recreation Area Brices Cross Roads National Battlefield Site Brown v. Board of Education National Historic Site Cane River Creole National Historical Park Carl Sandburg Home National Historic Site Castillo de San Marcos National Monument Chattahoochee River National Recreation Area Chesapeake & Ohio Canal National Historical Park 1976 General Management Plans (GMP) Plans (CSP) (complete/due) Chickamauga & Chattanooga National Military Park Cuyahoga Valley National Recreation Area Dayton Aviation Heritage National Historical Park Delaware Water Gap National Recreation Area Ebey's Landing National Historical Reserve 1990 General Management Plans (GMP) Plans (CSP) (complete/due) Florissant Fossil Beds National Monument Fort McHenry National Monument & Historic Shrine Fort Union Trading Post National Historic Site Frederick Law Olmsted National Historic Site 1983 General Management Plans (GMP) Plans (CSP) (complete/due) Fredericksburg & Spotsylvania County Battlefields Memorial National Military Park George Rogers Clark National Historical Park George Washington Birthplace National Monument George Washington Carver National Monument Great Egg Harbor Scenic and Recreational River Hagerman Fossil Beds National Monument 1996 General Management Plans (GMP) Plans (CSP) (complete/due) Home of Franklin D. Roosevelt National Historic Site Homestead National Monument of America Hubbell Trading Post National Historic Site Jean Lafitte National Historical Park & Preserve John D. Rockefeller, Jr., Memorial Parkway John Fitzgerald Kennedy National Historic Site 1984 General Management Plans (GMP) Plans (CSP) (complete/due) General Management Plans (GMP) Plans (CSP) (complete/due) General Management Plans (GMP) Plans (CSP) (complete/due) General Management Plans (GMP) Plans (CSP) (complete/due) Saint Croix Island International Historic Site Salinas Pueblo Missions National Monument Salt River Bay National Historical Park and Ecological Preserve San Antonio Missions National Historical Park San Francisco Maritime National Historical Park Santa Monica Mountains National Recreation Area Sunset Crater Volcano National Monument Theodore Roosevelt Birthplace National Historic Site Theodore Roosevelt Inaugural National Historic Site 1993 General Management Plans (GMP) Plans (CSP) (complete/due) Upper Delaware Scenic and Recreational River Virgin Islands Coral Reef National Monument War In The Pacific National Historical Park Wolf Trap Farm Park for the Performing Arts 1982 General Management Plans (GMP) Plans (CSP) (complete/due) The following are GAO’s comments on the Association of Partners for Public Lands’ letter dated June 13, 2003. 1. We agree that NPS must better manage information on nonprofits, and this is one of our recommendations. We do not agree that the report title should be changed as proposed because the change would not capture another issue that our report and recommendations address -- the need to better manage the increasing role of nonprofits in providing visitor convenience items and services. Problems in these areas led to conflicts at three of the parks we visited. Moreover, our recommendation that parks develop commercial services plans is directed at managing the roles of nonprofits in the parks. 2. The association correctly points out, as we likewise observed in the report, that our observations at six parks cannot be generalized to the system as a whole. However, because association sales of convenience items are growing more rapidly than other association revenue items (table 8), we are concerned that the likelihood of conflicts between associations and concessioners may also increase. Positive relationships between associations and concessioners are discussed in the section “Not All Concessioners Were Concerned about Competition from Cooperating Associations,” on pp. 25 - 26. 3. We agree that cooperating associations provide benefits to visitors that are not measured by the amount of donations to the Park Service. We identified nonfinancial benefits that associations provide in a distinct report section on p. 14 and noted that association activities are focused on providing visitors with educational materials and services on p. 16. In addition, examples of nonfinancial assistance are in table 7. 4. This effort focused on the National Park Service’s role in partnering with nonprofits. We do cite prior GAO efforts that examined IRS oversight of nonprofits. For example, we cite TAX-EXEMPT ORGANIZATIONS: Additional Information on Activities and IRS Oversight, (GAO/T-GGD-95-198), which found compliance and administrative difficulties with Unrelated Business Income Tax reporting (see p. 32). 5. We added the association’s view to the discussion on p. 36. As stated in this section, we believe cooperating associations offer a considerable financial advantage, owing to the associations’ nonprofit status and other park support. However, we did not attempt to quantify the value of these advantages or to measure their effect on park decision makers. 6. We agree that net assets are intended to cover operating reserves and are not held exclusively for future contribution. We added the clarification that these assets are “potentially” available (pp. 3 and 13) and “could become” available (p. 7) for contribution. To the extent that nonprofit assets exceed operating expenses and other liabilities, net assets can only be used for their tax-exempt purpose, which for most of the nonprofits discussed in this report, is solely to benefit national parks. 7. Detailed technical and clarifying comments were incorporated into the report as appropriate. The following are GAO’s comments on the National Park Hospitality Association’s letter dated June 18, 2003. 1. We agree that Commercial Services Plans will require time to develop and implement and that development and implementation may be difficult because of resource constraints or because General Management Plans must first be prepared or updated. In this regard, we note on p. 1 that federal funding for the Park Service has not kept pace with such needs as visitor services and maintenance requirements. On p. 40, we note that Park Service officials told us that Commercial Service Plans were not developed because park resources are limited and there are higher priorities. We also note that Commercial Services Plans must be consistent with long-term plans – General Management Plans – and while the National Parks and Recreation Act of 1978 requires that each park unit maintain an up-to-date General Management Plan, these are frequently out of date. Although progress in developing and implementing Commercial Services Plans is necessarily dependent upon the availability of agency resources and its consideration of other agency priorities, we believe the likelihood that concessioner and nonprofit conflicts will become more common (see p. 42) supports placing greater emphasis on Commercial Services Plans. 2. As is clear from the heading on p. 33, the section “Park Managers Have Broad Discretion in Deciding to Expand Cooperating Association Sales and Services and Do Not Always Provide Transparent Rationale” already discusses the considerable autonomy park managers have at the local level. This was an important factor in our recommending that these managers provide rationale for decisions involving the scope, mix, and appropriateness of association and concessioner sales and services (see p. 44). Because we did not examine the advantages and disadvantages of the Park Service’s decentralized structure, we cannot address the need for increased headquarters’ or regional oversight of park managers. 3. We did not identify instances where the contractual rights of concessioners were not respected. In addition, D.O. # 32 makes reference to the preferential rights of concessioners. The National Parks Omnibus Management Act of 1998 (P. Law 105-391) prohibits the Secretary of the Interior from granting a preferential right to a concessioner for most new contracts or services. Although D.O. # 32 could be updated for consistency with current law, we are not making this recommendation because we did not identify problems related to the outdated wording. Moreover, the contracts that we examined as part of our work usually did not give concessioners “exclusive” rights to sell or provide services. In fact, contract language in some cases specifies that concessioners are not granted “an exclusive or monopolistic right, to provide public accommodations, facilities, and services.” The Association correctly points out that the Reference Manual for D.O. # 32 specifies that associations may be authorized to sell visitor convenience items when “concessioners are not presently providing such services”. This same instruction later specifies that a concessioner and an association generally will not carry on duplicative, competitive operations “in the same building.” Although the Park Service may wish to reexamine these provisions, we did not make this recommendation because, in some cases, concessioners and associations may need to provide similar services at a park. For example, prior to the new visitor center facility opening at Fort Sumter NM, the merchandise concessioner chose not to operate its store during the off-season. During this period, the association operated that facility, providing visitor convenience items in addition to interpretive materials. 4. Table 5 notes that association financial contributions include a dollar value assigned to information assistance provided by association staff to visitors and that the Park Service allows associations to claim up to 50 percent of association sales staff salaries. However, we agree that additional detail would provide a clearer picture of the composition of association contributions. We added language to tables 5 and 11 that 25 percent of association contributions were for information assistance. We also added that information assistance is a primary type of park support to the discussion on p. 2. 5. The issues addressed in this report do not provide a basis for making these recommendations. 6. Associations have appointed concessioner officials to their Boards of Directors. This was the case, for example, at Grand Canyon NP and Yellowstone NP. We believe that deciding who should serve on its Board of Directors is a decision best left to the private cooperating association. 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 e-mail alerts” under the “Order GAO Products” heading. | Two types of nonprofit organizations, cooperating associations and friends groups, provide substantial support to the national parks. GAO was asked to report on (1) the number of park units supported by nonprofits and the amount of their contributions, (2) the revenue-generating activities of nonprofits and how they compete with park concessioners, (3) factors that contribute to competition between nonprofits and for-profit concessioners, and (4) how park managers are held accountable for meeting goals for nonprofit financial support. Cooperating associations and friends groups help support 347 (90 percent) of our national parks. Their contributions totaled over $200 million from 1997-2001 and were an important supplement to federal appropriations. These organizations also have additional assets totaling about $200 million, which could become available for future donation to the parks. The primary revenue-generating activities of cooperating associations are selling educational materials in park bookstores and providing educational services to park visitors. In contrast, friends groups generally rely on donations and membership dues to generate revenue. Accordingly, only cooperating associations directly compete with concessioners or other local for-profit businesses. In some parks, the sales and services provided by cooperating associations have caused conflicts between park management, the associations, and concessioners. There are three major factors that contribute to conflicts between associations and concessioners: (1) Park Service policies encourage an expanding reliance on nonprofit organizations; (2) the broad discretion local park managers have in deciding the role and scope of association activities has permitted expanded sales and service activities by cooperating associations; and (3) the agency has a financial incentive to use cooperating associations because they provide a higher return on sales revenue. To minimize conflicts and better ensure that park managers consistently apply agency policies in making decisions about whether and how to use cooperating associations and concessioners, Park Service guidelines call for individual park managers to develop "Commercial Services Plans." However, these plans are rarely developed or used. In addition, even though one of the agency's key goals is to increase its reliance on partnerships with nonprofit organizations, the Park Service does not have a process for holding local park managers accountable for meeting contribution goals. |
USERRA has extremely broad coverage, provides a wide range of protections, and applies over long time periods. The discrimination provisions of the law cover every individual who serves in, plans to serve in, or has served in the uniformed services of the United States. The law’s reemployment and benefit provisions are applicable to some active duty military personnel as well as to National Guard and Reserve members. USERRA applies to public and private employers in the United States, regardless of size, and includes federal, state, and local governments, as well as for-profit and not-for profit private sector firms. It also applies in overseas workplaces that are owned or controlled by U.S. employers. Generally, servicemembers are entitled to the reemployment rights and benefits provided by USERRA if they meet certain conditions. These include having held a civilian job prior to call-up, serving fewer than 5 years of cumulative military service with respect to that employer, providing their employer with advance notice of their service requirement when possible, leaving service under honorable conditions, and reporting back to work or applying for reemployment in a timely manner. Provided servicemembers meet their USERRA requirements, they are entitled to prompt reinstatement to the positions they would have held if they had never left their employment, or to positions of like seniority, status, and pay; health coverage for a designated period of time while absent from their employers, and immediate reinstatement of health coverage upon return; training, as needed, to requalify for their jobs; periods of protection against discharge based on the length of service; non-seniority benefits that are available to other employees who are on leaves of absence. Figure 1 is a flowchart that shows servicemembers’ options for receiving federal assistance with their USERRA complaints. While the flowchart shows several different paths for resolving employment problems, the chart does not show all of the options available to servicemembers. Some servicemembers have used members of their military chain-of-command to help them resolve problems with their employers. In addition, the ESGR is available to provide information and informal mediation of USERRA- related employment problems. The DOL offers assistance similar to the ESGR in that it provides information to employers and employees, and works to informally resolve USERRA-related employment problems. The DOL also receives formal complaints from servicemembers under USERRA. Another option that is available to servicemembers at any time is to hire a private attorney and to file a complaint against their employer in court (for private employers and state and local governments) or before the Merit Systems Protection Board (for federal employers). However, a working group from the American Bar Association found that many private attorneys are reluctant to take USERRA complaints because cases are not likely to result in large judgments or settlements. The responsibility for enforcing and implementing USERRA is complex, involving several federal agencies. Under USERRA, specific outreach, investigative, and enforcement roles are assigned to DOD, DOL, DOJ, and OSC. Most of the people entitled to USERRA rights and benefits earn their entitlement while serving in the military services. The Secretary of Defense shares responsibility with DOL for informing servicemembers and employers of their rights, benefits, and obligations under the act. The ESGR carries out this responsibility for DOD. The ESGR was established in 1972 to manage activities that maintain and enhance employers’ support for the reserve components, and it has a goal to inform servicemembers and their employers of their respective USERRA rights and responsibilities. The Office of the Under Secretary of Defense (Personnel and Readiness) develops the policies, plans, and programs that manage the readiness of both active and reserve forces, and within that office, the Assistant Secretary of Defense for Reserve Affairs oversees the activities of the ESGR. The ESGR has a staff of about 55—18 civilians and 37 military personnel— at its national headquarters in Arlington, Virginia. However, much of the ESGR’s work is done through its more than 4,000 volunteers who are organized into state committees. These volunteers help to educate both employers and servicemembers about USERRA, and a specially trained subgroup of about 800 volunteers serve as impartial ombudsmen who work to informally mediate USERRA issues that arise between servicemembers and their employers. While many volunteer ombudsmen are attorneys, human relations specialists, or have other backgrounds that assist them in their mediation work, all of the ESGR’s ombudsmen are required to attend a 3-day training course before they handle servicemember complaints. (App. II contains additional information about the backgrounds of these volunteer ombudsmen.) Most USERRA-related complaints come to the ESGR through its toll-free telephone number (1-800-336-4590), which is answered at the ESGR’s Customer Service Center in Millington, Tennessee. The customer service representatives in Tennessee screen calls, fill requests for information, and forward complaints that appear to have merit to volunteer ombudsmen, who are generally located geographically near the servicemembers. The complaints are often channeled through state ombudsmen coordinators. The ESGR’s volunteer ombudsmen attempt to resolve pay-related USERRA complaints within 7 days and other USERRA complaints within 14 days. When ombudsmen cannot resolve servicemember complaints, they are to notify the servicemembers of the other options that are available to address complaints. The ombudsmen may then pass the complaints to the ESGR headquarters through their state ombudsman coordinators. The Secretary of Labor has responsibility for providing assistance to servicemembers who claim USERRA rights and benefits. This responsibility is carried out primarily through the efforts of VETS. VETS is led by an assistant secretary who is supported by headquarters, regional, and state staff as well as local investigators. When a servicemember leaves active duty and a USERRA-related complaint develops against the servicemember’s civilian employer, the servicemember can file a formal complaint at www.vets1010.dol.gov, or can file a printed copy of the complaint form, such as the one included in appendix III, with the Secretary of Labor. The complaint is then assigned to one of VETS’s approximately 125 investigators, generally an investigator who is located close to the employer. These VETS investigators examine USERRA complaints and try to help the servicemembers and employers resolve their differences. The investigators also typically have a host of other responsibilities that support veterans’ programs but that are not directly related to USERRA. The law gives DOL subpoena power over records and individuals to aid in its investigations, but officials note that subpoenas are used infrequently because the threat alone is usually enough to gain cooperation. The statute also states that the Secretary of Labor may use the assistance of volunteers and may request assistance from other agencies engaged in similar or related activities. When DOL is unable to resolve servicemember complaints, DOL informs the servicemembers that they may request to have their complaints referred. A complaint is referred to DOJ if it involves state or local governments or private employers or to OSC if it involves a federal executive agency. Before complaints are sent to DOJ or OSC, they are reviewed by a VETS regional office, which reviews the memorandums of referral to ensure that the investigations are thorough and that the documentation is accurate and sufficient. The referrals are also reviewed by a DOL regional solicitor’s office to assess the complaints’ legal basis. Both offices render opinions on the merits of the complaints. Even if both offices find that the complaints have no merit, DOL is required by the act to pass the complaints to DOJ or OSC if the servicemembers request referrals. Along with their investigation and mediation responsibilities, VETS investigators also conduct briefings to educate employers and servicemembers about USERRA requirements and responsibilities, and they field service-related employment and reemployment questions that are directed to their offices. These investigators are required to take three courses that train them in the basics of the USERRA law, advanced investigative techniques, and the differences between veterans’ preference issues and USERRA discrimination issues. Under USERRA, the Secretary of Labor reports USERRA information to Congress on an annual basis, after consulting with the Attorney General and Special Counsel. The Secretary’s report includes information about the number of complaints reviewed by DOL during the fiscal year for which the report is filed along with the number of complaints referred to DOJ or OSC. The annual report should also address the nature and status of each complaint and should state “whether there are any apparent patterns of violation.” Finally, the report should include any recommendations for administrative or legislative action that the Secretary of Labor, the Attorney General, or Special Counsel consider necessary to effectively implement USERRA. USERRA also granted DOL authority to issue regulations that implement USERRA provisions for state and local government and private employers. In its most recent report to Congress, the department did not note any apparent patterns of violation. DOL did note that it had published draft regulations implementing USERRA for the first time on September 20, 2004, and DOL has completed the evaluation of comments that were submitted in response to these draft regulations. DOL has submitted the final regulations to OMB for formal review prior to publication in the Federal Register, and publication is expected in the near future. The Attorney General is assigned enforcement responsibilities under USERRA, but DOJ is not authorized to receive USERRA complaints directly from servicemembers. It investigates, mediates, and litigates only private sector or state or local government complaints that it receives from DOL. The Civil Division in DOJ was responsible for handling USERRA complaints until September 2004, when DOJ transferred responsibility to its Civil Rights Division, which handles other types of employment discrimination complaints not related to military service. The Civil Division procedures called for the division to review the complaint and either (1) decline representation and return the complaint to DOL’s regional solicitor’s office because the complaint lacked merit or (2) forward the complaint to the U.S. Attorney’s Office for possible litigation. If the complaint was forwarded, the U.S. Attorney’s Office would assign the complaint to an assistant U.S. attorney who would review the information in the DOL referral, and interview the servicemember and potential witnesses. The assistant U.S. attorney then would make a determination on the merits of the complaint. If the assistant U.S. attorney found that the complaint was meritorious and the U.S. attorney agreed, the U.S. attorney’s Office would represent the servicemember. In these situations, the assistant U.S. attorney would contact the employer and try to resolve the matter without litigation. If that failed, the assistant U.S. attorney would file a complaint against the employer in federal district court. If the assistant U.S. attorney found that the complaint was not meritorious and the U.S. attorney agreed, the complaint would be referred back to DOL and the servicemember would have the option of seeking their own legal representation and filing a complaint against the employer in federal district court. A settlement could be negotiated at any stage of the process. In July 2005, the Civil Rights Division was still following these procedures pending sufficient experience with USERRA complaints to decide if new procedures are necessary. DOJ’s Civil Rights Division attorneys are trained in handling discrimination complaints because they receive training on Title VII of the Civil Rights Act of 1964. In addition, according to DOJ officials, 37 attorneys in the Employment Litigation Section received training on USERRA in March 2005 and also received a collection of reference documents relevant to USERRA. These attorneys are available to handle both civil rights and USERRA complaints. There are also 18 professional and 8 clerical staff who are trained on USERRA matters. Under USERRA, OSC is responsible for enforcing USERRA rights at federal executive agencies. Prior to February 8, 2005, OSC was not authorized to receive USERRA complaints directly from servicemembers and had to wait until DOL referred the complaints. However, under a demonstration project, OSC may now receive USERRA complaints against federal executive agencies directly from certain servicemembers. OSC recently established a six-person USERRA unit to investigate, mediate, and, as necessary, litigate USERRA complaints. Under the traditional procedures, when a servicemember employed by a federal executive agency requests to have his or her DOL complaint referred to OSC, DOL’s regional solicitor sends a referral to OSC. While OSC takes the referral information into account, OSC conducts its own review of the facts and the law and comes to its own conclusions on the merits of the complaint. If the complaint is received directly from the servicemember, OSC conducts the investigation without DOL input. In either case, if OSC is satisfied that the servicemember is entitled to corrective action, OSC begins negotiations with the servicemember’s federal employer. If an agreement cannot be reached, OSC may represent the servicemember before the Merit Systems Protection Board. If the Merit Systems Protection Board rules against the servicemember, OSC may appeal the decision to the U.S. Court of Appeals for the Federal Circuit. In instances where OSC finds that complaints do not have merit, it informs the servicemembers of its decision not to represent them and informs servicemembers that they have the right to take their claims to the Merit Systems Protection Board without OSC representation. OSC’s USERRA unit consists of three investigators, two attorneys, and a unit chief, who is also an attorney. According to the unit chief, the members of the USERRA unit spend most of their time on USERRA complaints but they also handle some other prohibited personnel practice complaints. The specific USERRA training for the unit consists primarily of on-the-job and other informal training. To support the personnel information needs of DOD, DMDC, which reports to the Under Secretary of Defense for Personnel and Readiness, surveys the attitudes and opinions of the DOD community on a wide range of personnel issues. In May 2004, DMDC surveyed a random sample of 55,794 Selected Reserve members who had at least 6 months of service and who were below flag rank. Figures 2 and 3 show the projected results from survey questions that asked employed survey respondents about their employers. Figure 2 shows that about 10 percent of employed Selected Reserve members are self-employed or work in family businesses. According to the figure, about 29 percent of Selected Reserve members below flag rank work for federal, state, or local governments. However, the federal government percentage in this figure is understated because DMDC’s survey did not ask full-time National Guard and Selected Reserve members and military technicians—DOD civilian employees who must be members of a National Guard or Reserve unit as a condition of their employment—the survey question from which these data are drawn. Figure 3 shows that an estimated 45 percent of employed Selected Reserve members below flag rank are employed by large employers who have 1,000 or more total employees. The figure also shows that about 13 percent of employed Selected Reserve members work for small employers who have 9 or fewer total employees. We have issued prior reports concerning USERRA and, more generally, about the need for results-oriented government. Our prior USERRA work has examined issues pertaining to employer support and enforcement of USERRA complaints at OSC. Our work on results-oriented government examined how the federal government could shift toward a more results- oriented focus. Since 2002, we have issued two reports related to employer support and USERRA. In our most recent report, we provided information on OSC’s role in enforcing USERRA. The report found that separate OSC and DOL determinations generally agreed on the merits of servicemember complaints, OSC took an average of about 145 days to process the 59 complaints it received between 1999 and 2003, and OSC had made changes that were designed to expedite the handling of current USERRA complaints and any influx of new complaints. In our earlier report, we addressed DOD’s management of relations between reservists and their employers. Our report stated the following. DOD had established a database to collect employer information from reserve component members on a voluntary basis in 2001. However, by May 14, 2002, only about 11,000 servicemembers had entered employer information into the database. DOD could not educate all employers concerning their USERRA rights and responsibilities because it viewed the Privacy Act as a constraint that prevented it from requiring reserve component members to provide civilian employer contact information. Ombudsmen were not always available to field servicemember phone calls. The ESGR did not have good data to determine the effectiveness of its outreach and mediation efforts. We made a number of recommendations to address these and other findings in the report. In response to our recommendations, DOD reevaluated its interpretation of the Privacy Act and issued a requirement that all Ready Reserve members provide contact information for their civilian employers to their military departments. DOD also began funneling calls to its volunteer ombudsmen through a central customer service center where information is logged into a database that is used to measure the ESGR’s outreach and mediation efforts. We have issued a number of reports that address the need for federal agencies to manage for results. In 2004, we issued a report that examined, among other things, the challenges agencies face in using performance information in management decisions and how the federal government can continue to shift toward a more results-oriented focus. The report noted that serious weaknesses persist, such as how agencies are coordinating with other entities to address common challenges and achieve common objectives. Moreover, mission fragmentation and overlap contribute to difficulties in addressing crosscutting issues, especially when those issues require a national focus. Other barriers to interagency cooperation include conflicting agency missions, jurisdiction issues, and incompatible procedures, data, and processes. These issues are particularly important in the context of USERRA implementation and enforcement. Since USERRA provisions are administered by four distinct agencies, coordination is imperative to successfully implement this law in the context of results- oriented government. DOL, DOJ, OSC, and DOD have formal and informal USERRA complaint data, and some employer support figures. DOL’s formal complaint numbers show a possible relationship with the level of reserve component usage and the number of complaints. By design, DOJ and OSC formal complaint numbers are small, and may not provide a fully accurate picture of USERRA compliance or employer support. DOD data indicate that some employers are exceeding USERRA requirements; however, these data have limitations. DOD has only 1 full year of informal complaint data, so it will be several years before it has data that can identify any meaningful trends. Furthermore, data from a DOD survey indicate that most servicemembers do not seek assistance for their USERRA problems, which indicates that complaint data alone cannot fully explain USERRA compliance or employer support. Formal complaint numbers from DOL show a possible relationship with reserve component usage and the passage of USERRA. Table 1 contains DOL’s formal complaint numbers and shows that DOL’s formal complaint numbers rose significantly in fiscal year 1991 and remained high in fiscal year 1992. This increase followed DOD’s activation of almost 270,000 reserve component members for Operations Desert Shield and Desert Storm. The table also shows an increase in complaints between fiscal years 2001 and 2004. This increase followed the activation of more than 300,000 reserve component members for Operations Noble Eagle, Enduring Freedom, and Iraqi Freedom. DOL’s formal complaint data also show that complaints were generally lower in the years following USERRA’s passage in 1994 than in the years prior to its passage. Table 1 shows that between fiscal years 1989 and 1994, DOL’s annual formal complaint figures ranged from 1,208 to 2,537 but between fiscal years 1995 and 2004 the formal complaints were lower, ranging from 895 to 1,465. Finally, if complaints for the fourth quarter of fiscal year 2005 are consistent with the first three quarters, fiscal year 2005 complaint numbers could fall back to between the fiscal year 2002 and 2003 levels. However, two recent changes could affect the number of complaints filed with DOL. First, a demonstration project now allows OSC to receive complaints directly from certain servicemembers instead of having the complaints referred to OSC by DOL. Second, DOL implemented an electronic (Form 1010) complaint form that allows servicemembers to file complaints directly from the DOL Web site rather than mailing or hand-delivering complaint forms to their local VETS offices. Relatively few formal complaints reach DOJ and OSC each year since the formal process begins at DOL and complaints may be resolved there and not forwarded to DOJ or OSC. Thus, the number of formal complaint data from these two agencies is small and cannot be used to fully explain the relationship between complaints and USERRA compliance or employer support. Between fiscal years 1995 and 2004, formal complaints at DOJ ranged from 37 to 59 complaints each year. OSC’s annual formal complaint numbers ranged from 1 to 21 over the same period. Data from DMDC and the ESGR show that some employers are exceeding USERRA requirements. DMDC’s May 2004 survey found that many employers of Selected Reserve members had provided these members with extra benefits beyond those required by USERRA. Projections, which apply to more than 120,000 Selected Reserve members who were employed and had been activated in the 24 months prior to the survey, show that more than 26 percent of these members have employers who pay them salaries or differential pay for at least part of the time they are away from their civilian jobs performing military duties. Projections also show that more than 32 percent receive medical benefits that are not required by USERRA, and more than 30 percent receive other benefits above and beyond those required by USERRA. While these data indicate that some employers are exceeding USERRA, the DMDC data were collected only in 2004 and therefore cannot establish whether overall employer support is improving, steady, or declining. The ESGR data show increases in both employer awards and statements of support, but these increasing figures cover a relatively small group of employers. Servicemembers are increasingly nominating their employers for the ESGR’s various employer support awards. “Patriot Award” employers may be recognized for simply complying with USERRA. However, higher level awards typically require support above and beyond USERRA requirements. According to the ESGR officials, award nominations have increased over the years, and in fiscal year 2004 servicemembers nominated their employers for more than 20,000 awards. The ESGR’s “Above and Beyond” award is one of the higher level awards. It is awarded annually by the ESGR’s state committees and recognizes employers who have exceeded USERRA requirements. Many employers have received this award over the years, and in fiscal year 2004 the ESGR’s state committees recognized 1,058 employers with “Above and Beyond” awards. In addition to increases in awards, the ESGR figures show increases in the numbers of employers signing the ESGR “statements of support.” In signing statements of support, employers acknowledge that they will comply with USERRA. Between 2000 and 2002, 575 employers signed statements of support. In 2003, 1,228 employers signed the statements, and by July 26, 2005, the ESGR records showed that almost 6,000 employers had signed statements of support. The ESGR continues to solicit statements of support, but is now focusing its outreach efforts on a “5-star” program, which encourages employers to move beyond simple USERRA compliance to increasingly higher levels of employer support. (See app. IV for additional details.) Despite encouraging increases in the ESGR’s employer support figures, the thousands of employers who have received awards or signed statements of support do not represent all the employers of the millions of servicemembers covered by USERRA. The absence of informal complaint data prevents linking the informal complaint numbers and the total number of complaints. It will be several years before the ESGR can identify any meaningful trends in informal complaint numbers because the ESGR has only 1 full year of informal complaint data in its central database. Until October 2003, the ESGR had a manual complaint tracking system that relied on monthly reports from its state committees to its national headquarters. Our 2002 reportreviewed the ESGR’s effectiveness and found that the ESGR did not have an accurate count of the complaints handled by its ombudsmen. We found that reporting by ombudsmen had been sporadic and some states had gone an entire year without reporting any complaints at all. In 2003, the ESGR began funneling calls to its ombudsmen through a central call center where the complaint information is logged into a centralized database before assigning the complaint to an ombudsman. As a result of the changed procedures, the ESGR is now able to track the complaints handled by each of its nearly 800 ombudsmen. After they have been assigned a complaint, ombudsmen can access, review, update, and close assigned complaints, but they cannot create new complaint files in the database. Although the database now captures the informal complaints brought to the ESGR, at the time of our review the ESGR had only collected 1 full year of complaint data—fiscal year 2004. Because informal complaint figures have not been captured annually, agencies cannot know whether informal complaints have been increasing, decreasing, or remaining steady. Available data suggest that the number of informal complaints handled by the ESGR is large enough that if annual data were available, the volume of informal complaints could overshadow that of DOL’s formal complaint data. We conducted a survey to collect information about the workload, backgrounds, and training of the ESGR’s ombudsmen because the ESGR lacked complete and accurate ombudsmen data. We surveyed all of the 831 ombudsmen that the ESGR headquarters officials told us were available to handle complaints as of April 6, 2005. Of the 831 ombudsmen, 618 responded to our survey but 52 said they were not available to handle complaints as of April 6, 2005. (See app. V for a complete list of our survey questions and results.) Our survey asked the ombudsmen how many complaints they had handled and resolved since becoming ombudsmen. Survey responses showed that the ombudsmen who were available to handle complaints on April 6, 2005, had handled 37,684 complaints. Although this figure does not cover a specific time period, it far exceeds the 22,204 formal complaints handled by DOL between 1989 and 2004. DMDC survey data also suggest that informal complaint numbers could overshadow formal complaint numbers. Projections from DMDC’s May 2004 survey show that between 54 and 78 percent of Selected Reserve members with USERRA problems seek assistance from the ESGR but only between 16 and 36 percent seek assistance from VETS. Cross tabulations of survey responses further showed that servicemembers who had received USERRA briefings were more likely to seek assistance from the ESGR than those who had never been briefed. Conversely, the cross tabulations showed that servicemembers who had received USERRA briefings were less likely to turn to VETS for assistance than those who had never been briefed. If this pattern continues, as more servicemembers are briefed about their USERRA rights, servicemembers may file more informal complaints and fewer formal complaints. DMDC survey data indicate that formal and informal complaint numbers do not capture most USERRA problems experienced by servicemembers because most servicemembers do not seek assistance for their USERRA problems. In the spring of 2004, DMDC surveyed a random sample of 55,794 Selected Reserve members and received responses from more than 19,000 of these members. Survey respondents were asked about their civilian work experiences, reserve component programs and affiliations, and activations, and were asked a series of questions related to USERRA if they were not full-time National Guard or Reserve members, or military were not on active duty when they completed the survey; were employed during the week prior to the time when they completed the survey, or during the week prior to their activation; and had been activated during the 24 months prior to the time when they completed the survey. The survey respondents who met these criteria were first asked if, despite their USERRA protection, they had experienced any of a series of USERRA problems. The survey projections show that between 4 and 8 percent of the 119,761 Selected Reserve members who met the criteria above did not receive prompt reemployment upon their return from military service; between 9 and 14 percent experienced a loss of seniority, seniority-related pay, or seniority-related benefits; and between 5 and 9 percent did not receive immediate reinstatement of employer-provided health insurance. The survey yielded similar results for other USERRA problems listed in the survey question. The survey respondents who experienced one or more problems were then asked if they had sought assistance for their problems. Survey results show that only between 18 and 28 percent of the 42,119 Selected Reserve members who had USERRA problems sought assistance for the problems. Therefore, at least 72 percent of the Selected Reserve members who had experienced USERRA problems never filed a complaint, either formal or informal, to seek assistance in resolving their problems. In a separate question, all of the Selected Reserve members who had responded to the survey were asked if they had ever filed a formal USERRA complaint with DOL/VETS. The survey results show that less than 2 percent of the more than 776,381 Selected Reserve members in the survey population have ever filed a formal USERRA complaint with DOL/VETS. The large percentage of servicemembers who fail to file either formal or informal complaints indicate that complaint data alone may be insufficient to fully explain USERRA compliance or employer support. Without periodic surveys of employment issues, such as DMDC’s May 2004 survey, DOD will continue to have difficulties determining trends in USERRA compliance and employer support. Agencies have taken actions to educate hundreds of thousands of servicemembers and employers about USERRA, but the efficiency and effectiveness of agency outreach actions are hindered by a lack of employer information. DOD, DOL, and OSC have conducted educational outreach using a variety of means, such as individual and group briefings, Web sites, and telephone information lines. However, agencies have been restricted in their ability to efficiently and effectively target educational outreach actions to employers who actually have servicemember employees because only limited employer information is available. DOD, DOL, and OSC have used a variety of means to educate servicemembers and employers about USERRA, such as individual and group briefings, Web sites, and telephone information lines. According to agency officials and employers, one of the primary reasons employers violate USERRA is their lack of knowledge about the law’s requirements. USERRA assigns DOD and DOL responsibilities for informing servicemembers and their employers about their USERRA rights, benefits, and obligations, but it gives the agencies flexibility to determine the appropriate means for conducting this outreach. DOD and DOL have used this flexibility to conduct educational outreach through a wide variety of means. Group briefings are one of the primary means these agencies use to educate employers and servicemembers about the law. However, they also have USERRA information on their agency Web sites, and headquarters and field representatives respond to individual requests for information through toll-free phone lines. Between September 11, 2001, and June 30, 2005, VETS staff responded to more than 34,000 requests for USERRA information and conducted briefings for more than 247,000 people. DOL also made a USERRA poster available for employers to post in their workplaces as a means of complying with the requirements set forth in the Veterans Benefits Improvement Act, which was enacted in December 2004. The poster is on the VETS Web site and is included as appendix VI of this report. The poster does not include any information about OSC’s role in providing assistance on USERRA problems, even though OSC told us that they have requested that DOL include information about OSC’s role. DOD also conducts a wide range of outreach actions. Some activities, such as the ESGR statements of support and awards, were discussed earlier in this report, and appendix IV contains information on many of DOD’s other outreach programs. Although not required by USERRA, OSC also has taken actions to educate federal employers about their responsibilities under the law. OSC officials have conducted USERRA briefings for executive branch employees and managers and other groups. For example, they have conducted briefings at recent federal dispute resolution conferences and for the District of Columbia Bar Association. OSC’s Web site also contains information about USERRA, contact information for complaints or questions, and information about OSC’s ongoing demonstration project. Agencies have been restricted in their ability to efficiently and effectively target educational outreach actions to employers who actually have servicemember employees, because only limited employer information is available. To accomplish its employer outreach requirements, DOD established a database and a policy requiring collection of these data. However, information collection efforts are incomplete, which impedes agencies’ ability to communicate with employers who have servicemember employees. In 2001, DOD established a database to voluntarily collect employer information from reserve component members, but few servicemembers submitted the data, and following a recommendation in our 2002 report, DOD made the submission of employer information mandatory. On March 21, 2003, the Under Secretary of Defense for Personnel and Readiness signed a memorandum mandating the collection of employer information. The memorandum directed the military departments to immediately implement a civilian employment information program for National Guard and Reserve members subject to involuntary recall to active duty. This memorandum required that all members of the reserve components provide employment-related information upon assignment to the Ready Reserve and at other times determined by their respective military departments. According to the Under Secretary’s memorandum, one of the purposes for collecting the employer information is to “utilize (the information) on a recurring basis to assist the Department in accomplishing its employer outreach purposes under 38 U.S.C. 4333.” The information required by the memorandum included employment status, employer’s name, employer’s complete mailing address, member’s civilian job title, and the servicemember’s length of experience in their civilian occupation. The memorandum indicated members who refuse to provide information or who provide false information may be subject to administrative action or punishment for dereliction of duty under the Uniform Code of Military Justice. The memorandum assigned unit commanders the responsibility for ensuring that their Selected Reserve members were familiar with the memorandum’s requirements and provided adequate time to comply with the requirements during training periods. The military departments were assigned responsibility for ensuring the compliance of other Ready Reserve members. According to DOD officials, reserve component members with a computer and Internet access can enter their employer information into DOD’s database from home or they can enter the information at their units during normal training periods. The employer database is linked to the defense enrollment eligibility reporting system. Therefore, if reserve component members check on their dependents’ eligibility for health care or enter their dependents into the system, they can also take the opportunity to enter or update their employer information. The collection of employer information is improving but, more than 2 years after the Under Secretary called for the immediate implementation of a civilian employment information program, collection efforts are still incomplete, which impedes the efficiency and effectiveness of agencies’ outreach efforts. As of August 2005, about 40 percent of DOD’s Ready Reserve members had not entered their civilian employer information into DOD’s database. The percentage of Selected Reserve members who have complied with the requirement to enter their employment information into the database has risen substantially over the past year—from 13 percent in October 2004, to 58 percent in April 2005, to 73 percent in August 2005, when we ended our review. Figure 4 shows the compliance rates for Selected Reserve members in each of the seven reserve components, as well as the compliance rates for Individual Ready Reserve and Inactive National Guard members in the six components where they serve. (The Air National Guard does not have any Inactive National Guard or Individual Ready Reserve members.) Figure 4 illustrates that compliance rates vary by reserve component, supporting the assertion of DOD officials that compliance rates are tied to command attention and enforcement. Compliance rates are substantially lower for Inactive National Guard and Individual Ready Reserve members than they are for Selected Reserve members, further reflecting the lack of enforcement of the policy. Responsible DOD officials said that as far as they knew, the military departments had not enforced this policy by subjecting any servicemembers to punishment or administrative action for failing to comply with the policy. Since Individual Ready Reserve members do not participate in any regular training and have been recalled to active duty less frequently than Selected Reserve members, the employers of Individual Ready Reserve members may be unaware that their employees have a military obligation and that they, as employers of servicemembers, have USERRA obligations. Therefore, outreach to these employers may be even more important than outreach to employers of Selected Reserve members. Between September 11, 2001, and June 30, 2005, more than 9,500 Individual Ready Reserve members had been recalled to active duty, with more than 4,500 coming from the Army Reserve and more than 4,200 from the Marine Corps Reserve. Despite these activations, figure 4 shows that only 10 percent of the Individual Ready Reserve members in the Army Reserve and only 16 percent in the Marine Corps Reserve had entered their employer information into DOD’s database. In the absence of full compliance with the requirement for servicemembers to provide civilian employer information, agencies’ abilities to conduct outreach to educate employers about USERRA has been hindered. Agencies have conducted many general outreach efforts but have been restricted in their ability to efficiently and effectively target outreach to employers who actually have servicemember employees. With limited employer data available, DOD is unable to share this information with the other federal agencies that perform employer outreach so that agencies can coordinate their activities to reach all the employers of servicemembers who are covered by USERRA. Without complete information about the full expanse of servicemember employers, the federal agencies conducting outreach efforts have no assurance that they have informed all servicemember employers about USERRA rights, benefits, and obligations. Therefore, agency outreach efforts are likely to be reaching some employers who do not have any servicemember employees while neglecting other employers who do have servicemember employees. A segmented process with incompatible data systems hampers agencies’ abilities to efficiently and effectively address servicemembers’ complaints and report results as intended by USERRA. The speed with which servicemembers’ USERRA complaints are addressed often hinges on efficient and effective information sharing among the agencies involved in the complaint resolution process; however, DOD, DOL, DOJ, and OSC use incompatible data systems to track USERRA complaints. This impedes information sharing and can lead to duplicative efforts that slow processing times. In addition, the use of paper files to transfer complaints among offices limits the agencies’ abilities to efficiently process complaints and increases complaint processing times. Futhermore, agencies’ abilities to monitor the extent to which complaints are efficiently and effectively addressed are hampered by a lack of visibility and by the segmentation of responsibilities for addressing complaints among several different agencies. The ability of DOD, DOL, DOJ, and OSC to effectively and efficiently address USERRA complaints has been hampered by the use of five different and incompatible automated systems to capture data about USERRA complaints. DOD, OSC, and DOJ each operate one system and DOL operates two systems, one for its VETS offices and another for its solicitors’ offices. Because the systems were created for different purposes, they do not capture the same data. The ESGR and VETS systems are complaint file systems that can contain extensive ombudsmen or investigator notes and details about individual complaints. The other three systems are used primarily for tracking purposes and do not capture extensive details about individual cases. Even when data fields in the different systems bear similar names, the information contained in the fields may not match. For example, in DOJ’s Interactive Case Management System, the date closed means that final action has taken place on the complaint. In contrast, in the VETS system, the closed date can mean several different things, such as the date the investigator resolved the complaint, the date the servicemember requested to have his or her complaint referred to DOJ or OSC, or the date the complaint was withdrawn by the servicemember. During the course of our review, we attempted to compare complaint data from the VETS system to data from the DOL solicitor, DOJ, and OSC systems. Because the systems captured data differently, we were not able to perfectly match the data during any of these attempts. In some cases we were able to match dates from the different systems, in other cases dates differed, and in still other cases we could not even identify the matching complaint files. Because DOL could not identify complaints that had been handled by the ESGR, we did not attempt to match DOL and the ESGR files. The inability of ombudsmen, investigators, and other officials to share complaint information by electronically transferring information among their systems or accessing each other’s systems may result in duplicate efforts to collect identical information that is needed to investigate and process USERRA complaints. For example, during informal mediation efforts, DOD’s approximately 800 ombudsmen may gather pertinent information and documentation that concerns servicemember eligibility for USERRA coverage; civilian supervisors; employer policies and organizational structures, including information about who makes employment decisions; circumstances surrounding the alleged USERRA violations; and witness statements. However, if ombudsmen efforts do not resolve the complaints and the servicemembers elect to file formal DOL complaints, the ESGR officials cannot transfer information from their database directly to DOL’s database, and DOL investigators do not have access to the ESGR’s database. As a result of this inability to share information, VETS investigators sometimes start their investigations with nothing more than the basic information included on the formal complaint form, and they later contact servicemembers and employer representatives to request the exact same information that was previously provided to the ESGR ombudsmen. These duplicative efforts slow complaint processing times, increase the times that servicemembers must wait to have their complaints fully addressed, and may frustrate servicemembers or employers. Likewise, DOL cannot transfer information from the VETS database to DOJ, OSC, or even to DOL’s solicitors’ offices, and people in these other offices do not have access to the VETS database. As a result, officials in these other offices may contact the servicemember or employer and again request information that had been previously provided to the ESGR or VETS. As complaints are referred from one office to another, agencies are unable to efficiently process complaints because they are forced to create, maintain, copy, and mail paper files due to the incompatible data systems. For example, when a servicemember asks a VETS investigator to refer his or her complaint to DOJ or OSC, the investigator cannot electronically transfer the complaint information to the requisite offices. Instead, the investigator prepares and mails a paper complaint file to a VETS regional office where the file is reviewed, added to, and then mailed or hand carried to a DOL solicitor’s office. The solicitor’s office then reviews the file, adds a legal opinion concerning the merits of the complaint, and mails the file to OSC or DOJ. Because VETS investigators cannot electronically transfer information when they refer complaints, they face the administrative burden of maintaining both paper and electronic complaint files that contain much of the same information. This reliance on paper files results in increased complaint processing times and can limit managers’ abilities to provide effective and timely oversight. When complaint numbers are large, managers can exercise more efficient and effective oversight of electronic complaint files that are stored in automated systems with query capabilities than of geographically dispersed paper complaint files. Of the four federal agencies we reviewed, only the agencies that deal with large numbers of complaint files—DOD and DOL—had electronic complaint files that were stored in automated systems with query capabilities that facilitate oversight. However, DOL still considers its paper complaint files its official records, and the VETS operations manual outlines management oversight and internal control procedures that focus on reviews of the investigators’ paper files. Because the paper files are located in VETS offices in all 50 states, the District of Columbia, and Puerto Rico, paper file reviews take longer than electronic file reviews, and managers can lose visibility of paper case files. For example, during our visits to two regional VETS offices, we judgmentally selected 64 complaints and asked to review the paper complaint files to compare the data in those files to information in the VETS automated system. Officials located 60 of the 64 paper files we requested, but 8 weeks after our visit to one office, officials were still unable to locate the other 4 files and concluded that the files had been misplaced or lost. In addition, our review of data from the VETS automated database identified a number of issues that warranted management attention. However, the VETS reviews of sample paper files had not addressed the full scope of these problems in a timely manner. For example, we were able to quickly identify more than 430 complaints that had been closed and then reopened, and we were also able to identify that a large portion of these reopened cases occurred in a single region, many with a single investigator. If VETS oversight procedures had focused on electronic file review rather than paper file review, corrective action could have been taken sooner on cases that were improperly closed. The ability of agencies to monitor the efficiency and effectiveness of the complaint process is hampered by a lack of visibility and by the segmentation of responsibility for addressing complaints among several different agencies. From the time informal complaints are filed with the ESGR through the final resolution of formal complaints at DOL, DOJ, or OSC, no one has visibility over the entire process. The segmented complaint resolution process means that the agency officials who handle the complaint at various stages of the process generally have limited or no visibility over the other parts of the process for which they are not responsible. This prevents any one agency from monitoring the length of time it takes for a servicemember’s complaint to be fully addressed, and leads agencies to focus on output figures for their portion of the complaint process rather than on overall federal responsiveness to complaints. As a result, agencies have developed goals that are oriented toward outputs of their agency’s portion of the process rather than toward results for an individual servicemember’s complaint. For example, agency goals address complaint processing times at different stages of the process, but agencies do not measure a result of primary concern to servicemembers— the elapsed time between the bringing of a complaint to a federal agency and the complaint’s final resolution. Due to the incompatibility of agency systems and the lack of visibility across agencies, we were not able to track the entire elapsed time that servicemembers wait to have their complaints fully addressed. However, the VETS database attempts to capture processing times from the time a servicemember files a formal complaint until the time the complaint is finally resolved by VETS, DOL’s solicitor’s office, DOJ, or OSC. To highlight the difference between agency focuses on processing times and servicemember concerns with elapsed times, we reviewed complaints that had been closed and later reopened by VETS investigators. Between October 1, 1996, and June 30, 2005, servicemembers filed 10,061 formal complaints with DOL. More than 430 of these complaints were closed and later reopened, and 52 of the 430 complaints were closed and reopened two or more times. For example, one investigator opened a complaint file on September 30, 2001, and then closed and reopened the complaint six times before finally referring the complaint to the VETS regional office on September 9, 2002. We analyzed the processing times and elapsed times for the 52 complaints that had been closed and reopened two or more times and found substantial differences between the figures. DOL’s system assigned separate complaint numbers to the 52 complaints each time the complaint was opened or reopened. As a result, the system recorded the average processing time as 103 days. However, from the servicemembers’ perspectives, it took much longer for DOL, DOJ, and OSC to address their complaints. The servicemembers who filed the 52 complaints actually waited an average of 619 days from the time they first filed their initial formal complaints with DOL until the time the complaints were fully addressed by DOL, DOJ, or OSC. Because agency officials do not have visibility over the entire complaint resolution process and no one has information about the time it takes federal agencies to fully address servicemember complaints, the Secretary of Labor, Attorney General, and Special Counsel cannot evaluate the full range of administrative or legislative actions that may be necessary to effectively implement USERRA, and the Secretary of Labor’s annual report to Congress cannot be as accurate and complete as required. Informal and formal complaint data from the agencies responsible for enforcing and implementing USERRA do not support the analysis needed to determine if employer compliance with USERRA and support for the act’s purpose has improved since passage of the act in 1994. The responsible agencies collect data and some insight may be gained from DOL’s formal complaint numbers. However, the numbers from DOJ and OSC are small and cannot be used to fully explain the relationship between complaints and USERRA compliance or employer support, and DOD’s data collection effort is so new that meaningful trends cannot yet be identified using informal complaint data. Complaint data alone may not accurately reflect the problems servicemembers are experiencing transitioning between their federal service and civilian employment. The vast majority of surveyed National Guard and Reserve members who experienced USERRA-related problems did not seek assistance for their problems. The survey data do not lend themselves to the analysis needed to determine if the problems were resolved to the servicemember’s satisfaction. DOD periodically conducts these surveys to identify issues that need to be addressed or monitored. However, questions on the surveys vary from year to year and have not always included those pertaining to USERRA compliance and employer support. Periodic, projectable surveys of the servicemembers who are covered by USERRA could provide DOD, DOL, DOJ, and OSC with a means to determine whether or not USERRA compliance and employer support is improving and thus, USERRA’s purpose—to minimize employment disadvantages that can result from service in the uniformed service—is being achieved. Employer violation of USERRA is often attributed to employers’ lack of knowledge about the law’s requirements. Having a means to identify the civilian employers of servicemembers who are covered by USERRA is essential to effectively and efficiently target the agencies’ educational outreach efforts. DOD has made progress establishing a civilian employer database. However, DOD has not taken steps to enforce its requirement for National Guard and Reserve members to enter and maintain their civilian employer data. Until complete employer information is obtained, agency outreach efforts are likely to be reaching some employers who do not have any servicemember employees, while neglecting other employers who do have servicemember employees. Currently, DOD’s ESGR, DOL’s VETS and solicitors’ offices, DOJ, and OSC all operate their own automated systems for tracking USERRA complaints. Officials from each agency have access to their own system but they cannot access complaint information in the automated systems of the other agencies, and complaint data cannot be electronically transferred from one system to another. As a result, officials from different agencies sometimes spend time collecting information that has already been provided to another agency. This slows the complaint resolution process. In addition, because data systems are incompatible, formal referrals from VETS investigators to DOJ or OSC must be accompanied by a paper file, which is first routed through a VETS regional office and a DOL solicitor’s office. The creation, maintenance, and transfer of these paper files add to complaint processing times and the time servicemembers wait to have their complaints addressed. As long as agency systems remain segmented and incompatible and referral information is passed through the mail, complaints will continue to be processed inefficiently. VETS investigators are geographically dispersed across the country and they maintain both paper and electronic USERRA complaint files. Managers with the requisite level of authority can have virtually instant access to every electronic complaint file from every investigator across the country. However, DOL considers its paper complaint files its official records. As a result, the VETS operating procedures and internal controls are geared toward the review of the paper complaint files. These paper reviews are time consuming. In addition, paper files can be misplaced or lost when they are moved from office to office. Until VETS switches to electronic files, investigators will continue the inefficient practice of maintaining duplicate records and managers will be limited in their ability to provide timely oversight and effective corrective actions for any problems that arise. The responsibility for enforcing and implementing USERRA is complex, involving several federal agencies. A single complaint can start at DOD and flow through three different DOL offices before finally being resolved at DOJ or OSC. The segmented complaint resolution process means that the agency officials who handle the complaint at various stages of the process generally have limited or no visibility over the other parts of the process for which they are not responsible. As a result, agency officials have not addressed complaint processing issues that cut across federal agencies or set outcome–oriented goals. Instead, agencies have focused their goals on outputs from their particular portions of the complaint process rather than focusing on overall federal responsiveness to USERRA complaints. Meanwhile, the servicemember knows how much time is passing since the initial complaint was filed. Under USERRA, specific outreach, investigative, and enforcement roles are assigned to DOD, DOL, DOJ, and OSC. However, no agency has visibility over the entire complaint process. Therefore, it is difficult for the responsible agencies to achieve their common goal–to minimize the employment disadvantages that can result from service in the uniformed service, and the time servicemembers wait to have their complaints fully addressed–which is of great importance to servicemembers. Furthermore, the Secretary of Labor’s annual reports will not provide Congress with a complete and accurate picture of USERRA violation patterns or the legislative actions that may be necessary to effectively implement the act. To gauge the effectiveness of federal actions to support USERRA by identifying trends in USERRA compliance and employer support, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to include questions in DOD’s periodic Status of Forces Surveys to determine the extent to which servicemembers experience USERRA-related if they experience these problems, from whom they seek assistance; if they do not seek assistance, why not; and the extent to which servicemember employers provide support beyond that required by the law. To more efficiently and effectively educate employers about USERRA through coordinated outreach efforts, which target employers with servicemember employees, we recommend that the Secretary of Defense take the following two actions: Direct the service secretaries to take steps to enforce the requirement for servicemembers to report their civilian employment information and develop a plan to maintain current civilian employment information. Direct the Assistant Secretary of Defense for Reserve Affairs to share applicable employer information from DOD’s employer database with DOL, OSC, and other federal agencies that educate employers about USERRA, consistent with the Privacy Act. To increase agency responsiveness to servicemember USERRA complaints, we recommend that the Secretary of Defense, the Secretary of Labor, the Attorney General, and the Special Counsel develop procedures or systems to enable the electronic transfer of complaint information between offices. To reduce the administrative burden on VETS investigators and improve the ability of VETS managers to provide effective, timely oversight of USERRA complaint processing, we recommend that the Secretary of Labor direct the Assistant Secretary for Veterans’ Employment and Training to develop a plan to reduce agency reliance on paper files and fully adopt the agency’s automated complaint file system. To encourage agencies to focus on results rather than outputs, to improve federal responsiveness to servicemember complaints that are referred from one agency to another, and to improve the completeness and accuracy of the annual USERRA reports to Congress, Congress should consider designating a single individual or office to maintain visibility over the entire complaint resolution process from DOD through DOL, DOJ, and OSC. For example, the office or individual would track and report the actual time it takes for federal agencies to fully address servicemember USERRA complaints. In written comments on a draft of this report, DOD, DOL, and OSC generally concurred with our findings and recommendations to their respective agencies. DOJ reviewed a draft of this report and had no comments on this report. DOD deferred to DOL, DOJ, and OSC regarding our recommendation for the agencies to develop procedures or systems to enable the electronic transfer of complaint information between agencies. DOL and OSC commented on our matter for congressional consideration that Congress should consider designating a single office to maintain visibility over the entire conflict resolution process. In DOD’s written comments, the department concurred with our recommendation for the Secretary of Defense to include questions on servicemembers’ employment issues in DOD’s continuing Status of Forces surveys that would address (1) the extent to which servicemembers experience USERRA-related problems; (2) from whom the servicemembers sought assistance if they experienced such problems; (3) if they did not seek assistance, why not; and (4) the extent to which the servicemembers’ employers provide support beyond that required by law. DOD stated that the department’s May 2004 Status of Forces survey asked a series of questions about reemployment after activation that included the areas addressed in our recommendations. We disagree. For this report, we used results from the May 2004 survey that showed at least 72 percent of the Selected Reserve members who had experienced USERRA-related problems never filed a complaint, informal or formal, to seek assistance in resolving the problem. However, the survey did not cover all the areas addressed in our recommendation. For example, the survey did not ask those servicemembers who had experienced USERRA-related problems and never filed a complaint, informal or formal, why they did not seek assistance in resolving the problem. We believe that this would be valuable information, if gathered regularly, to gauge the effectiveness of federal actions to support USERRA by identifying trends in compliance and employer support. DOD also stated that, at the request of DOL, it has agreed to include the series of questions about reemployment after activation in future surveys. OSC generally concurred with this recommendation, but had no specific comment. DOL did not comment on this recommendation. DOD also concurred with our recommendation for the Secretary of Defense to (1) take steps to enforce compliance with servicemembers’ reporting of their civilian employer information and maintain employer information, and (2) share employer information from the database with other federal agencies that educate employers about USERRA. DOD stated that the first objective of this recommendation had already been accomplished. We disagree. In our report, we noted that compliance with the requirement to enter Selected Reserve member employment information into the database has risen substantially during this review— from 13 percent in October 2004, to 58 percent in April 2005, to 73 percent in August 2005. We also noted that compliance varies by component, with the Army Reserve and the Marine Corps Reserve each having the lowest percentage of compliance—66 percent. Further, we noted that compliance rates are substantially lower for the Individual Ready Reserve and the Inactive National Guard—about 24 percent. Individual Ready Reserve and Inactive National Guard members are subject to be recalled to active duty. About 9,500 Individual Ready Reserve members were called to duty between September 11, 2001, and June 30, 2005. Outreach to employers of Individual Ready Reserve members may be even more important than outreach to Selected Reserve members’ employers. Individual Ready Reserve members do not participate in regular drilling and their employers may be unaware of the employees’ military obligations and USERRA rights. As the war on terrorism continues, DOD may rely more upon Individual Ready Reserve members. DOD also noted that enforcement of compliance is a high priority and is already monitored. As noted in our report, responsible officials told us that as far as they knew, the military departments had not enforced the requirement for servicemembers to comply with reporting their civilian employer information by subjecting any member to punishment or administrative action for failing to comply. We believe DOD has more to accomplish in this area. With regard to the second objective of this recommendation, DOD stated that it is working collectively with DOL and the Department of Veterans Affairs to ensure that their respective systems facilitate consistent reporting capabilities. OSC generally concurred with both objectives of this recommendation, but had no specific comments. DOL did not comment on this recommendation. DOD deferred to DOL, DOJ, and OSC regarding our recommendation for the Secretary of Defense, along with the Secretary of Labor, the Attorney General, and the Special Counsel, to develop procedures or systems to enable the electronic transfer of complaint information between agencies. DOD stated that the department only tracks “informal inquires,” not complaints that are filed with DOL, with possible referral to the DOJ or the OSC. Therefore, establishment of a complaint database would fall within the purview of those agencies. DOD noted that it would support the sharing of USERRA information received by DOD with responsible agencies. We note that DOD’s system can contain extensive ombudsmen notes and details about informal complaints, not just inquires for information that are tracked separately, and would be beneficial and time saving to DOL if an informal complaint becomes a formal complaint filed with DOL. DOL concurred with this recommendation and noted that DOL has initiated internal discussions on ways in which DOL offices can ultimately use one electronic case management system. DOL stated that the department will work closely with DOD, DOJ, and OSC in advancing an electronic shared system configured to fit the agencies’ responsibilities under USERRA. OSC also concurred with this recommendation, noting that OSC’s ability to enforce USERRA has not been adversely affected by the transfer of information by other than electronic means. Nevertheless, OSC noted that the office was dedicated to improving USERRA services to servicemembers and thus generally concurred with the recommendation, although OSC indicated that the development of USERRA-specific electronic files may require additional funding from Congress. DOL concurred with our recommendation for the Secretary of Labor to develop a plan to reduce agency reliance on paper files and fully adopt the agency’s automated complaint file system. DOL noted that the establishment of such electronic files would enhance DOL’s ability to more efficiently and effectively share documents and other case-specific data with other agencies, thus advancing accomplishment of our recommendation for DOD, DOL, DOJ, and OSC to develop procedures or systems to enable the electronic transfer of complaint information between agencies. DOL and OSC commented on our matter for congressional consideration that Congress should consider designating a single office to maintain visibility over the entire complaint resolution process from DOD through DOL, DOJ, and OSC. DOL noted that the mandated OSC demonstration project is ongoing, and therefore, it would be premature to make any suggestions or recommendations for congressional or legislative action until the pilot has been completed. However, DOL stated that its office is uniquely suited to provide an overview of the entire complaint resolution process. OSC supported our matter and stated that OSC has unparalleled experience and expertise in administering federal sector employment complaints and prosecuting meritorious workplace violations before the Merit Systems Protection Board. OSC believes that their office is the best qualified to be the overseer. DOD did not comment on this matter. We believe that the Congress is the best qualified to determine the identity of the overseer and the timing of this matter for congressional consideration. DOD, DOL, and OSC’s written comments are reprinted in their entirety in appendixes VII, VIII, and IX, respectively. All the agencies also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We are sending copies of this report to the Secretary of Defense; the Secretary of Labor; the Attorney General; the Special Counsel; the Secretaries of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; the Chairman of the Joint Chiefs of Staff; 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 www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5559 or stewartd@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 XI. To assess whether the federal agencies that support or enforce USERRA have data that indicates the level of compliance with USERRA, we gathered and analyzed data from DOL, DOD, DOJ, and OSC. Specifically, we obtained historical data on the numbers of formal complaints handled by DOL and then analyzed the data to determine whether the data showed any trends and whether it was sufficient to demonstrate overall USERRA compliance or employer support. We also analyzed the annual numbers of formal complaints referred from DOL to DOJ and OSC between fiscal year 1997 and the third quarter of fiscal year 2005 to determine whether there were trends in the total referrals, or the referrals to either agency. We also followed up on our 2002 report to determine whether the ESGR had improved its collection of informal complaint data. We interviewed the ESGR headquarters officials and ombudsmen who handled informal complaints. We observed training for the ESGR’s new database and we observed data entry procedures at the ESGR’s Customer Support Center. In addition, we analyzed DMDC’s projectable Status of Forces Survey of Reserve Component Members, which was conducted in the spring of 2004. This survey included more than 20 questions about servicemember employment and USERRA-related issues. We also analyzed results from the Reserve Officers Association’s annual surveys of Fortune 500 companies, which asked about policies that support servicemember employees. We discussed the agency data related to USERRA compliance or employer support, along with the practices and methods used to collect these data, with responsible officials from the Department Of Labor, Washington, D.C.; Department Of Labor, Veterans Employment and Training Service, Field Offices in Memphis, TN, and Norfolk, VA; and regional offices in Philadelphia, PA; and Atlanta, GA; Department Of Labor, Office of the Solicitor, Washington, D.C.; and Regional Offices in Philadelphia, PA, and Atlanta, GA; Department of Justice, Washington, D.C.; Office of Special Counsel, Washington, D.C.; Department Of Defense, Employer Support of the Guard and Reserve, Arlington, VA; and Department Of Defense, Employer Support of the Guard and Reserve, Customer Service Center, Millington, TN. We also discussed these issues with The ESGR’s State Ombudsmen Coordinators from AR; IL; KY; MD; TN; UT; and Washington, D.C., and with officials who were present at The ESGR’s Basic Ombudsman Training Session held in Meridian, MS. To gauge the impact of the ESGR’s ombudsmen program, we conducted a survey of ombudsmen nationwide. We wished to survey all ombudsmen who were available to handle servicemember complaints as of April 6, 2005 (the “target” population). To do this, we obtained the list that the ESGR was using to assign USERRA complaints to ombudsmen on that date (the “study” population), which presumably included all of the individuals who were available to handle complaints. We conducted seven pretests of our ombudsmen questionnaire prior to administering the survey. During the pretests we asked the ombudsmen whether (1) the survey questions were clear, (2) the terms used were precise, and (3) the questions were unbiased. We made changes to the content and format of the final questionnaire based on pretest results. The ombudsmen surveys were conducted using self-administered electronic questionnaires posted on the World Wide Web. The survey questionnaire consisted of 12 questions, and asked ombudsmen how many USERRA complaints they had received and personally resolved. (App. V contains a copy of the survey and the survey results.) On May 3, 2005, we used a list supplied by the ESGR headquarters to send E-mail notifications to 831 ombudsmen in 54 states and territories to inform them that a survey would be forthcoming. Then, on May 9, 2005, we activated the survey, sending each of the 831 members of the study population a unique password and username by E-mail so they could enter and complete the Web-based questionnaire. To encourage ombudsmen to respond, we sent two additional E-mail messages over the following 3 weeks. Those ombudsmen who were unable to complete the survey online were given the option to respond via fax, phone, or mail. We closed the survey on June 9, 2005. Although all members of the study population were surveyed, not every member replied to our survey. Specifically, 618 of the 831 members of the study population replied. In addition, 52 of the 618 respondents were out of scope because they indicated they were not serving as volunteer ombudsmen as of April 6, 2005. Table 2 contains a summary of the survey disposition for the surveyed cases. The response rate for our survey was 74 percent. We obtained responses from volunteer ombudsmen across the country. Although the response rate of ombudsmen differed somewhat across states, we have no reason to expect that the responses on the issues studied in our survey would be associated with the ombudsmen’s states. Therefore, our analysis of the survey data treats the respondents as a simple random sample of the population of the ESGR volunteer ombudsmen across the country. Assuming that the respondents constitute a random sample from the study population, the particular sample of ombudsmen we obtained was only one of a large number of such samples that we might have obtained. To recognize the possibility that other samples might have yielded other results, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. Unless otherwise noted, the percentage estimates from the survey have a margin of error of plus or minus 3 percent or less with a 95 percent level of confidence. All numerical estimates other than percentages have a margin of error of plus or minus 14 percent or less of the value of those numerical estimates with a 95 percent level of confidence, unless otherwise noted. The practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed, can introduce unwanted variability into the survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize these nonsampling errors. For example, social science survey specialists designed the questionnaire in collaboration with GAO staff with subject matter expertise. Then, the draft questionnaire was pretested to ensure that the questions were clearly stated and easy to comprehend. When the data were analyzed, a second, independent analyst checked all computer programs. Since this was a Web- based survey, most respondents entered their answers directly into the electronic questionnaire. This eliminated the need to have the data keyed into a database, thus removing an additional source of error. A GAO analyst entered responses into our database from those ombudsmen who were unable to complete the survey on-line and responded via fax, phone, or mail. All these data were independently verified by a second analyst to ensure their accuracy. We also assessed the reliability of the data from the May 2004, Status of Forces Survey of Reserve Component Members, by (1) interviewing agency officials from the Defense Manpower Data Center, Washington, D.C., and the Assistant Secretary of Defense for Reserve Affairs, Washington, who were knowledgeable about the data, (2) reviewing existing information about the data and the system that produced them, and (3) performing electronic testing of required data elements. The response rate for the survey was 39 percent. To the extent that respondents and nonrespondents had different opinions on the questions asked, the estimates from this survey have the potential to be biased. DOD has previously conducted and reported on research to assess the impact of response rate on overall estimates. DOD found that, among other characteristics, junior enlisted personnel (E1 to E4), servicemembers who do not have a college degree, and members in services other than the Air Force, were more likely to be nonrespondents. We have no reason to believe that potential nonresponse bias not otherwise accounted for by DOD’s research is substantial for the variables we studied in this report. All percentage estimates cited from the survey have sampling errors of plus or minus 2.3 percentage points or less, unless otherwise noted. The at least 72 percent of National Guard and Reserve members who never sought assistance for their USERRA problems represents the lower bound of a 95 percent confidence interval around a point estimate (77 percent) that has a plus or minus 5 percent margin of error. Ranges cited from the survey represent a 95 percent confidence interval around point estimates. We used the weighting factors and the sampling error methodology provided by the Defense Manpower Data Center to develop estimates and sampling error estimates, and determined that the data from the May 2004 Status of Forces Survey of Reserve Component Members were sufficiently reliable for the purposes of this report. To asses the efficiency and effectiveness of federal educational outreach efforts, we reviewed Section 4333 of Title 38 of the United States Code to determine which agencies have outreach responsibilities under USERRA. We interviewed agency officials to determine whether their agencies had any significant educational outreach efforts. Although only two of the four agencies we reviewed had outreach responsibilities under the law—DOD and DOL—officials from three agencies said that they had significant outreach activities—DOD, DOL, and OSC. We obtained information about each agency’s activities, and analyzed the available outreach figures for individual programs and total agency outreach. Because DOD has at least nine different formal outreach programs, we devoted an entire appendix (app. IV) to the details of DOD’s programs. We also followed up on issues related to the collection of servicemember employer information, which we raised in our 2002 employer support report. Specifically, we reviewed DOD’s policy memoranda that were issued after our 2002 report and which mandated that Ready Reserve members supply information about their civilian employers. We also monitored and analyzed figures that showed servicemember rates of compliance with the estimates from this survey on these reporting requirements. These compliance figures covered each of the reserve components and various reserve categories. To asses how efficiently and effectively DOD, DOL, DOJ, and OSC addressed servicemember complaints, we obtained and analyzed information about complaint processing practices, including applicable guidance, regulations, or operations manuals. We also obtained and reviewed the memorandums of understanding between DOL and DOJ, OSC, and the ESGR. To further analyze the entire process, we gathered and analyzed information about how the agencies share information from USERRA complaint files with one another. We exported data from the VETS USERRA Information Management System and analyzed the data to look for trends in processing times. We specifically focused our analysis on cases that had been closed and later reopened, and on cases that had been referred from DOL to DOJ or OSC. We performed multiple sorts of the entire data set, and data subsets, to determine whether there were any common characteristics in complaint files from the group of complaints that remained open for long time periods, or in the complaint files from the group of complaints that were quickly resolved. For example, we sorted complaint data by: type of employer, regional office, type of servicemember, and type of complaint. We used many of the other more than 70 data fields to perform data sorts but much of our analysis did not yield reportable results because substantial amounts of information were missing for certain data fields. However, our analysis of date fields was not hampered by missing data and we were able to calculate elapsed times and processing times from the available data. We assessed the reliability of formal complaint data provided by DOL, DOJ, and OSC by (1) reviewing existing information about the data and the systems that produced them and (2) interviewing and obtaining written responses from agency officials knowledgeable about the data. We compared data obtained from DOJ and OSC to that captured in the DOL USERRA Information Management System. We also compared data drawn from DOL’s USERRA Information Management System at different time periods to determine the consistency of the data. In addition, where available, we compared information from 59 hard copy complaint files to data recorded in the DOL system to assess how accurately information was being entered into the database. We also discussed informal complaint data and its reliability with knowledgeable ESGR officials. On the basis of these assessments, we determined that the data were sufficiently reliable for the purposes of this report, though agency data systems had some limitations that we discussed in the report. We conducted our work from October 2004 through August 2005 in accordance with generally accepted government auditing standards. Between May 9, 2005, and June 9, 2005, we surveyed the ESGR’s volunteer ombudsmen who were available to handle servicemember complaints as of April 6, 2005. We received a 74 percent response rate to our survey. Tables 2 shows that about 58 percent of the volunteer ombudsmen were employed in full-time jobs, and about 30 percent were retired. Table 3 shows the distribution of ombudsmen by their primary employers. About 44 percent worked for the government or military, and about 56 percent worked for private employers, including the approximately 21 percent who were self-employed. In addition to the general background employment questions, our survey asked respondents to specify their occupations or backgrounds that they felt were particularly relevant to their ombudsmen duties. The responses were varied and showed that many of the volunteers hold or had previously held paid positions that required: leadership, skillful negotiation, extensive interactions with different types of people, or knowledge of laws and regulations or military operations and procedures. In the information that follows, we have grouped the responses and provided some examples of the occupations the ombudsmen thought were particularly relevant. The ombudsmen said that they had held Legal positions ranging from paralegals to attorneys, assistant attorney generals and a wide range of judges—administrative law, municipal, district, superior court, and state supreme court; Dispute or resolution positions as mediators, negotiators, arbitrators, facilitators, and grievance officers; Counseling positions as veterans’ career/employment, vocational rehabilitation, and recruitment/retention counselors; Political positions ranging from local mayor and city council positions to lobbyist and state legislature and senate positions; Military positions in the active Army, Navy, Air Force, and Marine Corps; and in the Army Reserve, the Army National Guard, the Air National Guard, the Air Force Reserve, the Naval Reserve, the Marine Corps Reserve, and the Coast Guard Reserve; Federal government positions in the Departments of: Defense, Justice, Homeland Security, Labor, Veterans Affairs, Education, Health and Human Services, Interior, Corrections, Energy, Agriculture, Treasury, and in the U.S. Postal Service; State and local government positions in the Departments of Military Affairs, Environmental Management, Public Safety, and Aviation; and in the Adjutant General’s office; Education positions ranging from teachers and college professors, who taught mediation and communications, to principal, school superintendent, and college president positions; Law enforcement positions as police officers, supervisors, or chiefs; state troopers, marshals, investigators, and as a liaison between the military and a major city police department that employs more that 500 Guard and Reserve members; Religious positions as chaplain and deacon; Business and management positions as labor relations specialists, negotiators, human resource managers, public affairs officers, owners, general managers, directors, presidents, vice-presidents, and CEOs; and Trade organization positions as union officers or shop steward/negotiators. OMB NO. 1293-0002 (EXP 03/31/2007) VETS/USERRA/VP Form 1010 (REV 2/99) Section III: Employer Information 10. Employer or Prospective Employer’s Name: _______________________________________________________________________ 11. Address: __________________________________________________________________________________________________________ Street City County State ZIP 12. Principal Employer Contact (PEC): (a) PEC Name/Title: ___________________________________________ (b) PEC Phone: __________________________________________ 13. Employment Dates (If applicable): From: ____________________ To: ____________________ 14. Since beginning work with this employer, has your cumulative uniformed service exceeded 5 years? ? Yes ? No If YES, explain in Comments box at end of this claim form. 15. Name of Union(s) That Represent You: ______________________________________________________ If Claim Concerns Veterans’ Preference in Federal Employment 16. Preference Issue (Check One): ? Hiring ? Reduction-in-Force (RIF) If Claim Concerns Employment Discrimination under USERRA 17. Employment Discrimination Issue(s): ? Hiring ? Reemployment ? Promotion ? Termination ? Benefits of Employment If Claim Concerns Hiring, Promotion, RIF or Termination 18. Title of Position Held or Applied For: _____________________________________________________________ 19. Pay Rate: __________________________ 20. Date of Application Employment/Promotion: ________________________ 20a. Vacancy Announcement No.: ______________________________________________________________________ 20b. Date Vacancy Opened: __________________________ 20c. Date Vacancy Closed: _________________________ If Claim Concerns Reemployment Following Service 21. Was Prior Notice of Service Provided to Employer? ? Yes ? No (If “No,” Explain in Comments) 22. (a) Who Provided Notice of Service to Employer? ? Self ? Other (name): _______________________________________ ? Written ? Oral ? Both (c) Date Notice of Service was given to Employer: _______________________ 23. Name/Title of Person to Whom Notice of Service was Provided: _________________________________________ 24. Date Applied for Reemployment: ______________________ OR Date Returned to Work: ______________________ 25. Reemployment Application Made To: Name: _________________________________ Title: _____________________________ ? Yes (date): ______________________ (a) If YES, what position? ____________________________________ at what pay rate? ________________________ (b) If NO, Date denied: ___________________ Reason given: ______________________________________________ (c) Who denied (name): ____________________________________ PUNISHMENT FOR UNLAWFUL STATEMENTS The information provided in this complaint will be utilized by the U.S. Department of Labor, Veterans’ Employment and Training Service (VETS) to initiate an investigation of alleged violations of the Uniformed Service Employment and Reemployment Rights Act (USERRA) and/or the Veterans’ Preference (VP) provisions of the Veterans Employment Opportunities Act of 1998 (VEOA). Potential claimants should keep in mind that it is unlawful to “knowingly and willfully” make any “materially false, fictitious, or fraudulent statements or representation” to a federal agency. Violations can be punished under Section 2 of the False Statements Accountability Act of 1996 by a fine and/or imprisonment of not more than 5 years. 18 U.S.C. § 1001. I certify that the above information is true and correct to the best of my knowledge and belief. I authorize the U.S. Department of Labor to contact my employer or any other person for information concerning this claim. Pursuant to 5 U.S.C., Section 552(b) of the Privacy Act, I consent to the release of the above information and any records necessary for the investigation and prosecution of my claim. SIGNATURE: ___________________________________________________________ DATE: _________________________________ Persons are not required to response to the collection of information unless it displays a currently valid OMB control number. Public reporting burden for this collection of information is estimated to average 15 minutes per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the U.S. Department of Labor, Veterans’ Employment and Training Service, Room-S1316, 200 Constitution Avenue, N.W., Washington, DC 20210. PRIVACY ACT STATEMENT The primary use of this information is by staff of the Veterans’ Employment and Training Service in investigating cases under USERRA or laws/regulations relating to veterans’ preference in Federal employment. Disclosure of this information may be made to: a Federal, state or local agency for appropriate reasons; in connection with litigation; and to an individual or contractor performing a Federal function. Furnishing the information on this form, including your Social Security Number, is voluntary. However, failure to provide this information may jeopardize the Department of Labor’s ability to provide assistance on your claim. Continue in Comments box &/or use additional sheet(s) to explain items if needed – Sign and date form (above) The ESGR has responsibility for most DOD outreach programs but DOD also has a public affairs campaign that encourages employer support of servicemember employees. In past years, the ESGR’s focus was on educating servicemembers concerning their employment rights. In fiscal year 2005, the ESGR shifted its focus to educating employers. The new focus better aligns with the ESGR’s mission—to gain and maintain support for employee military service from all public and private employers of the men and women of the National Guard and Reserve. To fulfill its mission, the ESGR has developed and implemented a number of employer outreach efforts. In addition to the ESGR’s “statement of support” and awards programs, which were discussed in the body of this report, the ESGR has a number of other outreach programs that are discussed below. Some of these efforts are well underway, others are relatively new. Mass Market Outreach. This ESGR effort has used public service advertising and mass marketing to make employers and the general public aware of the importance of employer support for Guard and Reserve members who are called to military service, and the role that the ESGR can play in encouraging supportive employer relations. Strategic Partnerships. Through these partnerships with the national headquarters and local chapters of the Chamber of Commerce, Society for Human Resource Management, National Federation of Independent Business, Small Business Administration, and Rotary Club, the ESGR strives to educate employers about USERRA, the ESGR organization, and the different ways employers can support their servicemember employees. The ESGR uses a variety of media, trade show, and speaking opportunities to reach this target audience. The ESGR’s goal was to reach at least 430 local chapters of these groups in fiscal year 2005. As of July 2005, the ESGR had met with 250 of its strategic partners. Industry Segment Outreach. This outreach effort is focused on leaders in industries that employ significant numbers of reserve component members. For about 5 years, DOD leaders have met regularly with key officials from the airline industry to discuss concerns that arise as the military and industry share the same personnel resources. In fiscal year 2005, the ESGR planned to hold three similar symposiums with (1) law enforcement, (2) fire and safety officials, and (3) city and municipal leaders. However, none of the other symposiums had taken place when we ended our review in August 2005. Federal Government Outreach. USERRA states that the federal government should be a model employer. The ESGR is encouraging the 17 cabinet-level departments and 81 independent federal government agencies to sign the ESGR statements of support as a means to demonstrate their commitment to their servicemember employees. The ESGR established a goal to have10 federal government agencies sign statements of support in fiscal year 2005. As of August 2005, a total of 20 federal agencies had signed statements of support. 5-Star Program. In the past, the ESGR’s outreach efforts were focused on simply asking employers to sign statements of support for their National Guard and Reserve members. The statement of support simply stated that employers would fulfill their obligations by complying with USERRA. Currently in its first year, the 5-Star Program seeks to get employers more actively involved in the management of their National Guard and Reserve employees. The five steps of the 5-Star Program are to (1) sign a statement of support, (2) review employer human resource policies with respect to employer support, (3) train supervisors and managers on USERRA, (4) provide “above and beyond” human resource policies, and (5) advocate for National Guard and Reserve members. Bosslifts. Bosslifts are usually 2- to 3-day outreach events where employers, civic leaders, and legislators are taken to Guard or Reserve units to observe Guard or Reserve members in action. These events present employers with opportunities to directly observe the technical, organizational, team building, and leadership skills of their employees. They also provide employers with opportunities to observe military training, some of which may be directly related to their employees’ civilian jobs. Each ESGR state committee is programmed for one nationally sponsored bosslift each year. However, based on the size and distribution of its reserve component population, California is programmed for two bosslifts. Additional committee-sponsored bosslifts are authorized and encouraged. Some state committees sponsor and fund bosslifts using state funding. Employer Briefings. Employer briefings provide a forum for local employers, unit commanders, the ESGR members, and community leaders to meet, network, and discuss issues that arise from employee participation in the National Guard and Reserve. The meeting site can be a local restaurant, hotel, service club, Chamber of Commerce, National Guard Armory, Reserve Center, or military installation. This is a local- level 1-day activity funded at the state level. Defense Advisory Board. In August 2003, the Secretary of Defense created a defense advisory board composed of 15 to 25 industry public and private sector leaders to act as consultants without compensation. The board was established for up to 3 years and provides advice to the Secretary of Defense about issues concerning Reserve component members and their civilian employers. It also recommends policies and priorities for employer support actions and programs. The board meets at least twice a year at the call of the National Chairman, and as needed to address emergent issues. In March 2005, this board met with both the Secretary and Deputy Secretary of Defense. Board members included a state governor, a major city fire chief, and representatives from employer associations, higher education, and the airline, information technology, aircraft repair, transportation, public relations and public affairs, defense and aerospace systems, investment banking, and food industries. America Supports You. This is a nationwide program launched by DOD’s public affairs office to recognize citizens’ support for military men and women and to communicate that support to members of the Armed Forces at home and abroad. Participants can join the team at www.americasupportsyou.mil, share their stories of support with the nation and troops, and download program materials. In turn, military members will access the Web site and learn about America’s support for their service. In addition to personal stories of support, the Web site has a section that recognizes employer support for servicemembers and particularly for servicemember employees. This appendix presents a facsimile of the actual questions asked in our survey of the ESGR ombudsmen along with aggregate responses. The results presented have been weighted to correspond to the universe of the ESGR ombudsmen. See appendix I, Scope and Methodology, for a detailed discussion of this process. 1. Were you serving as an Ombudsman and available to handle cases as of April 6, 2005? (Select one answer.) Yes (Continue.) No (Click here to skip to question 12.) 2. How long have you served as an Ombudsman with the ESGR? (Select one answer.) Less than 1 year 1 to less than 3 years 3 to less than 7 years 7 or more years No response 3. Have you received or not received each of the following types of training either prior to or since becoming an Ombudsmen? (Select one answer in each row.) a. Basic Ombudsman training b. Advanced Ombudsman training d. Other training related to your If you received any of the above types of training, what was the year of the most recent training you received? (Enter year of training. Please enter all four digits of the year, e.g., “2004”.) 2005-10% 2004-22% 2003-23% 2002 or earlier-45% N=698 2005-8% 2004-33% 2003-26% 2002 or earlier-33% N=244 2005-11% 2004-41% 2003-18% 2002 or earlier-30% N=137 2005-31% 2004-27% 2003-13% 2002 or earlier-29% N=259 If you received any “other training related to your Ombudsman duties”, what was included in that training and at what specific location(s) did that training take place? 5. Since becoming an ESGR Ombudsman, what is the total number of cases that you have handled? (Enter number. If none, enter zero.) Mean = 51.4 cases Total = 37,684 cases N=735 Please indicate whether the number you entered in question 5 above was an… (Select one answer.) Exact number (from records or memory) 6. Since becoming an ESGR Ombudsman, what is the total number of cases that you have personally resolved, that is that you brought to closure yourself? (Enter number. If none, enter zero.) Veterans’ Employment and Training Service or ESGR national headquarters or state coordinators. Mean = 40.6 cases Total=29,816 cases N=735 Please indicate whether the number you entered in question 5 above was … (Select one answer.) Exact number (from records or memory) 7. On average, how many hours do you spend in a typical week on your ESGR Ombudsman duties? Minimum = 0 hours Maximum = 45 hours Mean = 3.7 hours N=730 Apart from your work as an ESGR Ombudsman, we are interested in finding out a few things about your current employment, or if you are retired, your former employment. 8. Other than your work as an ESGR Ombudsman, are you currently employed full-time (35 hours or more per week), employed part-time (34 hours or less per week), retired, or not currently employed? (Select one answer.) Retired Not currently employed, but not retired No response 9. Other than your work as an ESGR Ombudsman, which one of the following best describes your primary employer? (If you are not currently employed or retired, answer for your former primary employer.) (Select one answer.) Military (Answer question 9a below.) Federal government (non-military) (Answer question 9a below.) State government (Answer question 9a below.) Local government (Answer question 9a below.) Corporation or large private sector firm Small business Non-profit or charitable organization Self-employed No response 9a. If you answered military, federal government (non-military), state, or local government in question 9 above, in what branch of the military or specific government agency are/were you 10. Other than your work as an ESGR Ombudsman, which one of the following best describes your current primary occupation? (If you are not currently employed or retired, answer for your former primary occupation.) (Select one answer.) Military - attorney/JAG Military - non-attorney officer Military - enlisted Nonmilitary - attorney Nonmilitary - not an attorney (Answer question 10a below.) No response 10a. If you answered “Nonmilitary - not an attorney” in question 10 above, and your primary or former occupation directly relates to your ESGR ombudsman responsibilities (e.g., mediator, negotiator, etc.), please enter this occupation in the space below. 11. If you have had more than one occupation that directly relates to your ombudsmen responsibilities, please list the secondary occupation (that was not covered by questions 9 and 10) in the box below. 12. If you would like to make any suggestions on how to make the ESGR Ombudsman program more successful, please use the space below. (You may enter as much text as you like. The space will expand to accommodate your response.) In addition to the contact named above, Brenda S. Farrell, Assistant Director; Renee S. Brown; Jonathan Clark; Michael J. Ferren; Stuart M. Kaufman; Susanna R. Kuebler; Mary Jo Lacasse; Ronald La Due Lake; Susan J. Mason; Jennifer R. Popovic; and Irene A. Robertson made significant contributions to the report. | The Uniformed Services Employment and Reemployment Rights Act (USERRA) of 1994 protects millions of people, largely National Guard and Reserve members, as they transition between their federal duties and their civilian employment. The act is intended to eliminate or minimize employment disadvantages to civilian careers that can result from service in the uniformed services. This report examines the extent to which the Departments of Defense (DOD), Labor (DOL), Justice (DOJ), and the Office of Special Counsel (OSC) have achieved this purpose, specifically, the extent to which the agencies (1) have data that indicate the level of compliance with USERRA, (2) have efficiently and effectively conducted educational outreach, and (3) have efficiently and effectively addressed servicemember complaints. Whether or not overall USERRA compliance has changed is difficult to firmly establish; however, the agencies that support or enforce USERRA have collected formal and informal complaint data and some employer support figures that provide limited insights into compliance. For example, DOL's formal complaint numbers show a possible relationship with the level of the use of the reserve components and the number of complaints. DOD data show that some employers exceed USERRA requirements, but these data have limitations. DOD has only 1 full year of informal complaint data, so it will be several years before DOD can identify any meaningful trends in informal complaints. Because informal complaint figures have not been captured on a consistent basis, agencies lack the data necessary to identify total complaint trends. Furthermore, data from a 2004 DOD survey showed that at least 72 percent of National Guard and Reserve members with USERRA problems never sought assistance for their problems. This raises questions as to whether complaint numbers alone can fully explain USERRA compliance or employer support. Some recently added employment questions on DOD's periodic surveys, if continued, offer the potential to provide insight into compliance and employer support issues. DOD, DOL, and OSC have educated hundreds of thousands of employers and servicemembers about USERRA, but the efficiency and effectiveness of this outreach is hindered by a lack of employer information. DOD's reserve component members who can be involuntarily called to active duty are required to enter their civilian employer information into a DOD database but the services have not enforced this requirement and as of August 2005, about 40 percent of the members had not entered the required information. Without information about the full expanse of servicemember employers, federal agencies have conducted general outreach efforts but have been limited in their ability to efficiently and effectively target educational outreach efforts to employers who actually have servicemember employees. Agency abilities to efficiently and effectively address servicemember complaints are hampered by incompatible data systems, a reliance on paper files, and a segmented process that lacks visibility. The systems that DOD, DOL, DOJ, and OSC use to track USERRA complaints are not compatible. As a result, data collection efforts are sometimes duplicated, and DOL relies on its paper files when transferring or reviewing complaints. This slows the transfer of complaints and limits the ability of DOL managers to conduct effective, timely oversight of complaint files. Furthermore, segmented responsibilities and lack of visibility have led agencies to focus on outputs rather than results. For example, agencies measure complaint processing times but not the elapsed time servicemembers actually wait to have their complaints fully addressed. GAO analysis of 52 complaints that had been closed and reopened two or more times found that recorded processing times averaged 103 days but the actual elapsed times that servicemembers waited to have their complaints fully addressed averaged 619 days. |
Addressing the Year 2000 problem in time will be a formidable challenge for the District of Columbia. The District government is composed of approximately 80 entities, responsible for carrying out a vast array of services for a diverse group of stakeholders. These services include municipal, state, and federal functions, such as street maintenance and repairs, economic development and regulation, trash pick-up, water and sewer services, educational institutions, hospital and health care, public safety, and correctional institutions. Each of these services is susceptible to the Year 2000 problem. The Year 2000 problem is rooted in the way dates are recorded and computed in automated information systems. For the past several decades, systems have typically used two digits to represent the year, such as “97” representing 1997, in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from 1900, or 2001 from 1901. As a result of this ambiguity, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results. The District has a widespread and complex data processing environment, including a myriad of organizations and functions. There are four major data centers located throughout the city, each serving divergent groups of users, running multiple applications, and using various types of computer platforms and systems. Most of the District’s computer systems were not designed to recognize dates beyond 1999 and will thus need to be remediated, retired, or replaced before 2000. To complicate matters, each District agency must also consider computer systems belonging to other city agencies, other governments, and private sector contractors that interface with their systems. For example, the Social Security Administration exchanges data files with the District to determine the eligibility of disabled persons for disability benefits. Even more important, the District houses the most critical elements of the federal government. The ability of the District to perform critical government services after the century date change is not only essential to District residents but also important to the continuity of operations of the executive, congressional, and judicial offices housed here. In addition, the Year 2000 could cause problems for the many facilities used by the District of Columbia that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, water and sewer systems, building security systems, elevators, telecommunications systems, and air conditioning and heating equipment could malfunction or cease to operate. The District cannot afford to neglect any of these issues. If it does, the impact of Year 2000 failures could potentially be disruptive to vital city operations and harmful to the local economy. For example: Critical service agencies, such as the District’s fire and police departments, may be unable to provide adequate and prompt responses to emergencies due to malfunctions or failures of computer reliant equipment and communications systems. The city’s unemployment insurance benefit system may be unable to accurately process benefit checks as early as January 4, 1999. The city’s tax and business systems may not be able to effectively process tax bills, licenses, and building permits. Such problems could hamper local businesses as well as revenue collection. Payroll and retirement systems may be unable to accurately calculate pay and retirement checks. Security systems, including alarm systems, automatic door locking and opening systems and identification systems, could operate erratically or not all, putting people and goods at risk and disabling authorized access to important functions. To address these Year 2000 challenges, we issued our Year 2000 Assessment Guide to help federal agencies plan, manage, and evaluate their efforts. This guide provides a structured approach to planning and managing five delineated phases of an effective Year 2000 program. The phases include (1) raising awareness of the problem, (2) assessing the complexity and impact the problem can have on systems, (3) renovating, or correcting, systems, (4) validating, or testing, corrections, and (5) implementing corrected systems. We have also identified other dimensions to solving the Year 2000 problem, such as identifying interfaces with outside organizations specifying how data will be exchanged in the year 2000 and beyond and developing business continuity and contingency plans to ensure that core business functions can continue to be performed even if systems have not been made Year 2000 compliant. Based on the limited data available on the status of local and state governments, we believe that the District’s Year 2000 status is not atypical. For example, a survey conducted by Public Technology, Inc. and the International City/County Management Association in the fall and winter of 1997, found that of about 1,650 cities that acknowledged an impact from Year 2000, nearly a quarter had not begun to address the problem. In addition, state governments are also reporting areas where they are behind in fixing Year 2000 problems. For example, as we recently testified before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight, a June 1998 survey conducted by the Department of Agriculture’s Food and Nutrition Service, found that only 3 states reported that their Food Stamp Program systems were Year 2000 compliant and only 14 states reported that their Women, Infants, and Children program were compliant. Moreover, four states reported that their Food Stamp Program systems would not be compliant until the last quarter of calendar year 1999, and five states reported a similar compliance time frame for the Women, Infants, and Children program. Until June 1998, the District had made very little progress in addressing the Year 2000 problem. It had not identified all of its mission-critical systems, established reporting mechanisms to evaluate the progress of remediation efforts, or developed detailed plans for remediation and testing. In addition, it lacked the basic tools necessary to move its program forward. For example, it had not assigned a full-time executive to lead its Year 2000 effort, established an executive council or committee to help set priorities and mobilize its agencies, or identified management points-of-contact in business areas. Since this past June, the District has recognized the severity of its situation and taken a number of actions to strengthen program management and to develop a strategy that is designed to help the city compensate for its late start. For example, to improve program management, the District has hired a new chief technology officer, appointed a full-time Year 2000 program manager, established a Year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts. The District also contracted with an information technology firm to assist in completing the remediation effort. To accomplish this in the short time remaining, the District and the contractor plan to concurrently (1) remediate and test system applications, (2) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment, (3) assess and correct noninformation technology assets, and (4) develop contingency plans. So far, the District has done the following. Developed an inventory of information technology applications. Of the 336 applications identified, the District and its contractor determined that 84 are deemed Year 2000 compliant, 135 have already been remediated but still need to be tested, and 117 need to be remediated and tested. According to the District, over 9 million lines of code still need to be remediated. Initiated pilot remediation and test efforts with the pension and payroll system. The system has been converted and the conversion results are being readied for system users to review. The District expects to complete the pilot by December 31, 1998. Adopted a contingency planning methodology that it is now piloting on the 911 system, the water and sewer system, and the lottery board system. It expects to complete the first two pilots by October 31, 1998, and the remaining one during the first quarter of fiscal year 1999. Developed a strategy for remediating non-IT assets that is now being tested on the water and sewer system. This is also expected to be done by October 31, 1998. After this effort is completed, the District and the contractor will begin to assess and remediate non-IT equipment at agencies providing critical safety, health, and environmental services. The District’s recent actions reflect a commitment on the part of the city to address the Year 2000 problem and to make up for the lack of progress. However, the District is still significantly behind in addressing the problem. As illustrated in the following figure, our Assessment Guide recommends that organizations should now be testing their systems in order to have enough time to implement them. They should also have business continuity and contingency plans in place for mission-critical systems to ensure the continuity of core business operations if critical systems are not corrected in time. By contrast, the District is still in the assessment process—more than 1 year behind our recommended timetable. For example, it has not identified all of its essential business functions that must continue to operate, finished assessing its IT infrastructure and its non-IT assets, provided guidance to its agencies on testing, and identified resources that will be needed to complete remediation and testing. Until the District completes the assessment phase, it will not have reliable estimates of how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans. The District will also be unable to provide a reliable estimate of the costs to implement an effective Year 2000 program. Further, the District has had some problems in completing the assessment phase. For example, according to program office officials, three agencies—the Court System, Superior Court, and Housing Authority—have refused to participate in the program office’s assessment activities. Agencies also do not consistently attend program office meetings and do not always follow though on their assessment commitments, such as ensuring that program office and contractor teams have access to agency personnel and data. Program office officials attributed these problems to the office’s limited authority and the lack of mandatory requirements to participate in the Year 2000 program. Failure to fully engage in the Year 2000 program can only increase the risks the District faces in trying to ensure continuity of service in key business process areas. District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time. We agree. Therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months. First, because it is likely that there will not be enough time to remediate all systems, the District must identify and prioritize its most critical operations. This decision must collectively reside with the key stakeholders involved in providing District services and must represent a consensus of the key processes and their relative priority. The results of this decision should drive remediation, testing, and business continuity and contingency planning and should provide increased focus to the efforts of the Year 2000 office and its contractor. To this end, we recommend that the District, along with its current Year 2000 efforts, identify and rank the most critical business operations and systems by October 31, 1998. The District should use this ranking to determine by November 30, 1998, the priority in which supporting systems will be renovated and tested. Continuity of operations and contingency plans for these processes and systems should also be initiated at this time if such action is not already underway. Second, for systems that may not complete remediation but that are still important to city operations, managers will need to develop contingency plans for continued operations. It is essential that such plans be developed early to provide stakeholders as much time as possible to provide resources, develop “workarounds,” or secure legislative or administrative approvals as necessary to execute the plans. Third, because of the dependencies between the District and the surrounding local and federal government entities, the District will need to work closely with those bodies to both identify and prepare appropriate remedial steps and contingency plans to accommodate those dependencies. We recommend that the District immediately develop an outreach program to first identify its dependencies and then determine the remediation required to minimize the risk of Year 2000 failure. Finally, efforts to address this problem must have continued top-level commitment from the Chief Management Officer and the department and agency heads, the Mayor’s office, and the control board. Establishing a program office and hiring a contractor with significant expertise is a good first step. However, the key stakeholders need to “own” the process, i.e., participate in critical decision-making on program direction, provide resources and support for the program, and ensure that all District agencies and offices fully participate in the process. To conclude, we believe the District’s Year 2000 program needs an absolute commitment from its leadership to make the most of the short time remaining. By addressing the steps outlined above, the District can better ensure a shared understanding of the key business processes that must be remediated, a shared understanding of the risks being assumed in establishing priorities for remediation, testing, and business continuity and contingency planning, and a shared commitment to provide the resources required to address those priorities. Mrs. Chairwoman and Mr. Chairmen, this concludes my statement. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the year 2000 risks facing the District of Columbia, focusing on: (1) its progress to date in fixing its systems; and (2) the District's remediation strategy. GAO noted that: (1) until June 1998, the District had made very little progress in addressing the year 2000 problem; (2) to compensate for its late start, the District has hired a new chief technology officer, appointed a full-time year 2000 program manager, established a year 2000 program office, and continued to use its chief technology officer council to help coordinate and prioritize efforts; (3) the District also contracted with an information technology firm to assist in completing the remediation effort; (4) to accomplish this in the short time remaining, the District and the contractor plan to concurrently: (a) remediate and test system applications; (b) assess and fix the information technology (IT) infrastructure, including the data centers, hardware, operating systems, and telecommunications equipment; (c) assess and correct noninformation technology assets; and (d) develop contingency plans; (5) the District has done the following: (a) developed an inventory of information technology applications; (b) initiated pilot remediation and test efforts with the pension and payroll system; (c) adopted a contingency planning methodology which it is now piloting on the 911 system, the water and sewer system, and the lottery board system; and (d) developed a strategy for remediating non-IT assets which is now being tested on the water and sewer system; (6) the District's recent actions reflect a commitment on the part of the city to address the year 2000 problem and to make up for the lack of progress; (7) however, the District is still significantly behind in addressing the problem; (8) the District has not: (a) identified all of its essential business functions that must continue to operate; (b) finished assessing its IT infrastructure and its non-information technology assets; (c) provided guidance to its agencies on testing; and (d) identified resources that will be needed to complete remediation and testing; (9) until the District completes the assessment phase, it will not have reliable estimates on how long it will take to renovate and test mission-critical systems and processes and to develop business continuity and contingency plans; (10) District officials acknowledge that the city is not able to provide assurance that all critical systems will be remediated on time; and (11) therefore, to minimize disruptions to vital city services, it will be essential for the District to effectively manage risks over the next 15 months. |
In recent years, much discussion about education technology has focused on the use of computers, networks, and connections to the Internet to augment learning. These technologies can be used in a variety of ways: Drill-and-practice programs can provide a way for students to improve basic skills (such as addition or spelling) and may be used by teachers to track and tailor student learning. Other software programs can provide students with powerful tools to facilitate writing, analyze and manipulate data, simulate physical and social science processes, and produce multimedia projects, combining text with sound, graphics, and video. Reference applications can give students and teachers quick access to a broad range of learning resources, such as encyclopedias available on CD-ROM. Modem or network connections can provide access to resources beyond the immediate reach of the classroom such as library card catalogs and Internet information. Networks can support collaborative and active learning by allowing many students, teachers, parents, experts, and others to share resources and communicate with each other both locally and over great distances. A computer-based education technology program has several components that range from the computer hardware and software to the training and support needed to use and maintain the technology (see fig. 1). Although technology models define components somewhat differently, they generally cover the same equipment and support elements. Although more complete data are needed, surveys conducted by Quality Education Data note a dramatic growth in computer-based technology in schools. In school year 1983-84, schools had 1 computer for every 125 students; in school year 1996-97, they had 1 for every 9. Nearly all schools now use personal computers, with the average school owning 86 computers for instructional use. Access to multimedia computers that have graphics, sound, and video capabilities important to taking advantage of learning opportunities on the Internet has also grown to about 1 such computer for every 22 students. In addition, schools are using computer networks more. The percentage of schools with local area networks grew more than twelvefold in just 5 years, from 5 percent in school year 1991-92 to 63 percent in school year 1996-97. Meanwhile, many education technology experts believe that current levels of school technology do not give students enough access to realize the technology’s full potential. For example, schools should provide a ratio of four to five students for every computer or five students for every multimedia computer, many studies suggest. These ratios are much lower than the ratios at most schools. Concern has also been expressed that aging school computers may not be able to run newer computer programs, use multimedia technology, and access the Internet. In school year 1995-96, 35 percent of installed computers used for student instruction comprised aging Apple II computers, which cannot run most software designed today. Furthermore, although the percentage of schools with Internet access quickly increased from 35 to 65 percent between 1994 and 1996, just 14 percent of instructional rooms (classrooms, computer or other labs, and library media centers) have this access. Policymakers want to know whether computer-based technology contributes to improved student achievement. In fact, some studies of traditional, tutorial-based applications, such as drill-and-practice software to improve basic skills (such as reading or arithmetic), have shown measurable improvements in student learning. Studies also note improvements in writing and other subject areas as well as improvements in students’ motivation and attitudes about learning resulting from classroom technology use. In addition, the benefits of computer-based instruction appear to be greater for educationally disadvantaged or low-achieving students. Although much research has focused on traditional, tutorial applications of technology, many are interested in technology’s potential to support fundamental changes in approaches to teaching. Such approaches involve environments in which students assume a central role in their own learning, learn to think critically, and collaborate with others. Students working together to research a topic on the Internet is one example of such an application. Research data on these more complex uses of technology are few, however, and are not as well organized as research on more traditional applications. Without other research, analysts often cite anecdotal reports of the positive experiences of schools that extensively use technology. On the other hand, some analysts have questioned whether technology can significantly benefit schools. Concerns have been raised, for example, about whether schools can use technology effectively and about the extent to which schools might shift resources from other important education needs to support technology investments. In addition, some researchers have questioned the methodologies used to evaluate technology’s impact on student achievement. For example, the influence of contextual factors in a number of studies has raised concern as have the persistence of the measured effects and the independence of those responsible for the research. Schools have also increasingly introduced technology as part of broader reform efforts, making it difficult to isolate the effects of technology alone. Our review did not address these issues; rather, our report describes how some districts found the funds to implement technology programs. School districts that want to provide students with continuing and effective access to education technology may require substantial amounts of money for acquiring computers and maintaining their investment. Quality Education Data has reported that public schools spent an estimated $4.3 billion on technology in school year 1996-97 and are projected to spend $5.2 billion this school year. A 1996 study by the RAND Corporation estimated the cost of providing technology-rich learning environments in all schools as between $10 and $20 billion per year, depending on the level of technology. This amounts to about 3.2 to 8 percent of current expenditures for public elementary and secondary education for the 1994-95 school year. In contrast, school district expenditures on technology in 1994-95 were estimated to be 1.3 percent of current education expenditures. The researchers note that financing such costs would be difficult for some districts because of current fiscal pressures and may require them to significantly restructure their budgets, a difficult task. Several federal, state, and private initiatives are helping school districts acquire and use technology. At the federal level, substantial funding increases have been provided recently for several programs supporting education technology, including the Technology Innovation Challenge Grant program, which was appropriated $106 million for fiscal year 1998.The Congress also appropriated $425 million to fund the Technology Literacy Challenge Fund in fiscal year 1998 in support of state efforts to integrate technology into school curricula. Another major source of financial assistance was provided for in the Telecommunications Act of 1996. Under this act, the Federal Communications Commission (FCC) adopted an order stating that schools should receive discounts ranging from 20 to 90 percent on all telecommunications services, Internet access, and internal connections, depending on the school’s level of economic disadvantage and its location in an urban or rural area and subject to an annual cap of $2.25 billion. The funds to support these discounts will come from collections from interstate telecommunications and other service providers. A number of federal agencies provide funding for education technology, including the Departments of Education, Agriculture, Commerce, Defense, and Energy; the National Science Foundation; and the National Aeronautics and Space Administration. Through these agencies, funding has been provided for technology and supported such activities as educational television programming, distance learning, assistive technologies for disabled learners, and more recently, assistance for telecommunications networks and technology planning. Other federal funding, though not specifically provided for technology, may be used for this purpose. For example, funds from ESEA programs—such as title I, which provides grants for educationally disadvantaged students, and the Eisenhower Professional Development program, which supports activities to strengthen teachers’ skills—may be used to support education technology efforts to reach these programs’ goals. Similarly, under the Goals 2000: Educate America Act, districts may use the education reform funds to acquire technology and implement technology-enhanced instruction. The federal government provides several hundred million dollars annually to support education technology, according to estimates. Much of this funding is provided through federal programs for which technology is not the direct focus. In addition, states have provided various levels of funding and other types of assistance for education technology. Many states have provided some funding to support technology in schools: New Jersey, for example, provided a total of $10 million in grants to every school district in the state in fiscal year 1997; and Georgia provided over $50 million in lottery funds to school districts for technology in fiscal year 1997. Other assistance provided by states includes negotiating statewide hardware and software purchase agreements, establishing technology training or support centers, providing school access to statewide networks, and easing regulations to allow schools to use state textbook funds to purchase software. In addition, some states have encouraged their public utility commissions to provide schools with telecommunication services at reasonable rates. Other public and private entities have also helped schools implement education technology. Businesses, foundations, universities, and other organizations have provided financial assistance or contributed expertise, shared resources, or donated equipment to support schools’ education technology needs. A recent example is NetDay, a national volunteer effort to install basic wiring in schools to give them Internet access. Businesses and individuals nationwide have contributed funds, technical expertise, or materials and joined with thousands of community volunteers to sponsor NetDay activities. Each district we studied used a combination of funding sources to support technology in its schools (see table 2). At the local level, districts allocated funds from their district operating budgets, levied special taxes, or both. They also obtained funds from federal and state programs specifically designated to support school technology or from federal and state programs that could be used for this purpose, among others. Finally, districts obtained private grants and solicited contributions from businesses. Although some individual schools raised funds in the districts we studied, obtaining technology funding was more a district-level function than a school-level function, according to our review. Although districts tapped many sources, nearly all districts obtained the majority of their funding from one source. This source, however, varied by district. For example, in Seattle a 1991 local capital levy has provided the majority of its education technology funding to date. In Gahanna, the district operating budget has provided the majority of technology funding. Regarding local funding, all five districts allocated funds from their operating budgets for technology, with such allocations ranging widely from 16 to 77 percent of their technology funding. Two districts also used funds raised through local bonds or special levies. One of them, Roswell, dedicated part of a triennial 2-mill levy to technology. Four districts received state funding specifically targeted for technology that totaled from less than 1 percent to 22 percent of their total technology funding. State technology funds were provided either on a per pupil basis or through competitive grants. Both Davidson County and Gahanna received state funding on a per pupil basis that funded significant portions of their hardware. Roswell also received state funding on a per pupil basis—but in smaller amounts—which it used to fund teacher training. Seattle competed for and won a state technology grant, which it used to purchase hardware and software for a middle school. Two districts won special federal technology grants. Manchester and Seattle won highly competitive 5-year federal Challenge Grants for $2.8 million and $7 million, respectively. Manchester won the grant in 1995 during the first round of Challenge Grant competition. This grant is the major source of funding for the district’s technology program, providing 66 percent of the district’s technology funding. A major objective of the grant is to create a network connecting computers in all schools to the Internet. Seattle won its grant in 1996 and uses it in several efforts, including activities that prepare students for employment in technology careers. The $1.5 million in grant funding Seattle has received so far accounts for about 4 percent of the district’s current technology funding. In addition to state and federal funds targeted for technology, all five districts reported using other federal and state program funding that was not specifically designated for technology but could be used for this purpose. For example, officials in four districts reported using federal title I funds, and officials in three reported using state instructional materials funds or textbook funds to support part of their program. In Manchester, a schoolwide program at a title I elementary school we visited had funded many of its 27 computers as part of its title I program. State program funds, such as for exceptional and at-risk children as well as vocational education, were a significant funding source in Davidson County, where the district has directed about $2 million of these state funds to technology. All districts we studied had obtained about 3 percent or less of their technology funding from private sources. This assistance comprised grants; monetary and in-kind donations; and assistance from businesses, foundations, and individuals. Officials attributed limited business contributions to several factors, including businesses not fully understanding the extent of the schools’ needs. One official said that when business representatives visit schools and compare schools’ technology with technology in their workplaces, they can better understand schools’ needs. Several officials also said businesses feel overburdened by many requests from the community for assistance, and some said their district had few businesses from which to seek help. Nonetheless, all five districts noted the importance of business’ contribution and were trying to improve their ties with business. As part of our review, we also examined the efforts of individual schools to raise money for technology. In all five districts, obtaining technology funding was mainly a district- rather than a school-level function. School-level technology coordinators in all but one school worked part time or had other responsibilities in addition to technology. Their main duties involved providing technical support and training and purchasing equipment, rather than obtaining funding for technology. The majority of funding that most schools used for technology came from the school district. Sometimes these funds were provided expressly for technology, such as those from local technology levies. In other cases, schools had some choice in spending funds and chose to use them to support technology needs. About half of the schools we studied also supplemented their district funding with funds for technology from parent-teacher organization activities and other school fund-raisers. Amounts totaled generally less than $7,000 in any given year but did range as high as $84,000 over 4 years at one school. A few schools reported obtaining special grants for technology from local businesses, foundations, or sometimes from their districts. Individual teachers or other staff wrote the grants, which generally were for small amounts, in most cases under $7,000. Staff at two schools also reported that teachers and other staff used their personal funds to support classroom technology activities. One district official estimated that teachers at a school in her district spent an average of $100 or more on software, hardware, and supplies; the official had also spent about $700 of her own money. One of the teachers at that school told us she spent $1,200 on technology items for her classroom in a single year. Technology directors in the districts we studied identified a variety of barriers to obtaining funding both at the district level and from other sources such as grants. Upon analyzing their responses to open-ended survey questions, we identified several types of barriers common to a number of districts (see table 3). The case studies in appendixes II through VI discuss these barriers further. District officials usually tried to overcome these barriers and obtain support for technology using broad informational efforts and various leadership approaches. Officials in all of the districts we visited reported that district-level funding for technology was difficult to obtain because it was just one of many important needs that competed for limited district resources. For example, a Gahanna official reported that his district’s student population had grown, and the district needed to hire more teachers. A Seattle official reported that his district had $275 million worth of deferred maintenance needs. In several cases, districts had to comply with certain mandates before making money available for needs such as technology. Manchester officials noted, for example, that required special education spending constituted 26 percent of the fiscal year 1997 district operating budget, a figure expected to rise to 27.5 percent in fiscal year 1998. As a result, officials believe that less funding may be available for other programs, including technology. In addition, one district official stated that one reason education measures were difficult to pass was that these measures competed for limited public funding with other programs such as transit systems, parks, and sports stadiums. Manchester district officials reported that the district competed even more directly with other city needs for tax revenues because the school district is a department of the city government and lacks independent fiscal authority to sponsor tax initiatives such as levies or bonds. General communitywide anti-tax sentiment contributed to difficulties in obtaining district-level funding for technology, according to district officials. Officials from all districts said that resistance to higher taxes affected their ability to increase the district’s operating revenue to help meet their technology goals. In Manchester, a district official reported that local property taxes already provide a large portion of the school district budget, and any tax increases face strong community resistance. Davidson County has one of the lowest local property tax rates in the state, and, according to officials, many county residents were attracted to the area because of the tax rates. In addition, two districts—Roswell and Seattle—lacked the ability to increase the local portion of their operating budgets. This is because—to improve equity—the state school finance systems limited the amount of funds districts could raise locally. Districts reported that anti-tax sentiment also affected their ability to pass special levies and bond measures. For example, Seattle voters supported a special levy to initiate the district’s technology plan but rejected a second levy to fund the next phase of the plan 5 years later. Davidson County voters had passed a bond measure several years ago that provided a small amount of funds for technology, but officials said it was too soon for the fiscally conservative community to consider another bond measure for technology. In Gahanna, several levy measures were defeated in the mid-1990s, reflecting, according to officials, the community’s dissatisfaction with the district’s leadership at that time. Although all district officials identified a resistance to taxes in their communities, most said they believed the community generally supported education. The lack of fund-raising staff presented difficulties to districts in raising funds beyond the school district. Many officials reported that their other job responsibilities precluded their searching for technology funding. When discussing this issue, district officials often mentioned that they need lots of time to develop funding proposals or apply for grants. For example, one technology director with previous grant-writing experience said she would need an uninterrupted month to submit a good application for a Department of Commerce telecommunications infrastructure grant. As a result, she did not apply for this grant. Manchester’s technology director said that when the district applied for a federal Challenge Grant, it created a team to work on the proposal. Two members of the team, the technology director, and another official had to drop everything else to complete the application within a 4-week time frame. Similarly, officials said they needed considerable time and effort to create the consortium of businesses, universities, and other organizations required for receiving some grants. For example, an official in Roswell said that such requirements made it difficult for geographically isolated districts like his to apply for these grants. According to some technology directors, the combination of scarce staff time and extensive grant application requirements sometimes kept them from applying for grant funding. In addition, although the funding potential of new sources is unclear, officials in most districts said they would like to have a staff member dedicated to pursuing new sources of technology program funding. Seattle and Manchester officials both said they had contracted with part-time grant writers. Seattle also had a general grants officer on the district’s staff to identify and manage grants, but he had limited time to write grant proposals. Gahanna officials said they planned to hire a district grants officer in the next year or two. In three districts we studied, technology officials said that some funding sources had conditions or requirements that made it difficult for the districts to obtain technology funding from these sources. In two of these districts, officials said that their districts did not meet the income requirements of some sources. For example, one official characterized her district as not being “needy” enough to qualify for some funding, stating further that corporations and foundations typically like to give funds to very needy schools where they can make a dramatic difference. Although her district’s student population had many students from lower income families, she said that the district was not disadvantaged overall compared with other school systems. Similarly, an official from another district said that his district’s average income was too high to meet the requirements for some sources. Conditions associated with other types of funding, such as levy funds, concerned an official in the third district. The official believed that restrictions on raising levy funds—such as minimum voter turn-out requirements, a 60-percent majority approval requirement, and a restriction prohibiting the district’s involvement in a levy campaign—make it harder for the district to obtain funds from this source. This particularly concerned this official because levy funding has been the main funding source for technology in this district. Districts employed general strategies to overcome these funding barriers rather than focus on specific barriers. The strategies involved two main approaches: efforts to inform decisionmakers about the importance of and need for technology and a variety of leadership efforts to secure support for technology initiatives. To inform decisionmakers, district officials addressed school board members, city council representatives, service group members, parents, community taxpayers, and state officials. Officials gave presentations and technology demonstrations, held parent information nights, made contacts with foundation representatives, and conducted lobbying efforts with state officials and grassroots efforts to encourage voter participation in levy or bond elections. Roswell, for example, set up a model technology school to demonstrate the use of technology in classrooms. One effort by Seattle officials involved soliciting support from the state legislature for changes in education funding laws that could affect the district’s spending on technology and other needs. In the districts we studied, district officials and business community members provided leadership to support school technology. In some districts, the superintendent garnered support for the technology program. For example, according to officials we interviewed, the superintendent in Davidson County had a long-standing commitment to technology and enough understanding of the political landscape to gain support for school technology implementation. Officials from two other districts noted that technology leadership in their districts had been lacking in recent years due in part to turnover in superintendents and other district personnel, and they looked to their current superintendents to provide it. Another leadership role held by some school district officials we visited stemmed from their technology expertise, including a vision for its educational use and an ability to articulate and implement this vision. Although the district’s technology director most often filled this role, occasionally school officials assumed this role. In Roswell, for example, one official referred to the district’s former technology director as the person who directed the effort to seek technology funding and to consider ways to spend that funding. This person was also characterized as having foresight and viewed as responsible for technology becoming such a big part of the district’s bond and levy measures. Likewise, technology directors in Davidson County, Gahanna, Seattle, and Manchester each played a central role in envisioning and implementing their respective district technology programs over multiyear periods and continued to be consulted for expertise and guidance. Beyond the school districts, members of the business community assumed leadership roles to support technology by entering into partnerships with the districts to help with technology development efforts as well as to help obtain funding. All five districts we studied had developed such partnerships with businesses in their communities. In Roswell and Seattle, business community leaders had developed a formal approach to helping their school districts’ efforts to implement technology by establishing a foundation that worked with each district, providing leadership and funding for technology. Seattle’s foundation, the Alliance for Education, views its role as helping the district reach its goals in several different areas, including technology. In this partnership, the Alliance serves as a convener and catalyst to join representatives from the business community with the school district and match entities interested in providing funding or other assistance with programs that need funding or other assistance. As part of its technology assistance, the Alliance also helps channel equipment to schools, provides training opportunities for teachers, and coordinates an effort to allow schools to have high-speed Internet access. In Roswell, the Educational Achievement Foundation has been involved in district policy-making as well as funding. In school year 1993-94, its members helped develop the school district’s initial technology plan using lessons learned by members who had developed technology programs for their businesses. The foundation also developed the concept for using technology in the district’s model technology elementary school and provided part of the funding for this school. Foundation members and district officials we spoke with said this model program was instrumental in convincing voters to pass a bond measure to implement technology in schools districtwide. In other locations we visited, the business community and districts were developing ties but through less formal structures. For example, the Manchester school district developed relationships with 40 business and community groups when it needed to meet a community consortium requirement for its Challenge Grant proposal. A district official stated that these relationships continue to grow and that education has become a main focus of the Chamber of Commerce. In Gahanna, the school district’s relationships with local businesses included ties to a local Business Advisory Council. Although providing funding is not this group’s main focus, it does provide the district with curriculum recommendations about skills needed in the workplace. In Davidson County, although officials said that few businesses reside in the rural area from which to solicit support, the district had established ties with some local businesses. One activity this district noted as evidence of local business support for technology was a successful effort to get community businesses to fund notebook computers for middle school teachers. Nearly all districts found maintenance, technical support, and training— components often dependent on staff—more difficult to fund than other components, according to our review. Officials cited several restrictions or limitations associated with funding sources that affected their use for staff costs. First, some funding simply could not be used to pay for staff. Officials in Roswell and Seattle noted that special levy and bond monies, their main sources of technology funds, may not be used to support staff because the funds are restricted to capital expenditures. North Carolina’s state technology program also prohibited funds from being used for staff costs. Second, some funding sources do not suit the ongoing nature of staff costs. Officials noted, for example, that grants and other sources provided for a limited time or that fluctuate from year to year are not suited to supporting staff. Furthermore, in two districts, officials said that businesses and foundations tend not to support ongoing program costs, including technical support and maintenance costs. Officials in one district also said that technical support and training were harder to fund because they were less visible than such items as hardware and software. Most districts funded technology staff primarily from district operating budgets. However, several officials noted that competing needs and the limited size of district budgets make it difficult to increase technology staff positions. Officials in all five districts reported having fewer staff than needed. Some technology directors and trainers reported performing maintenance or technical support at the expense of their other duties due to a lack of sufficient support staff. Some district officials also noted high stress levels among district technology trainers or maintenance staff trying to serve many school sites. One result of a lack of staff was lengthy equipment downtime when computers and other equipment were not available for use. In several districts, repairs for some equipment reportedly took as long as 2 weeks or more. Equipment downtime means reduced access for teachers and students, and several officials observed that this may frustrate teachers and discourage them from using the equipment. Limited funding for staff costs also affected teacher training, according to officials. In Gahanna, the district technology director said the district lacks enough educational technologists to assign one to each school, and, as a result, all teachers have not received in-depth training. He noted that training made a noticeable difference in teachers’ effectiveness in using technology and that in cases where teachers had worked one on one with educational technologists, students were gaining new skills in acquiring, assimilating, and manipulating data. Manchester’s technology director said that the most difficult costs for the district to fund are teacher release time and substitute pay to enable teachers to get training. Most district officials expressed a desire for more technology training capability, noting that teacher training promoted the most effective use of the equipment. Another official concluded that the district risked wasting the dollars it had invested in technology if it could not keep the equipment running or if teachers were not using the technology for lack of training or technical support. Many districts had developed some approaches to mitigating the shortfalls in technology support staff. For example, Seattle reported purchasing extended warranties on new equipment as a cost-effective way to support maintenance needs. Having manufacturers or vendors rather than district staff perform maintenance on newer machines allowed the district to concentrate its limited maintenance resources on the older equipment. Several district high schools were also training students to provide technical support in their schools. In addition, several schools we visited designated one or more teachers to help with training or provide technical support to other teachers in the building along with their full-time responsibilities. Two districts also had cooperative agreements with nearby colleges to assist with teacher training. In addition to staff-related components, several districts reported problems obtaining funds for hardware and telecommunication service charges. Technology’s high cost and continual changes requiring higher powered machines made funding hardware difficult, according to district officials. Finding funds for equipment upgrades was also difficult, said one official, because these needs are less visible to potential funders. Despite significant hardware investments, several districts reported having less teacher and student access to equipment than desired. Difficulties in funding telecommunication services were raised by officials in three districts for different reasons. One district official said such costs posed problems because of their large expense; an official in another district said funding these services was difficult because the need for funding is ongoing; and an official in a third district cited problems due to the need for funding from limited district operating funds. Most of the districts we studied planned to continue supporting the costs of their technology programs largely as they had in the past, despite the uncertainties associated with many funding sources. The ongoing costs faced by districts are basically of two types. First, districts need to fund regular annual costs, such as those for maintenance, technical support, training, and telecommunications services. Second, districts and schools need to fund the periodic costs of upgrading and replacing hardware, software, and infrastructure to sustain their programs. Most districts planned to continue funding ongoing maintenance, technical support, training, and telecommunications costs mainly from their operating budgets. Most hoped to sustain at least current levels of support; just one district, Seattle, anticipated losing some support staff due to districtwide budget cuts. District officials in most locations believed, however, that current levels of maintenance and technical support were not adequate and recognized that demands for staff would most likely grow with the addition of new equipment, expanded networks, and aging of older equipment. Some officials talked about hiring staff in small increments but did not know to what extent future district budgets would support such hiring. Officials in two districts looked to assistance promised under the Telecommunications Act to help with telecommunications costs, but at the time of our visit the timing and actual level of assistance they would receive had not been determined. The periodic cost of upgrading and replacing hardware, software, or infrastructure can be substantial and although each district had made significant progress in these areas, most faced some uncertainty in continuing to fund at least some of these costs from current sources. For example, officials in several districts noted that state technology funding was an inconsistent source of funding, subject to changing priorities of state legislatures. Davidson County and Gahanna had the most notable examples of this. Davidson County has relied heavily on state technology funds to buy hardware and establish its infrastructure, but the state reduced the program funding in the second year, and the district received only about $300,000 rather than the $900,000 it had expected. Similarly, Gahanna received only about half the amount it expected from state technology funding when the funding formula was changed to target funds to poorer districts. In Seattle, special levies are the district’s main funding source for equipping schools with computers and expanding networking in schools, according to the technology director, despite the unpredictability of this source. A failed levy in 1996 set technology plans back several years and forced the district and schools to piece together much smaller amounts from grants and other sources. Manchester, which completed the second year of a 5-year Challenge Grant in December 1997, will have to figure out where to get funding to sustain its program after the Challenge Grant is completed given the district’s operating budget limitations and a lack of state technology funds. Officials in Roswell also reported uncertainties about future funding, but the district has established a pattern of passing levies every 3 years and using some of these funds for school technology. All of the districts we visited were still working toward acquiring enough computers to reach their goals, and most had not developed plans to address the eventual need to replace current hardware. Some officials said they believed that the general public probably does not know that this will be necessary. Officials in all districts underscored the need for stable funding sources and for technology to be considered a basic education expenditure rather than an added expense. They suggested different ways to accomplish this. For example, officials in most districts believe the district operating budget should have a technology line item. They believe this would demonstrate district commitment to technology as well as provide a more certain funding source. An official in one district that had such a line item pointed out, however, that even this approach would not ensure funding because budget items can be decreased in times of general budget reduction or changing district priorities. Another official saw the need for state assistance to ensure stable funding for school technology. He said that technology is increasingly being considered part of basic education and as such should be included in state formula funding. Without such funding, he said districts would be divided into those that could “sell” technology funding to voters and those that could not. Furthermore, when districts cannot provide adequate technology funding for all schools, technology tends to grow in pockets; schools with a strong, supportive parent base or a principal with good public relations or grant-writing skills are likely to get more funding than schools without these resources. Education technology represents a substantial investment for school districts intent on following the lead of business and industry in making computers an integral part of everyday activities. Finding money to pay for the technology could be difficult, however, because it is but one of many education expenses—such as reducing class size or renovating aging buildings—that compete for limited funding. Furthermore, because technology programs involve ongoing maintenance, training, and other expenses, one-time funding is unlikely to be sufficient. As a result, technology supporters in the districts we studied not only had to garner support at the start for the district’s technology needs, they also had to continue making their case year after year. To develop support for technology, leaders in these school districts used a broad informational approach to educate the community, and they also formed local partnerships with business. Although each district has developed some ties with business, funding from private sources for each district, including business, constituted about 3 percent or less of what each district has spent on its technology program. Other districts may, like these, need to continue depending mainly on special local bonds and levies, state assistance, and federal grants for initially purchasing and replacing equipment and on their operating budgets for other technology needs. Lack of staff time for seeking and applying for funding and the difficulty of funding technology support staff were major concerns of officials in all the districts we studied. Too few staff to maintain equipment and support technology users in the schools could lead to extensive computer downtime, teacher frustration, and, ultimately, to reduced use of a significant technology investment. The technology program in each of the five districts we studied had not yet obtained a clearly defined and relatively stable funding source such as a line item in the operating budget or a part of the state’s education funding formula. As a result, district officials for the foreseeable future will continue trying to obtain funding from various sources to maintain their technology programs and keep them viable. Because this report addresses issues at the school district level, we did not seek formal comments from the Department of Education. We did, however, brief Department officials on the report’s contents and considered their comments where appropriate. We also submitted district case studies to school district officials for their review and considered their comments where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. If you wish to discuss this report, please call me on (202) 512-7014 or Eleanor Johnson, Assistant Director, on (202) 512-7209. Major contributors are listed in appendix VII. The objectives of this study were to determine (1) what sources of funding school districts have used to develop and fund education technology, (2) what barriers districts have faced in funding the technology goals they set and how they have tried to overcome these barriers, (3) which components of districts’ technology programs have been the most difficult to fund and what the consequences have been, and (4) how districts plan to handle the ongoing costs of the technology they have acquired. To answer these questions, we conducted case studies of five school districts nationwide: Davidson County Schools, Davidson County, North Carolina; Gahanna-Jefferson Public Schools, Gahanna, Ohio; Roswell Independent School District, Roswell, New Mexico; Manchester School District, Manchester, New Hampshire; and Seattle Public Schools, Seattle, Washington. We selected these locations to illustrate school districts’ experiences in funding education technology programs. To identify possible case study sites, we asked state officials responsible for education technology in each state as well as officials in other education organizations for examples of school districts that had established education technology programs and made some progress implementing them. Because we sought information on experiences that were likely to be relatively common among districts nationwide, we asked the officials to exclude districts that had benefited from extraordinary assistance, such as those that had received a major portion of their funding from a company or individual. We selected five districts from those suggested that provided variety in size, community type, geographic location, state assistance for education technology, state fiscal capacity, and state share of education funding. For example, district size ranged from about 7,000 students in the suburban Gahanna-Jefferson Public Schools to about 47,000 students in Seattle Public Schools, a large urban school district. The state share of education funding in school year 1993-94 ranged from just over 8 percent in New Hampshire to about 74 percent in New Mexico. We also reviewed each district’s school-level experiences in funding technology. We asked district technology directors to name one school that was relatively advanced in its implementation of technology and one school whose experiences reflected a more typical school in the district. We visited a total of 11 schools—9 elementary and 2 high schools. Although the districts and schools we selected are not statistically representative, the diversity of those selected increases the likelihood that findings common to all five districts are relevant to other districts and schools implementing education technology. We visited each location and interviewed district, school, state, and other officials. At the district level, we spoke with district technology directors and in several locations also interviewed the district superintendent, budget or finance officials, and staff that provide technical assistance or training. In Roswell and Seattle, we also spoke with officials from the education foundations supporting those districts, and in Gahanna, with one city council member and one school board member. At each school, we interviewed the school principal and the technology coordinator or media coordinator responsible for technology if such a position existed. We also spoke with teachers who are technology focal points for their buildings, teachers that use technology extensively, and members of parent-teacher organizations who are involved in funding technology. At the state level, we interviewed officials responsible for education technology at state education agencies to obtain the state context for the districts’ experiences. Although education technology includes a wide range of tools, including instructional television and distance learning, our discussions with district and school officials focused on computers and peripherals and their connectivity to local and wide area networks and to the Internet. We refer to these resources as computer-based technology. We used open-ended interview questions and focused on how the districts funded the technology they acquired and what barriers they faced in obtaining these resources. Major questions covered in district and school interviews included but were not restricted to (1) the history of the technology program, (2) efforts to obtain technology funding, (3) barriers to obtaining technology funding and strategies used to overcome them, (4) barriers to funding technology components, and (5) funding ongoing costs of the technology program. Our interviews with state and other officials generally focused on the type and level of their involvement in funding education technology. We did not try to evaluate districts’ technology goals or to assess the effect of technology on students’ academic progress. In addition to the interviews, we asked district and school officials to complete a background survey detailing the sources of funding they had used to fund their technology programs and the amounts they had received. Because the five districts began implementing their technology programs at different times—one district began funding technology in earnest in 1989, others began more recently—some of the information reported about each district reflects different time periods. The background survey also asked officials for basic demographic and financial data and information on the current level of technology in the district or the school. In addition, district, school, and state officials provided us with other pertinent documents, such as technology plans, which we reviewed. In conducting the case studies, we relied primarily on the opinions of the officials we interviewed and the data and supporting documents they provided. We did not independently verify this information but sought corroboration by conducting many interviews in each district. We also reviewed data officials provided us for internal consistency and sought clarification where needed. We submitted the case studies to district and school officials for their review and made changes as appropriate. We conducted the study between March and November 1997 in accordance with generally accepted government auditing standards. Located in central North Carolina, Davidson County is a largely rural area near Winston-Salem. The county covers more than 500 square miles and supports several manufacturers of furniture, textiles, machinery, ceramics, and glass. Also an agricultural area, the county has about 3,000 farms. Davidson County Schools developed its current technology plan in 1995. The goals of the technology plan include placing networked computers in classrooms, computer labs, and media centers; providing Internet access from any networked computer; and connecting schools to a wide area network. Among our case study districts, Davidson County stands out due to the extent of its reliance on state technology funds and other state program funds. Table II.1 shows summary information about the district, including the extent to which technology has been implemented. As table II.1 shows, Davidson County’s efforts reflect a significant amount of assistance from state technology funding. In 1993, North Carolina’s General Assembly established the School Technology Commission and charged it with developing a statewide technology plan. The Commission’s plan, completed in February 1995, called for a commitment of $381 million over a 5-year period to provide students with technology-rich environments and teachers with the training and means to effectively use technology. However, for the first 2 years of the 5-year period, appropriations for the School Technology Trust Fund have totaled $62 million, significantly less than anticipated levels. Money from the School Technology Trust Fund has been allotted to county school systems mainly on the basis of districts’ average daily membership. A small portion of the funding was also distributed to school districts according to low wealth formulas in the program’s first year. The money may not be used to hire new personnel but otherwise may be used to implement local technology plans, including purchasing computer hardware, software, and supplies; contracting for services; purchasing telecommunications services; and paying for substitutes while teachers receive technology training. The state has recently passed legislation to give schools the flexibility to use state textbook funds for other purposes, including education technology, according to a state official. The 24 staff members in the Department of Public Instruction’s Instructional Technology Division provide school districts a wide array of services. A team of four technology consultants helps districts to implement and evaluate technology plans, focusing primarily on instruction. Each consultant serves a geographic region of the state and provides on-site consultation, help with resource identification, and plan review. In addition, the state coordinates and supports distance learning by satellite and delivers training and instructional telecasts for teachers and students. The Instructional Technology Division also reviews and evaluates educational materials, including instructional software, and publishes a bimonthly hard-copy review and an online review of recommended titles. One of the instructional materials reviewer’s positions is funded by a professional library journal, which publishes the recommendations. Other ways in which the state is involved in education technology include requiring teachers to obtain technology training as a condition for license renewal and requiring students to pass a computer competency test in eighth grade to graduate. State agencies have also negotiated contracts to provide computers and other equipment at discounted rates to school districts. In addition, the state was among the first to receive a grant from the Technology Literacy Challenge Fund totaling almost $3.7 million for school year 1997-98. The officials we talked with agree that Davidson County Schools has achieved as much as it has with technology because the district has made technology a priority. Around 1990, the superintendent began to take steps to ensure that modest amounts from the regular budget were available for technology. A small portion of a bond issue was also used to buy computers for students. In 1993, a district technology committee developed a 3- to 5-year technology plan outlining the standards and goals for schools as they implemented technology. Two years later, after the district had reached several of its goals, state funding became available through the state School Technology Trust Fund. In response, the district prepared a new 5-year plan that was somewhat broader in scope than its previous plan. The technology director reported that the district is generally on schedule in implementing its technology plan, despite some shortfalls in expected state funding. The district has accomplished a student-to-computer ratio of 6 to 1. Many of the computers have older generation technology, however, so excluding these machines, the ratio would be closer to 8 to 1. The technology director said the district almost has at least one computer in every classroom. Twenty-three of the 26 schools have a schoolwide network, which generally can support two networked computers in each classroom. All schools had at least one Internet connection, mostly using dial-up modems. Four schools were soon to be connected to the district’s wide area network, giving their networked computers Internet access. The district funded its technology plan from a combination of resources. From its operating funds, the district has spent about $150,000 on software in the last 2 years and over $400,000 on hardware. It has also used local funds for several staff positions in schools to support technology. State technology funds have been an important resource to the district, although the amounts have been smaller than expected. These funds have been the main source of funds for the district’s hardware and infrastructure needs. In addition to using state funds specifically provided for technology, the superintendent and district program directors have also taken advantage of the flexible authority of many other state programs and prioritized these funds for technology. As a result, 43 percent of the district’s funding for technology has come from state programs focused on other areas such as vocational education and at-risk students. Parent-teacher organizations have also made technology a priority, with some providing as much as $20,000 to $30,000 per year for technology. Smaller amounts of assistance have come from private and other sources, including several local businesses that supported the purchase of notebook computers. In addition to the technology director, several other staff provide technology support to schools. The district’s two technology educators focus on teacher training and spend most of their time in schools modeling curriculum-related uses of technology for teachers in their classrooms. The district also funds a program that trains teachers to serve as technology mentors for other teachers in their building. District computer technicians, network specialists, and an audio-visual technician perform maintenance on the computer and other equipment. The district’s technology personnel raised the following issues about school technology: insufficient technology personnel, lack of time for fund-raising, uncertain future funding, taxpayer resistance, district ineligibility for some funding sources, and the importance of leadership. District officials reported that one of their greatest needs is technology-related personnel. For example, they noted that the district needs more technology educators. The district’s two technology educators divide their time among the 26 schools and are overworked, according to the technology director. She said she would like to have technology educators serve no more than three to four schools each, as is the case in some neighboring districts. She noted, however, that personnel are difficult to fund because the ongoing cost requires a stable funding source. State technology funds, for example, cannot be used for staff, and, even if they could, these funds have fluctuated greatly from year to year. Officials also noted the community’s strong resistance to increased taxes, making it difficult to consider increasing staff. The district and schools addressed personnel shortages by using teaching assistant positions in the schools for technology and by having teachers mentor other teachers in technology. The technology mentors are not paid for these duties but receive the use of a notebook computer and other equipment. Among the most significant barriers to obtaining technology funding was the lack of time to pursue funding sources, according to the technology director. This was closely related to the general problem of insufficient staff to support the technology program. The technology director said she spends her day handling crises, such as fixing downed servers when maintenance staff are unavailable, making it difficult to find the time to research and write grants. She noted that because of this, she has foregone applying for some state and federal grants and has instead focused more on local foundations and other groups with limited application requirements. The uncertainty of state technology funding has also concerned district staff. After providing $42 million for the program’s first year as planned, the General Assembly appropriated just $20 million for the program’s second year, significantly less than the $71 million outlined in the state’s technology plan. Consequently, the district received about one-third the funding anticipated in the program’s second year. Budget proposals for the program’s third year suggest a continued shortfall from amounts identified in the state plan. The timing of state technology funds is also a problem, according to the technology director. The district often does not know the amount it will receive until after the school year has started. In addition to these concerns, officials noted that voters’ resistance to taxes in Davidson County was particularly strong. The county has one of the state’s lowest property tax rates, and, according to officials, many county residents came there because of these tax rates. The technology director considered the community’s long-standing resistance to taxes a significant barrier to funding technology in schools. The district’s demographic profile also poses a barrier to obtaining technology funding, according to the technology director. She noted that funding sources are often more available for districts with high percentages of students living in poverty. In contrast, Davidson County— described by one official as a blue-collar area—has a relatively small percentage of children living in poverty. It is neither extremely wealthy nor poor. The low poverty rate and the low tax rate combine to create a situation in which the district has the state’s third lowest level of spending per student. The technology director also said it seemed to her that corporations and foundations are more interested in giving to schools where their contribution can improve achievement dramatically. Davidson County, in contrast, has consistently produced test scores above the state average. A key factor in getting technology into their schools, according to several officials, was the strong leadership and direction of the superintendent and technology director. The school superintendent strongly believes in the need for technology and has used his authority to reallocate significant funds to achieve technology goals. Many also noted the leadership provided by the district’s technology director to implement the superintendent’s vision as a crucial element to meeting technology goals. The superintendent and the technology director said that Davidson County’s experience shows that any district can establish a technology program if the goals are realistic and educationally relevant and if it has strong advocates who will persevere to get technology funds. In each district, we examined two schools’ technology programs in depth to determine how local schools were implementing technology programs and what, if anything, they were doing to supplement the funding provided through the district. We asked the district’s technology director to select two schools for us to visit—one considered more advanced in its implementation of technology than other schools in the district and one considered more typical of the district’s schools. Northwest Elementary School was suggested as a school making widespread use of technology; Pilot Elementary School was suggested as a more typical school for the district. Northwest Elementary School is in the northern part of the county, close to Winston-Salem. The elementary school has 875 students in kindergarten through fifth grade, with 9 percent eligible for free or reduced-price lunches and 4 percent who are racial or ethnic minorities. Northwest Elementary School developed a 3-year technology plan in school year 1993-94 and completed the plan in 1 year. The rapid implementation was due in part to state technology funds that were not anticipated when the plan was developed. The school has also benefited from large contributions from the school’s parent-teacher organization for technology—about $84,000 from school years 1993-94 through 1996-97. The school has a student-to-computer ratio of 6 to 1, with most of the computers located in classrooms. Almost one-quarter of these computers, however, are older generation computers. Nearly all classrooms have Internet access using dial-up modems, and the school was soon to be connected to the district’s wide area network, which also provides Internet access. The school’s media specialist is responsible for technology as well as the media center. Officials noted that before the addition of computers, tending the media center was already a full-time job for media specialists and coordinators. The principal said the school has been trying to get a position dedicated solely to technology but has not succeeded. The school also rotates its teaching assistants to supervise the school’s computer lab. This has meant classroom teachers giving up their assistants for part of a day. The school also has four technology mentors, who are classroom teachers who help other teachers in the building integrate technology into the curriculum. The mentors receive no stipend but have the use of a notebook computer for home and school. The principal appreciated the support the school receives from the district but noted that the district needs more staff. He said that if the school had waited for district staff to install wiring, it would not have been ready for connecting to the wide area network when it was. The school paid to install the wiring and was fortunate that a parent donated the technical skills required for putting in the infrastructure. The principal cited the district’s low tax rate and the fact that the district has had no levies specifically for technology as significant barriers to funding technology. He also said the school lacked the staff to actively seek funding sources. Although he had experience in writing grants, he did not have the time to do so. Pilot Elementary School, in the heart of Davidson County, has about 490 students in prekindergarten through fifth grade. About one-quarter of Pilot’s students are eligible for free or reduced-price lunches, and less than 1 percent are racial or ethnic minorities. Pilot’s efforts to introduce technology began in earnest in 1992 when the school obtained four Macintosh computers and automated the media center, according to the school’s media coordinator. In 1993, the school developed a formal technology plan as required by the district in anticipation of expected state technology funds. In the last several years, the school has surpassed its original technology goals, which the media coordinator described as modest. The school has one computer lab and each grade level has one networked computer shared among classrooms. Some primary grade classrooms also have older Apple computers. The student-to-computer ratio is about 6 to 1, including these older machines, and about 9 to 1 excluding them. The school’s newer section is wired for network connections, but the school does not yet have the computers that can take advantage of these connections. The school has one connection to the Internet for student use through a dial-up modem in the media center. The school’s media coordinator divides her time between overseeing the media center and supporting technology, although she said technology consumes most of her time. She trains teachers and students, troubleshoots equipment and software problems, does minor repairs, and installs software on the network. The school also has a half-time technology assistant plus two technology mentors. In addition, the school receives maintenance and technical support from the district, but school officials noted that these functions are understaffed given the many schools in the district and the increase in the number of computers. One of the most significant barriers to the school’s ability to raise its own funds to supplement district technology efforts is the limited incomes of the families in this rural part of the district. The principal appreciated the school’s parent-teacher organization’s contributions for technology— about $9,500 since 1994—but hesitated to pressure them to provide more. The principal also mentioned that not many businesses are located in the school area. Although a nearby furniture manufacturer has provided some assistance, no large corporations or industries are there to fund a computer lab or donate used computers. As for searching for additional funds, both the principal and media coordinator said the school did not have the staff to do this. The Gahanna-Jefferson School District is in a suburban area northeast of Columbus, Ohio. The district serves a population of about 36,000 people and includes the City of Gahanna as well as parts of two townships. The school district has 11 schools, and about 7.5 percent of the students are eligible for free or reduced-price lunches. The district adopted its first technology plan in 1989 and has funded technology mainly with district operating funds supplemented with state assistance. Each classroom in grades 1 through 4 has at least two computers purchased in part with recent funding from a state program. In the Gahanna high school and three middle schools, students have access to computers primarily in computer labs. All Gahanna schools are connected to the Internet through a wide area network. Table III.1 shows summary information about the district, including the extent to which technology has been implemented. As table III.1 shows, Gahanna relied on state funding for about 19 percent of its technology funding. Ohio has had extensive involvement in providing hardware, software, professional development, and technical assistance directly to schools; developing a statewide technology infrastructure; and coordinating partnerships among schools, businesses, universities, libraries, and other public institutions. Recent initiatives have been guided, at least in part, by Ohio’s 1992 State Technology Plan. The plan provided a framework for making state-level policy decisions and allocating resources and is intended to guide schools as they proceed with their own technology planning. Although the state has funded technology directly or indirectly in several ways, state funding assistance for Gahanna has come mainly from Ohio’s SchoolNet Plus program and to a lesser degree from the SchoolNet program—two state programs that have provided substantial funding for technology to school districts statewide. SchoolNet Plus is a $400 million effort to provide at least one interactive computer workstation for every five public school students in kindergarten through fourth grade. The state planned to disburse these funds in three rounds that began in fiscal year 1996 with a portion of the funds targeting districts with low property wealth. As of April 1997, the state reported that about $203 million, which includes all of the first round and part of the second round of funding, had been disbursed to districts. Districts could use these funds to purchase computer hardware and software, provide professional development, or upgrade wiring. Ohio SchoolNet, established in fiscal year 1994, authorized $95 million in state bond sales to finance classroom wiring and computer workstations. Of the total amount, $50 million was set aside to wire Ohio’s 100,000 public school classrooms. (Because Gahanna had already wired its classrooms, instead of funding, it received state credits it could redeem for computers.) The remaining $45 million of state SchoolNet funding was set aside to purchase computers and related equipment for approximately 14,000 classrooms in the state’s districts with the least property wealth. In addition to the SchoolNet and SchoolNet Plus programs, the state of Ohio offers a number of other technology funding programs. These include about $27 million in Technology Equity Grants funded since 1993. The state technology plan provided the road map for using technology in schools, and Ohio’s statewide telecommunication infrastructure provided the interconnecting backbone and served to greatly leverage the kinds of applications that are or will be available in schools. As early as 1976, Ohio had implemented a microwave network that initially connected the state’s 12 public television stations and later grew to connect the state’s 29 educational radio and 10 radio reading stations. The independent Ohio Educational Telecommunications Network Commission partly subsidized the operations of these stations and worked with educational service agencies to provide instructional programming. Recognizing the need to expand the network’s capacity along with many other state agencies’ need to access a high-speed network, the state authorized its Department of Administrative Services to contract with a consortium of telephone companies to provide a statewide fiber optic-based broadband network at substantially reduced rates. The contract, initiated in February 1996, allows all users in the state, including schools, to purchase access to high-speed lines that allow users to access the Internet and other networks and enable the transmission of high-quality data, video, and sound at the same competitive rate. As of April 1997, about 300 elementary or secondary schools had high-speed lines installed under this contract. Ohio has applied to receive an estimated allocation of $8.5 million from the federal Technology Literacy Challenge Fund for school year 1997-98. It plans to use the funds to extend its SchoolNet Plus program into the middle grades. Computer technology in Gahanna schools began in about 1986, when the Gahanna schools and Columbus State Community College developed a partnership that equipped a Gahanna high school classroom with computers to be used by high school students during the day and by college students in the evening. Interest in technology rose in 1989, when a Gahanna high school teacher won a 20-computer lab in a technology and learning teacher-of-the-year contest. The district began developing its first technology plan in the late 1980s with the participation of a committee of teachers, students, and other community members. Implementation goals included providing computer labs, a computer for each classroom, ongoing teacher access and training, and wiring for networking as buildings were renovated. The Board of Education included the plan as part of an operations levy in 1989 that earmarked more than $800,000 over 4 years for technology. However, part of the funding was cut due to lower-than-expected revenues and higher district operating expenses. Most of this 4-year technology plan was eventually completed after about 6 years. Subsequent technology plans focused on equipping classrooms with computers. From 1989 through 1997, the district operating budget provided a total of about $2.5 million for technology. In 1996 and 1997, Gahanna received nearly $465,890 from the state SchoolNet Plus program to provide all elementary schools with software and two computers for each classroom in grades 1 through 4. Computers in both the high school and the three middle schools are mainly located in labs rather than in classrooms as in the elementary schools. All Gahanna schools are connected to the state’s wide area network that provides Internet access at reduced rates. The Gahanna district has a full-time technology director and one full-time maintenance technician who provides equipment and network maintenance. Some maintenance is done on contract, and the district is considering hiring another technician part time. The district has recently established the position of education technologist—for an educator with technology expertise to help and instruct teachers and students in the classroom; it currently has four education technologists. Each is assigned to two or more schools. The district’s technology personnel raised the following issues about school technology: competing education needs, leadership, taxpayer resistance, staffing needs, and the uncertainty of funding. Gahanna officials said that many district needs were competing with technology for funding, particularly teachers’ salaries, so it was critical to convince community leaders and other taxpayers that technology is important. In addition, several top district leadership changes in the past few years hurt the district’s ability to establish technology as a funding priority, according to officials. They hope that the new district superintendent will provide the leadership they believe is needed to establish technology as a district priority. The district has also had three recent operations levy failures that resulted in budget cuts, including a reduction in planned technology funding. Officials reported that the district is trying to educate and inform voters and decisionmakers about the importance of technology by conducting activities such as neighborhood meetings with the superintendent, technology fairs, and demonstrations by school children and the education technologists. Gahanna officials said they believe they need to build district and community commitment to technology. District officials said they would like additional staff for technology maintenance, training, and fund-raising to overcome problems and improve the program. One official said they need another full-time technician to adequately address current equipment downtime of up to 3 weeks, but current plans call for hiring a part-time technician. Officials reported being pleased with the success of the education technologist training approach inaugurated in school year 1996-97. They noted they would like to provide more teacher training to optimize computer use and would like each school to have one education technologist. Finally, officials cited the need for staff to seek new funding sources and write grants. They plan to add a district grants officer position in the next year or two. According to one official, Gahanna’s state technology funds were reduced by about half last year because of a state-level decision to target more of the funding to less affluent districts. District officials expect to continue to receive state funds, although the funds are not ensured and the amounts are not known. The technology director said stable technology funding is important, and district officials are considering some new funding approaches such as a special technology tax levy in the next year or two. District officials are generally positive about future technology funding and expect it to come mainly from district resources. They noted, however, that the uncertainties raised by a recent Ohio State Supreme Court decision calling for a complete overhaul of the school finance system may make it difficult to pass the upcoming regular school levy. In each district, we examined two schools’ technology programs in depth to determine how local schools were implementing technology programs and what, if anything, they were doing to supplement the funding provided through the district. We asked the district’s technology director to select two schools for us to visit—one considered more advanced in its implementation of technology than others in the district and one considered more typical of the district’s schools. Blacklick Elementary School was suggested as a school making widespread use of technology; Goshen Lane Elementary School was suggested as a more typical school for the district. Blacklick Elementary—the newest school in the Gahanna-Jefferson district—has about 364 students in kindergarten through fifth grade. About 4 percent of the students are eligible for free or reduced-price lunches, and about 9 percent are racial or ethnic minorities. When the school opened in 1994, its first principal made technology a priority. She allocated well over half her $250,000 set-up budget for technology, while funding the school library at less than half the normal amount. The school’s parent-teacher organization helped raise funds to complete the library during the first school year. Currently, the school has 73 instructional computers—mostly in classrooms—and the student-to- computer ratio is about 5 to 1. Classrooms in grades 1 through 4 also received state SchoolNet Plus funding and have four computers per classroom. Classrooms in grade 5 have two computers. All classrooms have Internet access through the state’s wide area network. The school’s librarian/media center coordinator spends about half of her time overseeing the school technology program. The principal said she would like a full-time technology teacher who could also help with troubleshooting and repairs. Regarding raising funds for technology at the school, the principal said she and her staff do not have time to write grant proposals because of their other duties. The Blacklick parent-teacher organization sponsors many fund-raisers that support school needs such as the library, gym equipment, and classroom supplies. The organization provided over $7,000 for technology from school years 1995-97. Members said many parents at the school were able to give their time freely—which they believe may not be the case at all district schools. They reported that parents give technology a high priority at their school. Goshen Lane Elementary School has 498 students in kindergarten through grade 5. About 13 percent of the students are racial or ethnic minorities, and about 25 percent are eligible for free or reduced-price lunches. Technology is relatively new at Goshen Lane, with many computers installed just before school year 1996-97. The student-to-computer ratio is about 8 to 1. Grades 1 through 4 have two computers per classroom, and all classroom computers are connected to the Internet through the state’s wide area network. The school also has two laptops, a transportable multimedia computer with a 32-inch monitor, and a 24-computer lab. Kindergarten and grade 5 classrooms do not have computers because SchoolNet Plus funds were used to equip grades 1 through 4. One fifth grade teacher said his class adapts by using the portable equipment and spending 3 hours a week in the computer lab. The one school staff member with technology responsibilities—the media coordinator—reported spending about half of her time on technology responsibilities. According to the principal, the school needs a district education technologist full time instead of half time to help teachers and students. The principal said she would like more training for teachers and more software—particularly software that encourages higher order thinking skills. Hardware is also needed to equip the kindergarten and fifth grade classes. In addition, the principal reported that many demands competed for funding at the school but that she tries to make technology a priority and has used some of her operations budget to purchase technology. She noted that she does not have time to search for potential sources and grant writing is extremely time consuming. According to the principal, the parent-teacher organization is active and manages all school fund-raising. The fund-raising projects thus far, however, have not been for technology purchases. Manchester is a traditional old New England mill city on the Merrimack River in southern New Hampshire. With a population of about 100,000, it is the largest urban environment in the state. Most employment is blue-collar employment, and the ethnic and racial makeup of the population has been changing with the recent addition of Asian, Hispanic, and African American immigrants. The Manchester district developed its first technology plan in 1994. In 1995, the district won a federal Challenge Grant and is connecting all schools to a state-of-the-art network for voice, video, and data. The current student-to-computer ratio is about 9 to 1. Two full-time district technology educators provide technology training for teachers along with a group of about 60 teacher technology experts who receive special training and help other teachers in their schools. Table IV.1 shows summary information about the district, including the extent to which technology has been implemented. Manchester did not receive any of its technology funding from the state, reflecting New Hampshire’s continuing reliance on local support for the vast majority of school funding. Overall in the state, local property taxes provide about 90 percent of school funding, with state funds providing about 7 percent and federal about 3 percent. The state provides no current funding to school districts for education technology. The New Hampshire Department of Education, however, has started several efforts to help districts with their technology programs. As part of a 1996 joint public/private venture called The New Hampshire Technology in Education Initiative, the Department conducted a survey of all school districts to determine the availability of computers and networks. That same year, the Department organized a Technology Committee to develop a plan and related strategies for supporting the effective integration of technology in the state’s education system. The Committee’s efforts resulted in the design for a statewide education technology resource system as well as the 1997 Statewide Education Technology Plan. The goals of the plan include providing classroom computer and Internet access; training teachers; providing effective software and online resources; development of technology plans at the district level; development of a state-level process and structure to provide ongoing planning, coordination, and communication; and promotion of effective technology integration in the education system. The State Board of Education recently added a technology component to the state professional requirements for teacher recertification. Teachers must now participate in 5 hours of activities relative to the application of technology and Internet use. The New Hampshire Department of Education has also applied for federal Technology Literacy Challenge funding and expects to receive about $1 million for school year 1997-98. The state office is requiring district applications to include a strategic 3- to 5-year technology plan and is providing training and technical assistance to districts in developing the plan. Program funding will be distributed to school districts through competitive grants, generally not to exceed $40,000 for single districts or $100,000 for large districts or district consortia. In 1985, the Manchester School District hired two technology staff members to build a district technology program. One had a teaching background, and the other had an accounting and computer background. The two have worked as a team ever since and believe that they have provided the district with the staff to “really make something happen.” When the team began, the district had 90 computers, most of them purchased with federal chapter II funds and located mostly in the elementary schools. In the early 1990s, the district purchased more technology due, in large part, to the efforts of a district superintendent who considered technology a priority and directed year-end district budget surplus moneys to technology. That superintendent also initiated an extensive study of district technology and development of a 5-year district technology plan. The plan called for funding of about $5 million over 5 years. The technology staff presented the plan to a joint session of the school board and the Board of Mayor and Aldermen in early 1995. It was well received by both bodies but was not funded. Later in 1995, the district applied for a Challenge Grant and was awarded $2.8 million over 5 years. The grant has been the district’s main source of funding. As part of the application process, the district developed a consortium of 40 businesses and other community organizations, which continues to grow. The district is using the Challenge Grant to connect all district schools to a state-of-the-art network for voice, video, and data and to buy some additional equipment. Initial implementation started in the high schools in school year 1995-96, in the junior high schools in January 1997, and will continue at the elementary schools during the last 3 years of the grant. The district has organized groups of teachers and staff at the schools to participate in planning and deciding what equipment to buy. In school years 1995-97, the district technology program also received about $80,000 in private grants and corporate cash and in-kind donations such as cable from the Hitachi Corporation. In addition, it used about $300,000 in federal program funding, including titles I, II, IV, VI, and VII of ESEA. The district has two full-time technology educators: one for grades kindergarten through 8 (who was part of the original district technology team) and one for the high schools. These educators provide technology training support to teachers and students. The district also offers teachers about 35 technology training workshops per semester after school and on weekends. In addition, the district has created a group of about 60 teacher experts to train and help other teachers and provide technical support for the district such as sending and receiving messages over the network. Equipment and system maintenance is provided by part-time contracted staff supplemented by the efforts of the technology director and her staff. The district’s technology personnel raised the following issues about school technology: government structure as a barrier to obtaining funds, competing education needs, taxpayer resistance, and staffing needs. District officials said the school district’s status as a city department is a barrier to securing technology funding. The school district budget requires the approval of both the school board and the city Board of Mayor and Aldermen. Consequently, the district competes with other city departments for local funding. Officials reported that this has been a funding barrier because the city Board does not always understand how budget actions affect district programs, including technology. One official said that considerable turnover in district leadership positions, including superintendent, assistant superintendent, and business manager, had made it hard for the district to focus on whether to make technology a priority. In addition, one official said the school board has the misperception that the Challenge Grant is completely paying for district technology and that therefore no additional budget funding is needed. District officials also reported that many important district needs, including Special Education and English as a Second Language programs, compete with technology for available district funds. Special Education costs made up 26 percent of the total 1997 district budget and are expected to increase to 27.5 percent in 1998. The district must spend more than $800,000 over the next 2-1/2 years on its English as a Second Language program as part of an Office of Civil Rights compliance agreement. According to one official, the immigrant population in the district is growing rapidly—at about 3 percent a month for the past 6 months—and 50 languages are spoken in the schools. District officials said that the district has strong voter resistance to raising community property taxes, and elected officials such as the School Board and Board of Mayor and Aldermen are sensitive to the voters’ demands. One official noted that the large retiree population may not understand classroom uses of technology, and another said that many in the population are on fixed incomes and are struggling to keep their homes. Another official noted that local taxes currently fund most of the district’s budget, and it is unlikely that voters will approve higher rates. Staffing issues surfaced in two areas. Officials reported lack of time and staff to seek additional funds outside the district and write grants. For example, one member of the technology staff noted that when the district applied for the Challenge Grant, the technology staff had to drop everything for a month to fulfill the grant requirements, including creating a consortium of 40 businesses and community organizations. The official noted that if they had adequate lead time to complete grant applications, they would be more likely to be able to apply. Officials also reported maintenance staff shortfalls (with just one part-time contract technician) but reported plans to add a full-time technician beginning in fiscal year 1997-98. A technology official reported that classroom computer downtime is sometimes more than 2 weeks and at one time this year a backlog of more than 50 repairs existed. The official reported that the district technology staff have been filling in by doing most of the troubleshooting, which interferes with their other job responsibilities such as teacher training. One official said that two district technology trainers would probably be sufficient if they could spend all their time on training rather than on technical support activities. In each district, we examined two schools’ technology programs in depth to determine how local schools were implementing technology programs and what, if anything, they were doing to supplement the funding provided through the district. We asked the district’s technology director to select two schools for us to visit—one considered more advanced in its implementation of technology than other schools in the district and one considered more typical of the district’s schools. When we visited Manchester, it had completed implementation of its Challenge Grant at its three high schools. Elementary school implementation had not yet begun. We visited Memorial High School to observe the full implementation of the program. We also visited Wilson Elementary School that was suggested as an elementary school considered relatively well equipped with technology; Webster Elementary School was suggested as an elementary school more typical of the district. Memorial High School has about 1,600 students in grades 9 through 12. About 6 percent are racial or ethnic minorities, and 7 percent are eligible for free or reduced-price lunches. Computer technology arrived at Memorial in the mid-1980s, and in 1988 the district bought 25 computers for the school’s computer laboratory. Implementation of the district Challenge Grant initiatives was completed at Memorial in 1996. About 65 percent of the school’s 220 computers are now in classrooms and the student-to-computer ratio is about 7 to 1. The school has two computer labs: one for students to use individually to complete assignments and the other for classes. All classrooms have been wired for Internet access—mainly through a wide area network with high-speed lines—and about 80 percent of the classrooms have computers. The school has no full-time school technology staff. Two teachers, however, spend about one-eighth of their time troubleshooting for the computer labs, and six teachers serve as technology mentors providing training to other interested teachers within and outside the school. The school principal reports that about 95 percent of the faculty and staff use computer technology and many can provide additional troubleshooting and other assistance. District staff perform major maintenance. According to the school principal, the school has performed no fund- raising for technology. The parent-teacher organization typically provides funding for noninstructional projects, such as student trips and athletics, but has not yet provided technology funding. Wilson Elementary School has about 476 students in kindergarten through grade 4, about 25 percent of whom are racial or ethnic minorities. In school year 1996-97, it was one of two district schools with schoolwide title I programs, and about 73 percent of the students were eligible for free or reduced-price lunches. The families of students tend to be transient: in school year 1996-97, the student turnover rate was over 100 percent. The school prepared its first technology plan in school year 1994-95 as part of its title I schoolwide plan. It basically follows the goals and objectives of the district plan. In school years 1994-95 and 1995-96, the school received $19,146 in title I funds for technology. Challenge Grant initiatives have not yet been implemented at Wilson or other district elementary schools. During the principal’s first year at Wilson (school year 1996-97), she included technology as one of four school goals, emphasizing integrating the use of computers into the educational curriculum. Eighty-five percent of the school’s 27 computers are in classrooms, and the student to computer ratio is 18 to 1. School officials said that they have little time to devote to fund-raising and most school efforts have focused on getting students gloves and socks for the winter and other basic needs. They believe the poverty level of the students’ families also limits the school’s ability to raise funds. The school has not been able to sustain a parent-teacher organization. Officials report that in September of each year, parents of kindergarten students are enthusiastic about supporting school activities and fund-raisers but, by about November, parent attendance completely drops off. Officials believe that parents are contributing as much as they can by participating in activities such as multicultural week and love-to-read week. One official observed that while the socioeconomic level of school families has limited fund-raising efforts, it has made the school eligible for title I funding with which it has been able to purchase technology. Webster Elementary School has about 720 students in kindergarten through grade 6. About 16 percent are eligible for free or reduced-price lunches. About 10 percent of the students are racial or ethnic minorities. The school has served mainly an upper and middle income group of families; however, recent redistricting has added a central city area, increasing the school’s economic and cultural diversity. Challenge Grant initiatives have not yet been implemented at Webster or other district elementary schools. Webster has 46 computers; 91 percent are located in classrooms. None of the classroom computers has Internet access. In school year 1995-96, the principal organized Partners in Education, a committee of parents, teachers, and local business representatives to address the school’s technology needs. The committee developed a plan to raise $27,000 over 1 year to equip the first and second grades with eight new computers and software. The plan focused on involving parents and businesses in finding funding sources and other support. The committee initiated many large and small fund-raising efforts, for example, applying for several corporate grants. The committee received $6,900 in matching funds from one company, contingent on the school’s obtaining the rest of the $27,000, and was awarded an additional $15,000 in grant funds. A number of smaller efforts included “Pennies for Technology,” which has raised $600 by placing jars for contributions in local businesses. In addition, the parent-teacher association and other school fund-raisers provided $3,500, and the principal and committee members made presentations to local businesses to solicit their support. The committee also received supplemental funding from the district to help them reach their goal. The school principal said that the committee had originally hoped to fund computers for the third and fourth grades the same way but noted that fund-raising on this scale is a daunting effort. He noted that seeking grants and funding sources beyond the school is difficult because school staff do not typically have the time and expertise to do so. School officials also reported concern about parent burnout from fund-raising efforts because of the many school requests for help and participation in fund-raising activities. Roswell Independent School District is located in rural southeastern New Mexico approximately 200 miles from any major city. This community of about 50,000 is largely agricultural, but its varied economy also includes manufacturing and oil production. The district’s overall technology goal is a completely networked school district that provides students with adequate access to the technological tools to complete collaborative research and learning projects. The district has developed one model technology school to help it discover the possibilities and generate the questions that need to be addressed to achieve this goal. Schools in this district use both Apple and IBM platforms, and each school has developed its own technology implementation plan. The district, however, approves each school’s plan and provides maintenance and technical support for each school. In 1997, the district reached a significant milestone in its overall technology plan by connecting all schools to the district’s wide area network. Table V.1 shows additional summary information about the district, including the extent to which technology has been implemented. New Mexico provides funding earmarked specifically for education technology. The state also provides on average about 74 percent of its public schools’ revenues, and these funds are considered noncategorical, allowing school districts to determine how they are spent. Because the state plays a significant role in meeting basic funding costs and provides great flexibility to districts in using these funds, the state’s overall role in funding technology may be understated in table V.1. According to a New Mexico state official, the first major New Mexico legislative action directly affecting education technology in public schools was a 1984 appropriation of $2.1 million to establish New Mexico Technet, a statewide telecommunications network. The next major action occurred in 1993, when the New Mexico Legislature requested that the State Department of Education develop a state plan for the technology use in prekindergarten through twelfth grade classes. In 1994, the state passed the Technology for Education Act, providing $3 million in technology funding—an amount equal to $9.64 per student. A significant feature of this appropriation was the inclusion of training among the items that could be purchased with the funds. The act also established a technology fund in the State Treasury, an Educational Technology Bureau in the Department of Education, a process of local and school district planning, and a formula for distributing state-provided education technology funds. In addition to the $3 million in per pupil funding, another $3 million was appropriated for computer-based language arts literacy programs for elementary school students, and $1.9 million was appropriated in special technology funding earmarked for certain schools and districts. Since 1994, New Mexico has continued its per pupil technology funding for districts in the amount of about $3 million per year. Special appropriations funding targeted to specific districts to purchase education technology has also continued and has ranged from $1.1 million to $2.2 million each year. In 1997, the legislature provided $4.4 million for technology for New Mexico students. As with previous state appropriations, this funding was provided on a per pupil basis and amounted to $12.50 per pupil. Specially earmarked funding was not appropriated in 1997 because the bill containing these funds died under a legislative filibuster. In addition to this state funding, the state of New Mexico received $1.6 million from the federal Technology Literacy Challenge Fund, which it distributed to districts on a competitive grant basis for the 1997-98 school year. State support for education technology has included more than funding. The state Educational Technology Office’s staff of four handle statewide technology planning and broker school district planning efforts. This brokering role, according to one state official, involves efforts to help school districts by identifying funding and partners that could help districts fund their technology needs. The small number of staff in the state education technology office limits the direct assistance the office can provide to school districts, according to one state official. The office does organize statewide professional development and training, however, and, in conjunction with Los Alamos Labs, sponsors a regional technology support group that assists districts statewide. Serious consideration of technology use in the Roswell Independent School District began in the late 1980s as district officials debated the value of technology and how to implement it. By school year 1993-94, these efforts culminated in a district technology plan developed by a committee of representatives from each school, district staff, and some community members. Shortly thereafter, as district officials were planning a bond measure to seek funding for a variety of capital projects, including technology, several local business and community members approached district officials, expressing interest in the district’s approach to implementing technology. These community members were part of a local nonprofit educational foundation, the Roswell Educational Achievement Foundation, and they hoped to help the district avoid the mistakes that the business sector had made in implementing technology. The Foundation got involved with the district’s technology plans and participated in establishing the district’s technology development and funding policy. In addition, the Foundation provided significant funding through a competitive grant process for one elementary school—Military Heights—in implementing a model technology program that other district schools could copy. The Foundation intended for Military Heights to be a showcase for technology use in schools districtwide. Both district and Foundation officials believe that the Foundation’s efforts were instrumental in helping the district to pass a bond measure in 1995. Passage of the bond and proceeds from 2-mill levies that included some funds dedicated for technology helped considerably in implementing the district’s technology program, according to district officials. Together these sources, along with about $290,000 in state matching funds, provided the district with about $4.9 million for technology through school year 1996-97. The district further funded the technology program using district operating funds and state technology funds to help pay for items that the bond or levy could not fund, such as staff salaries and training. In addition, the district has also obtained significant funding for software through a negotiated agreement with the local teachers union. This agreement allowed the district to use some funds for software that otherwise would have been included as part of a salary increase for teachers. The agreement provides for a one-time allocation of $65,000 for software to each district school. In the first 2 years of the agreement, over $1 million has been provided to 16 of Roswell’s 22 schools for software purchases. Federal and private funds provided the remaining sources for the technology program. Of the federal funds, title I money was the largest source, supplying almost $1 million to pay for salaries and hardware. Private funding was split between a monetary donation from the Roswell Educational Achievement Foundation and in-kind donations from the IBM Corporation. Almost all of the private funds received by the district for technology went to the district’s model technology school, Military Heights Elementary. The district’s technology personnel raised the following issues about school technology: staffing shortages, competing education needs, and the uncertainty of future funding. District officials had major concerns about staffing shortages in the technology area. They cited staffing shortages as affecting the time technology staff had to search for and complete grant applications as well as their ability to provide technical support and perform needed maintenance. The district’s technology director position is only a one-third time position because the technology director is also responsible for several other district programs. The district has almost six full-time equivalent positions supporting its technology program (such as technical support and maintenance staff), but the technology director believes this staffing level is not adequate, noting the long work hours and high stress levels of some support staff. As a result, the technology director believes the number of district technology staff needs to be at least doubled. The technology director also had concerns about competition for funds at the local level (that is, competing with the city and county for bond funds) and at the state level. In addition, several district officials cited building maintenance and facility needs as another competing demand. One official said that the district had decaying buildings and needed additional classroom space. Another official noted that the district had $62 million worth of facilities needs. Furthermore, officials noted that requirements to meet state or federal mandates, such as asbestos removal, meant that less funding was available for other programs such as technology. While recognizing the value of these other needs, district officials expressed concern about the ability to fund technology given limited resources. District officials also expressed uncertainty about handling some future technology costs, especially for ongoing personnel-related matters such as maintenance and technical support. The technology director also had concerns about the district’s ability to upgrade equipment and replace hardware. However, he was more optimistic about funding software (because state instructional material funds can be used for this purpose) and about funding telecommunications access charges (because this is a relatively low-cost item for the district). The anticipated increases in these costs associated with the development of the district’s wide area network and the aging of current equipment heightened district officials’ concerns about hardware and personnel. Although some uncertainties remained, district officials were optimistic about funding future ongoing technology costs through such sources as local levy funds, state funds, and district operational funds. In each district, we examined two schools’ technology programs in depth to determine how local schools were implementing programs and what, if anything, they were doing to supplement the funding provided through the district. We asked the district’s technology director to select two schools for us to visit—one considered more advanced in its implementation of technology than other schools in the district and one that was more typical of the district’s schools. Military Heights Elementary was suggested as a school making widespread use of technology. Valley View Elementary was suggested as a more typical school for the district. Military Heights Elementary has about 450 students in kindergarten though grade 6. Almost 60 percent of the students are eligible for free or reduced-price lunches, and almost half of them are racial or ethnic minorities. In 1994, after winning a competitive grant from the Roswell Educational Achievement Foundation, Military Heights implemented a model technology program according to the grant’s specifications. The grant required all teachers and administrators at the school to implement technology using a “full commitment model” that involved integrating computers into instruction and the curriculum. It also required an after-school technology program and the involvement of parents in the technology program. The Foundation provided funding to implement the model program ($123,000), and the district provided matching funds ($123,000). In addition, IBM got interested in this project and provided software, technical support, and training valued at over $150,000. Currently, Military Heights has five computers in each regular instruction classroom, plus additional computers in the school’s library and in special education classrooms. The school’s computers have been networked from the outset, and students have access to about 160 software programs. After the school received its grant funding, all teachers took a 2-week summer training program to prepare them to integrate the computers into their classroom instruction as outlined by the full commitment model. Teachers have received additional technology-related training since then to improve their skills. The school’s technology coordinator is a full-time teacher who is also responsible for running the network and troubleshooting problems that arise. The coordinator helps teachers whenever time is available (such as during lunch), conducts some training sessions, and performs activities such as backing up the network and loading software. For serving as technology coordinator, the teacher receives a small stipend. This biggest technology concern of officials at Military Heights is identifying funding to maintain their model program. Because Military Heights is technologically ahead of other district schools, school officials believe they may get lower priority for future district funding. This situation, combined with difficulties in identifying alternative funding sources, has them concerned about their ability to upgrade and replace equipment in the future. Although the school receives some assistance or equipment from other activities, such as school and parent-teacher organization fund-raising programs, business partnerships, and a local grocery store’s program (that allows exchanging grocery receipts for equipment), these sources are inadequate to fund the more significant technology costs that the school will probably face in the future when system upgrades and replacements are needed. Valley View Elementary has about 400 students in prekindergarten through grade 6. Fifty-six percent of the school’s students are eligible for free or reduced-price lunches, and about half are racial or ethnic minorities. Valley View developed its first technology plan in school year 1993-94; it had a 3- to 5-year implementation time frame. However, the school accomplished the first 2 years of the plan’s objectives in the first year, according to the principal. He attributed this success to staff cooperation and input and to the priority the school has placed on technology. Currently, the school has a student-to-computer ratio of about 6 to 1, and the school is moving away from a computer lab concept to putting technology into the classrooms. Every classroom can access portable multimedia equipment, including a computer, television, and video cassette recorder. According to Valley View’s principal, the school’s computer equipment is ready to go online when the district gets its network operational. Valley View has financed its technology program mainly with district and state funds, although the school and the parent-teacher organization have also contributed funding for the technology program in the past 2 years. The school has raised funds mainly through ice cream and school picture sales, while the parent-teacher organization has had community fund- raisers. These funds have helped to pay for technology-related supplies such as paper, printer cartridges, and ribbons, among other things. Like Military Heights, Valley View has also received a few computers and other equipment by participating in the local grocery store’s receipts-for-equipment program. Although Valley View has received significant technology funding from the district, school officials remain concerned about the decline in district- provided operating funds in the last few years and restrictions on bond funds that limit what they may buy. The expected rise in technology costs as technology changes and develops heightens this concern. These funding issues, combined with the anticipated maintenance cost increases associated with aging school buildings districtwide, concern the principal as he considers the district’s ability to keep up with technology costs. Officials also raised concerns about the tradeoffs that school officials have had to make to fund technology by using school activity funds previously used for other needs, including eyeglasses, clothing, and shoes for some students. As at Military Heights, Valley View’s technology coordinator teaches full time and receives a small stipend to perform the additional technology duties. In the spring of 1997, the technology coordinator devoted much more time to the school’s technology program because she had a student teacher who could perform many of her classroom duties. The technology coordinator believes, however, that as the technology program grows, the school will need a full-time technology coordinator. Seattle Public Schools is the largest school district in Washington state, with about 47,000 students. In this urban school district, about 60 percent of students are racial or ethnic minorities, and 21 percent have non-English-speaking backgrounds. The district also has a high proportion of children from poor families; 43 percent are eligible for free or reduced- price lunches. The school district developed a districtwide technology plan in 1991 that included, for each district school, a 30-station networked computer lab or networked computers for each classroom. A special technology levy for about $22 million passed in November of that year, providing the major portion of the district’s technology funding to date. Levy funds were used to acquire significant amounts of hardware, including take-home computers for slightly more than 50 percent of the teachers. Failure of a second levy 5 years later has slowed planned goals, although most schools currently have at least one Internet connection and about one-third are on a wide area network. Table VI.1 shows additional summary information about the district, including the extent to which technology has been implemented. Seattle Public Schools relied on state funding for less than 5 percent of its technology expenditures, reflecting the state’s relatively limited role in technology funding. The state’s technology plan, developed in 1994, outlined 12 recommendations intended to provide a comprehensive, systemic approach to education technology for the state. The plan also estimated that it would cost almost $500 million to implement these recommendations over a 6-year period. It also provided ideas, models, and examples of technology implementation to the districts because in Washington much decision-making about school policy is done by local districts. State funding for education technology has generally been provided as one-time appropriations rather than as multiyear funding. In 1994, the state legislature chose to use windfall funding from the general operating budget to provide about $19 million directly to schools for the purchase of instructional materials or technology-related investments. In 1995, the legislature appropriated $10 million for the 1995-97 biennium for technology to be distributed through competitive grants to districts, and in 1997 it authorized another $39 million in competitive grant funding for the 1997-99 biennium. In addition to these funds, another $8.5 million was provided during these two biennia to support the state’s Educational Technology Support Centers (ETSC), which provide technology support to school districts. Other state funding available to districts includes grants for staff development, which are often used to provide technology-related professional development for teachers. Washington also received about $2.6 million in federal Technology Literacy Challenge Fund moneys to be distributed as competitive grants to consortia of school districts in school year 1997-98. The state education agency’s technology office (with a staff of five) and nine regional ETSCs coordinate state education technology efforts. The state, through the ETSCs, tried to reduce the cost of school technology by negotiating reduced software and hardware rates. In addition, the state is coordinating the development of a high-speed network for Internet and interactive video that, when completed, will link school districts, community and technical colleges, and universities for a cost of about $54 million. Other state technology initiatives include the operation of the Washington Television System and a data system called WedNet, used by 276 of the 296 school districts to transport administrative data. The state agency also provides some technical assistance and several online resources, including a list of funding opportunities. In addition, the agency is involved in the STAR schools program and several grant projects, including a partnership with the Washington Education Association that provided laptop computers and training for 1 percent of the state’s teachers. Seattle’s initial use of computers began in the early 1980s with early applications of the technology focusing on sharpening students’ basic skills. In subsequent years, schools demonstrated additional educational applications, including introducing online circulation systems in libraries to aid research and communicating with students in other countries. In 1991, the district developed a comprehensive, districtwide instructional technology plan outlining goals and objectives for using school technology. The $75 million plan included a 30-station networked computer lab for each school or networked computers for each classroom. In addition, the plan provided for other equipment, such as a television and video cassette recorder, for each classroom. The plan was intended to be implemented over 6 years and funded in three phases using special levies. Seattle voters passed an initial special technology levy to begin implementing the technology plan but did not pass a subsequent levy to fund the next phase. The first levy passed in November 1991, which provided about $22 million for instructional technology. Schools focused their portion of the levy funds heavily on acquiring computers and peripherals. Before the levy the ratio of students to computers was 38 to 1. By 1995, this ratio had been reduced to 8 to 1. The district also used levy funds to automate school libraries and to provide take-home computers for about half the teachers. In 1996, the district approached voters with a $75 million levy proposal for phase II of the plan. The original plan had changed significantly to include both district administrative and instructional needs through one districtwide network, according to the district’s technology director, and a portion of it was to address the district’s network infrastructure. Although the proposal received more than 50 percent of the votes, it fell short of the 60-percent approval needed for school district levies in the state. With the failure of the 1996 technology levy, the district did not reach its planned goals. According to the district technology director, the student-to-computer ratio, planned at 5 to 1, is now about 7 to 1. Most classrooms do not have Internet access, and building infrastructure problems, such as inadequate electrical power, continue to prevent some schools from using available technology. During our study, the district estimated its technology needs to be about $120 million to $130 million because of changes in technology since the last plan was developed and the need to replace aging hardware in schools, much of which is now 5 years old. The district is considering a special capital levy measure for early 1998, and some of these funds will probably be used to further the district’s wide area network, update electrical power in buildings, and provide money to schools to upgrade computers. The district’s technology personnel raised the following issues about school technology: few alternatives to special levies, challenges of funding through special levies, and obtaining other funding sources. Seattle Public Schools has relied heavily on special levies to fund technology partly as a result of the limited availability of other major funding sources. The district technology director reported that most of the district operating budget is already being used for critical needs, such as special education or reducing class sizes, making it difficult to redirect these funds to technology. The district cannot increase its operating budget because state school finance laws limit the amount of funding districts may raise locally. In fact, according to the district, it reduced programs and services by about $15 million between 1995 and 1997 due to funding shortfalls. Regarding state funding, Seattle has received some state aid for technology, but the amounts have been relatively small compared with the district’s needs and offered as one-time grants rather than as multiyear funding. The district technology director believes the most significant barrier to funding school technology is that although the state considers technology part of basic education, state funding for basic education has not changed to accommodate the additional cost of integrating technology into schools, forcing districts to turn to less reliable sources of funding technology such as special levies. Several features of special school levies in Washington state make them a difficult funding source for school technology. First, to pass a school levy, state laws require a minimum turn-out equal to 40 percent of the number of people voting in the last general election, and 60 percent of these voters must approve the measure. According to officials, these conditions can pose a challenge in Seattle, where just 18 percent of voters have school- aged children and where districts are prohibited from actively campaigning for their own levy initiatives. After a history of passing both general operating and special levies, the district has experienced some levy failures in recent years. The district technology director commented that levies had been affected by taxpayer fatigue due to the many tax initiatives presented to voters, including those for public transit, law enforcement, libraries, and sports facilities. The district also has other needs requiring special levy funds, including about $275 million worth of deferred maintenance needs, according to a Seattle official. Relying on special levies to fund technology also means having to appeal again to voters every few years to ensure that schools have current hardware and software. In addition, special levies have limitations on their use. They are restricted to capital expenditures and so generally may not be used to purchase software, provide maintenance, or fund technical support. Levy funds, for example, may be used to install a telephone line but not to pay the monthly charges. These restrictions have required districts to find other ways to support many of their noncapital technology costs. The district has sought other types of funding with some success. Most notably, it won a $7 million Challenge Grant in 1996. These moneys are helping to create new learning environments that connect students, parents, and educators to workplaces through electronic information systems and to develop a new career track for high school students to prepare them for Microsoft certification and future employment in technology. The district has also received about $1 million in funding and in-kind donations from foundations and corporations. Outside sources of funding, however, have not necessarily been easy to obtain. Developing new sources of funds takes time, and the technology director reported not having enough staff to identify and tap such sources. He also said that grant opportunities often provide limited seed money for innovative new programs. Seattle has used such funds to establish model programs in some schools, but expanding the models districtwide depends on the district’s finding additional resources. The technology director also noted that businesses and foundations tend not to support ongoing costs such as technical support or telecommunications charges. One helpful partner for the district has been the Alliance for Education, a private nonprofit educational foundation comprising representatives of several major local corporations and others interested in education. The Alliance has helped Seattle develop new sources of funds by engaging business and community support for districtwide and school programs. In the technology area, the Alliance has helped channel equipment to schools as well as provide training opportunities for teachers. A recent major focus of the foundation has been coordinating an effort to wire 63 of the district’s schools for high-speed Internet access. Toward this end, the Alliance has sought funds, grant opportunities, and in-kind donations of equipment and training and has also helped to recruit and deploy skilled volunteers. The foundation hopes to complete this project by the end of the 1997-98 school year. The Alliance is still exploring ways to support the district’s technology efforts, but, according to one representative, is not inclined to support ongoing program costs such as for staff positions or maintenance. In each district, we examined two schools’ technology programs in depth to determine how local schools were implementing technology programs and what, if anything, they were doing to supplement the funding provided through the district. We asked the district’s technology director to select two schools for us to visit—one considered more advanced in its implementation of technology than other schools in the district and one considered more typical of the district’s schools. Nathan Hale High School was suggested as a school making widespread use of technology; Wing Luke Elementary School was suggested as a more typical school for the district. Nathan Hale High School is a 4-year senior high school with approximately 1,100 students. About 39 percent of these students are eligible for free or reduced-price lunches, and about 58 percent of the students are racial or ethnic minorities. Initial efforts to develop the school’s technology program began in 1991, when the school used some one-time state funding and some windfall funding from the district to develop a technology lab. When the district’s technology levy passed in 1991, a school committee developed and the faculty approved a 5-year school technology plan. The school received about $300,000 in levy funds in 1992 to implement the plan and an additional $150,000 in district funding in school year 1993-94 to further build the program. Since 1992, the technology program at Nathan Hale has expanded to over 300 networked computers with every classroom connected to the Internet and the school’s network linked to a high-speed telecommunications line. In 1994, the district’s printing and graphics center was moved to the Nathan Hale campus, where students can use equipment for instructional purposes and produce materials for the school and district. Nathan Hale has had a full-time technology coordinator from early on in its technology program. In its first year, the position was funded by sacrificing one teaching position. Since then, discretionary moneys in the school’s budget have funded the position—a decision that involves approval by the school’s teachers. The technology coordinator has developed student and staff training for computer technology in the building, managed the network, served as head of the technology committee, supervised student network assistants, and repaired computers and software. In addition, he has solicited funds and donations for the school’s technology program. In part because of budget cutbacks, however, this position is being funded as a half-time position in school year 1997-98. Obtaining funds to replace existing hardware appears to be the most significant technology issue facing the school today. According to the technology coordinator, much of the equipment needs to be replaced because it is now over 5 years old and is becoming obsolete. Because the cost of replacing technology is so high, however, the technology coordinator does not know where to obtain the large sums needed to continue with the technology program. The school principal stated that the school would seek the additional funding needed to preserve the program through whatever means are available. Wing Luke Elementary School, located southeast of downtown Seattle, serves about 270 children in kindergarten through fifth grade. The school has a high proportion of students who are racial or ethnic minorities—a little over 40 percent are Asian and about one-quarter are African American. About 70 percent of its students are eligible for free or reduced-price lunches. The school has multi-age classrooms and uses computers in the classrooms mainly for writing and research. Key development of Wing Luke’s technology program began in school year 1991-92, when the school received a $200,000 federal magnet grant to develop a technology program. The grant funding, provided to the school over a 2-year period, was used to buy equipment such as computers, software, and furniture for the classrooms. Additional funding for the technology program came from about $85,000 in levy funding received in 1992 and used to meet the needs that had not been met by the magnet funds. Additional funding from state, district, and private sources has also been used for technology, but the amounts have been small compared with the federal magnet and levy funding. Presently, the school has one computer for every five students but does not have a building network linking the computers together. During the federal grant period, Wing Luke had a full-time technology coordinator paid for, in part, by grant funding. This coordinator played a large role in developing the technology program by making program purchases, training teachers in using technology, and providing technical support to maintain the system. After the grant period ended, the coordinator position became an added responsibility for a full-time teacher rather than a separate position. The teacher now serving in this position receives a stipend to provide technical support for the program but is not involved in training teachers as the full-time technology coordinator had been. Her main role is troubleshooting problems and trying to fix broken computers or printers. She typically performs these duties whenever she can such as after school and during lunch. The school also receives technical support from the district, and, as Wing Luke was bringing some of its systems online, lack of support was an issue. However, one school official stated that current support is meeting the school’s needs. Since the federal magnet grant and levy funding received 5 to 6 years ago, Wing Luke has been able to secure little additional technology funding. As an elementary school with one of the highest poverty rates in the Seattle district, located in a community with limited resources, Wing Luke has found it difficult to obtain parent or local business funding for its technology program. These factors, coupled with the limited time available for the principal to seek grant funding sources, make the school reliant on district funding for some technology. However, with the district’s budget cuts and with the failure of the 1996 technology levy, district funds for technology in the past few years have been limited at Wing Luke. One recent development that may provide some technology assistance has been an offer by the Alliance for Education and the school district to help Wing Luke get its building wired for a network connection to the Internet. According to one school official, without the district’s and Alliance’s help in obtaining a corporate sponsor to provide matching funding, Wing Luke would be unable to participate in this program. In addition to those named above, the following individuals made important contributions to this report: Linda Y.A. McIver, Dawn E. Hoff, and Barbara A. Billinghurst helped conduct the fieldwork and write the report; Linda W. Stokes helped conduct the fieldwork; Andrew C. Scott provided guidance on computer technology; Ellen K. Schwartz helped with the research design; Dora C. Baltzell provided advice on data collection instrument design; Stanley H. Stenersen guided the message development and report writing; Sylvia L. Shanks served as attorney advisor; and Marlene S. Shaul and James R. Sweetman, Jr., served as technical advisors. 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 five school districts funded their technology goals and their difficulties in finding those resources, focusing on: (1) the funding sources school districts used to develop and fund their technology programs; (2) the barriers school districts have faced in funding the technology goals they set, and their efforts to overcome these barriers; (3) which components of districts' technology programs have been the most difficult to fund, and what have been the consequences; and (4) how the districts plan to handle the ongoing costs of the technology they have acquired. GAO noted that: (1) the five districts that GAO studied used a variety of ways to fund their technology programs; (2) funding sources included money from district operating budgets, special technology levies and bonds, state and federal funds, and private and other contributions; (3) most districts received a majority of funding from one source, although this funding source varied by district; (4) technology directors in the five districts have cited a variety of barriers to obtaining the funds needed to implement technology programs; (5) in all five districts, technology had to compete for funding with other needs and priorities, including school building maintenance, repair, and construction, mandated programs, and additional teachers to handle increased enrollment; (6) community resistance to higher taxes, according to district officials, limited all five districts' ability to raise more revenue; (7) technology directors also cited barriers to obtaining other sources of funding, such as business contributions or grants, particularly because the districts lacked staff to manage fund-raising efforts; (8) furthermore, some officials reported that demographics made them ineligible for some grants; (9) program components that were hardest to fund, technology directors and others said, were those heavily dependent on staff positions; (10) staffing was difficult to fund because some funding sources' could not be used for staffing and because some sources were not well suited for this purpose; (11) to support the ongoing and periodic costs of their technology programs, the districts planned to continue using a variety of funding sources largely as in the past despite some of these sources' uncertainties; (12) most planned to continue to fund annual ongoing costs, such as maintenance and technical support, with district operating dollars; (13) officials were not sure, however, how much these sources would provide in the future as program needs grow; (14) the periodic costs of eventually upgrading and replacing equipment, software, and infrastructure also faced uncertain funding; and (15) officials in some locations noted that at times major funding sources fell significantly short of expectations. |
Since 1992, DOD has obligated more than $2.5 billion of the over $3 billion the Congress has appropriated to help CTR recipient countries destroy weapons of mass destruction, transport and store weapons to be destroyed, and prevent weapons proliferation. Early in the program, CTR assistance was largely provided to recipient countries in the form of equipment, such as cranes, trucks, and cutting tools. As the program matured, most of the assistance provided was in the form of services, such as the dismantlement of Russian nuclear submarines that are contracted for or provided by the CTR program to recipient countries. Additionally, other costs have been associated with the program, such as travel expenses, the defense and military contacts program, and contractor support. Figure 1 shows the level and types of assistance provided from fiscal years 1992 through 2000. In 1992, DOD began providing equipment to recipient countries for use in destroying weapons of mass destruction and improving the infrastructure needed to destroy these weapons. By the mid-1990s, DOD began to hire U.S. companies to coordinate and integrate the destruction of the recipient countries’ weapons of mass destruction because these countries claimed they could no longer afford to complete the work and were falling behind schedule. When work is undertaken at sensitive facilities where access is limited or denied, DOD often contracts directly with recipient country contractors. DOD uses the following three basic procedures to provide oversight and maintain accountability for CTR assistance: (1) audit and examination team visits, (2) routine program management, and (3) intelligence analysis. At the start of the CTR program, bilateral agreements were signed with recipient countries that established the United States’ right to determine if assistance is being used for its intended purposes. To implement its rights under these agreements, DOD initially developed what it calls “audit and examination” procedures to account for CTR-provided equipment. Under these procedures, a DOD team documents equipment condition and use by visiting sites to inspect the equipment and reviewing documents to determine its use, a process of essentially taking an inventory of equipment provided under the program. CTR assistance provided in the form of service contracts is generally overseen and accounted for under the program management function. Program management entails the continual involvement of DOD officials throughout the life of the project to ensure proper use of all services and training before payment, in accordance with Federal Acquisition Regulations. All contracts for services with recipient countries are awarded on a firm-fixed-price basis; that is, contract milestones must be met and work accepted by a U.S. government representative before payment is authorized. The Defense Contract Audit Agency reviews all contract costs and conducts audits of U.S. contractors involved with the CTR program. To compliment its audit and examination and program management oversight, DOD also uses information provided by the intelligence community to account for CTR assistance. Initially, much of the CTR assistance provided consisted of equipment, whereas now the vast majority of assistance is provided in the form of contracted services. As illustrated in figure 2, in 1994, 45 percent of CTR assistance provided was equipment compared with less than 1 percent in 2000. DOD has procedures in place to obtain the information necessary to provide reasonable, but not absolute, assurance that most CTR assistance is used for the purpose intended. Through program management, audit and examination procedures, and intelligence analysis, our analysis indicated that DOD can reasonably account for at least 95 percent of the total program dollars provided to recipient countries. Using these methods, DOD obtains a variety of information, including documentary, visual, testimonial, and photographic evidence, that it then uses to compile its annual accounting report to the Congress. The 5 percent or less of the total value of assistance provided for which DOD cannot give reasonable assurance that it is being used for the purposes intended generally consists of equipment located at sites where DOD’s access is restricted or denied. (See app. I for information on DOD’s 1999 report accounting for CTR assistance.) Through program management, audits and examinations, and intelligence analysis, DOD can account for most of the total program dollars provided to recipient countries. As illustrated in figure 1, approximately $2.2 billion of the $2.5 billion of CTR assistance obligated has been in the form of services and other activities, with the remaining $340 million of assistance provided in the form of equipment. Our review shows that DOD maintains effective accountability for services, other activities, and some equipment through its program management and intelligence analysis. However, the inability to view all equipment, particularly at those sites where Russia does not allow U.S. personnel access, precludes DOD from determining that all equipment is being used for the intended purpose. Our analysis showed that a limited amount of equipment—less than 5 percent of the total value of CTR assistance provided—is in locations where U.S. personnel have no access rights or do not visit. Although DOD has used these procedures to account for CTR assistance since the program began, we found that, in the past, DOD officials did not routinely document the results of their program management visits. DOD has strengthened its procedures for documenting information collected through its program management efforts, which is extremely important now that the vast majority of new CTR assistance is in the form of services, whose accountability primarily relies on program management. DOD partially accounts for CTR assistance through program management, which provides oversight of the majority of CTR assistance. In managing their projects, CTR program officials make frequent visits to recipient countries. Through these site visits, they observe the use of CTR-provided equipment, monitor contract performance and schedule, and inspect and accept the work performed, in addition to discussing technical and programmatic issues with recipient country officials. DOD has recently developed a reporting system to capture these activities more systematically. Since implementing the system at the start of fiscal year 2001, 70 program management visits were conducted through the end of February 2001; 69 of these visits have been documented. Thirteen visits included inspecting and accepting the work performed, and 30 visits included the inspection of CTR-provided equipment and materials, among other activities performed. Additionally, program managers obtain information from the U.S. contractors that manage some of the projects and maintain CTR-provided equipment. Project managers obtain the status of projects from contractors responsible for managing entire projects. For example, the U.S. contractor for the construction of the Security Assessment Training Center at Sergiev Posad, Russia, maintains U.S. nationals on site to directly oversee ongoing work. Contractor personnel provide weekly status reports and meet frequently with CTR project officials. When we visited Sergiev Posad in January 2001, we observed the interaction between contractor personnel and program officials regarding the construction of a small arms training facility and the testing of various security systems. For example, figure 3 shows several types of vehicle security gates provided through CTR assistance. These gates are tested by U.S. and Russian personnel at the facility to determine which equipment best meets requirements for upgrading security at Russian nuclear storage facilities. DOD also has one U.S. contractor providing logistics and maintenance support for all CTR-provided equipment. This contractor has recently developed the Electronic Information Delivery System that tracks equipment location, value, and maintenance. The system also monitors the number of contractor visits scheduled, completed, and denied to the sites where equipment is located. The database is available to program officials through the Internet. Program officials can obtain reliable information from their various contractors on how CTR assistance is used. DOD personnel conduct audit and examination visits on the basis of formal agreements and procedures with recipient countries. Audit and examination teams essentially take an inventory of CTR-provided equipment to verify location and use for the annual accounting report; however, the teams do not assess the projects’ efficiency or effectiveness. For calendar year 2000, DOD scheduled 23 audits and examinations, of which 14 were conducted. The remaining nine were either cancelled or postponed, primarily due to difficulties with the Russians concerning the agreement governing audit and examination procedures. However, CTR program officials stated that they had full confidence that the equipment meant to be inventoried by the audit and examination teams was being used as intended as the result of their program management procedures. The selection of which projects, sites, and equipment will undergo an audit and examination is judgmental and is based on the risk of equipment loss, misuse, or diversion; the estimated dollar value of the equipment; the date of the last audit and examination of that project; and the site’s accessibility. DOD officials, however, could not always specify the rationale used in scheduling audits and examinations. Audit and examination team leaders determine the specific sites to be visited and equipment to be inventoried on the basis of program manager and contractor input; however, the decision is subject to director approval. Audit and examination teams, through visual inspection and record reviews, annually inventory a selection of CTR-furnished equipment to ensure its proper location and use. The information obtained through audits and examinations varies from project to project, depending upon the implementing agreements with recipient countries. For example, we observed DOD officials conduct two audits and examinations in Russia. One consisted of visiting a site where CTR-provided equipment was located, meeting with the officials who used the equipment, conducting a complete inventory of high-value equipment, and reviewing training documents. Figure 4 shows the Reutov Business Development Center, where we observed an audit and examination team examine about $270,000 worth of CTR-provided office equipment. The other audit and examination compared detailed photographs, taken by recipient country officials, of CTR-provided equipment with inventory lists provided by DOD and the recipient country. Although the DOD officials who conducted these audit and examination visits verified that equipment provided through the CTR program was in place, the officials did not assess whether the projects examined were conducted in an efficient manner, or whether they were effectively meeting the objectives of the CTR program, because such assessments were not part of the scope of work of the audit and examination teams. The Weapons Intelligence, Nonproliferation, and Arms Control Center provides intelligence analysis to the CTR program. The center’s staff analyzes information obtained from across the intelligence community regarding CTR-provided assistance. Its assessments supporting CTR accountability are included in a classified annex to DOD’s annual accounting report. The center’s assistance also includes briefings to program and project managers when needed, assessments of ways in which potential CTR projects could enhance recipient countries’ military forces, studies of current events and trends, and information helpful in negotiating and implementing projects. DOD’s inability to gain access to all sites in some recipient countries where CTR-provided equipment is located has been an issue since the CTR program began in 1992. The U.S. government has been concerned about its ability to examine the use of the equipment, while recipient countries have had security concerns regarding U.S. access to sensitive facilities. In an effort to balance these concerns, bilateral agreements were signed to provide the United States with the general right to audit CTR assistance, but separate agreements were also required specifying the procedures by which the United States can audit individual projects. For example, all audit and examination team visits require a 30-day notice of the audit before arrival of the team and are limited to no more than three visits per calendar year, per project. Due to the extreme sensitivity of nuclear weapon storage sites, Russia did not agree to provide U.S. personnel with access to those sites. Thus, a separate agreement was negotiated to provide photographic audits rather than on-site visits to account for the use of CTR-provided assistance. This agreement stipulates that recipient country officials, after meeting with the audit and examination team, use CTR-provided cameras and film to photograph equipment at sites where U.S. officials are denied access. The team provides the country officials with specific guidance on how to photograph the equipment as well as a unique identifier that must be included in all photographs. Recipient country officials then provide the photographs to the awaiting audit and examination team for review. The team compares the CTR-provided equipment in the photographs with inventory lists maintained by DOD and the recipient country. Although the level of access varies among CTR projects, nearly all CTR program-related visits must be preapproved by recipient countries. Certain types of documents, such as visas, are required of all visitors. We have grouped the level of access to sites where $340 million worth CTR equipment has been provided into the following three categories: (1) those sites where no access is provided to U.S. personnel, although audits and examinations are performed through alternative methods; (2) those sites where audits and examinations are not performed due to the absence of administrative arrangements but where program managers have access to the project sites (restricted access); and (3) those sites where access has not been denied to either audit and examination teams or project managers (unrestricted access). Figure 5 shows the value of CTR equipment by recipient country and level of access. United States officials are not provided access to the Russian sites where the equipment associated with the storage and transportation of nuclear warheads is located. In some cases, equipment such as the U.S.-provided railcars used to transport warheads is delivered to alternate locations for review by U.S. government officials. In other cases, such as for the equipment at warhead storage sites, U.S. government officials are provided with time-stamped photographs of the equipment to account for its use. For example, figure 6 is a photograph of a supercontainer that was used to transport nuclear weapons. The photograph was taken during the January 2001 audit and examination of equipment at Russian nuclear weapons storage sites. DOD accepted the photograph as proof that the equipment was located at a nuclear weapons storage site where U.S. personnel were denied access. Audit and examination teams have restricted access to sites containing equipment designed to help the Russians eliminate their strategic nuclear delivery systems—that is, heavy bombers, intercontinental ballistic missiles, and submarine launched ballistic missiles—and the safe storage of fissile materials. Although program managers usually have access to those sites where such equipment is located, the Russian government has denied access to CTR audit and examination teams since 1999, even though DOD considers this a violation of Russia’s obligations under the bilateral agreements. DOD officials said that they are working with the Russian government, primarily the Ministry of Atomic Energy, to negotiate a mutually acceptable arrangement to promote the continuation of audits and examinations. The final category covers CTR equipment provided to recipient countries where access has not been routinely denied to audit and examination teams and project managers. This equipment ranges from that used to destroy chemical weapons in Russia to that used to eliminate strategic nuclear delivery vehicles in Ukraine and Kazakhstan. However, recipient countries must preapprove virtually all visits to sites where CTR assistance is located, and, occasionally, project managers and audit and examination teams are denied access to CTR-provided equipment. For example, during a September 2000 audit and examination of export control equipment in Kazakhstan, team members were denied access to two buildings for security concern reasons. Furthermore, some contractor personnel have been denied access to recipient country facilities that are normally open to U.S. personnel. From May 2000 through April 2001, the CTR logistics support contractor scheduled 361 site visits to repair and maintain CTR-provided equipment, but in 9 cases, the requests were denied. All nine denials were at sites in Russia involving the elimination of strategic offensive arms. DOD could improve the quality of its program oversight function by better targeting and expanding the scope of its audit and examination procedure. Audits and examinations have become less useful in accounting for CTR assistance because they frequently duplicate what program managers do on a routine basis, and, as currently conducted, the reviews simply consist of taking equipment inventories. As the CTR program has changed from providing equipment to providing contracted services, audits and examinations have not evolved to include assessments of the effectiveness or efficiency of the services provided. Many audits and examinations conducted in 2000 appear to provide little value in accounting for CTR assistance beyond the information already provided through program management and intelligence analysis. Of the 13 audits and examinations scheduled for Russia in calendar year 2000, 7 did not take place. However, CTR officials we interviewed stated that it did not matter that these audit and examinations were not conducted because the officials could account for their projects without the information supplied by audits and examinations. The officials said they had sufficient data available from program management and intelligence analysis to provide reasonable assurance on the use of equipment. Figure 7 is a photograph used to inventory CTR-provided equipment at a Russian nuclear weapons storage site. DOD accepted this photograph as proof that U.S.-provided equipment was located at the site where U.S. personnel were denied access. Our analysis indicated that audit and examination visits often duplicated equipment verification already performed and documented through program management. For example, in October 2000, a project manager visited a strategic nuclear arms elimination site in Ukraine and documented his observation of CTR-provided equipment, including 16 of 33 dump trucks. Later, in December, an audit and examination team visited the same site and inventoried the same equipment, but this time observed 17 of 33 trucks. During both visits, the remaining trucks were accounted for through a review of records. Although DOD officials acknowledged that audits and examinations, as currently conducted, provide little additional value, they believe that these procedures should continue to be used to account for CTR assistance. The officials commented that the United States should maintain its right to audit and examine CTR-provided assistance as stated in the bilateral agreements with the recipient countries but added that the scope of audits and examinations could be expanded to encompass more than simply taking an inventory of equipment. The results of a recent DOD Inspector General audit of CTR assistance support the concept of broader reviews.For example, the report raised no issues regarding the accountability of assistance but did raise concerns regarding the efficiency of some CTR projects. Specifically, DOD officials questioned how recipient countries would use funds generated by salvageable materials from the elimination of weapons of mass destruction. Furthermore, with the help of the Defense Systems Management College, DOD officials are reviewing CTR program management processes to see if they can be strengthened. DOD has procedures in place that provide reasonable assurance that most assistance is used for its intended purpose; however, DOD’s inability to gain access to some sites preclude it from collecting sufficient evidence to ensure that all CTR-provided assistance is used only for the purposes intended. DOD has developed and begun implementing new procedures for documenting the methods it uses to collect data regarding CTR assistance. Specifically, information obtained from the recently developed reporting system to capture program manager trip activities and the Electronic Information Delivery System for tracking CTR-provided equipment could improve the quality of future accounting reports. Given the program’s transition from providing equipment to providing services, most of the audits and examinations conducted in 2000 appear to lack value beyond that provided by program management and intelligence analysis. By restructuring and better targeting audits and examinations, DOD would have a more valuable tool to oversee and account for CTR assistance. This may mean doing fewer audits and examinations, but expanding the scope of such audits and examinations to include assessments of projects’ effectiveness and efficiency, including the delivery of services. Currently, there are no well-defined criteria for targeting audits and examinations. To improve DOD’s accounting of CTR-provided assistance, we recommend that the Secretary of Defense strengthen audit and examination procedures by developing criteria to target audits and examinations at the most vulnerable CTR projects, such as those least accounted for through other means; and expanding the scope of audits and examinations from simply taking an inventory of equipment provided under the program to assessing the effectiveness and efficiency of CTR assistance, including contracted services. DOD’s Defense Threat Reduction Agency commented on a draft of this report and agreed with our findings and our recommendation to enhance the quality of its oversight of the Cooperative Threat Reduction Program. In discussing how it plans to implement our recommendation, DOD said it has developed a methodology to better target audits and examinations at the most vulnerable CTR projects, such as those least accounted for through other means. The methodology includes calculating a weighted risk factor for each CTR project based on 10 criteria. (See appendix II for more details.) By applying these criteria to each project, program officials can better target which audits and examinations to conduct. In addition, DOD officials plan to expand the scope of audits and examinations to periodically assess the effectiveness and efficiency of CTR assistance, including contracted services. DOD did not specify, however, how and when such measures would be incorporated into its CTR audit and examination process. On the basis of the legislative mandate, our objectives were to assess (1) whether DOD’s oversight procedures produce the necessary information to determine if the threat reduction assistance, including equipment provided and services furnished, is being used as intended and (2) whether improvements can be made in the way DOD carries out its oversight responsibilities. To accomplish our objectives, we examined DOD’s scope, procedures, and mechanisms for collecting and analyzing data used to account for the use of CTR assistance; determined what data DOD uses to report on whether CTR assistance is being used for the purpose intended; and reviewed how much of the equipment and services DOD actually accounts for. Specifically, we interviewed Defense Threat Reduction Agency officials, CTR policy officials, and CTR contractors responsible for DOD’s CTR accounting reports. We interviewed four of the six primary program managers and several project managers, particularly those who had audit and examination visits for their programs cancelled. We interviewed five of the eight audit and examination team leaders. We also met with officials from the Weapons Intelligence, Nonproliferation, and Arms Control Center to obtain information on certain CTR projects and on how the intelligence community supports CTR program accounting efforts. We reviewed program management trip reports, weekly reports, quarterly program reviews, and other program documents. We were given a demonstration and were provided documentation of the newly developed Electronic Information Delivery System, which is a contractor-based logistics and maintenance support database. We also spoke with U.S. contractors working in Russia. We accompanied a Defense Threat Reduction Agency audit and examination team on two audits and examinations in Russia from January 19, 2001, to February 1, 2001. Additionally, we reviewed all audit and examination trip reports for 1999 and 2000. We met with and obtained documentation from officials in the DOD Inspector General’s Office who had recently examined several CTR projects. We also reviewed DOD’s annual accounting report for 1999 to determine whether the Department had met the legislative requirements of section 1206 of the National Defense Authorization Act for Fiscal Year 1996. See appendix I for our analysis. We performed our work from October 2000 through May 2001 in accordance with generally accepted government auditing standards. We are providing copies of this report to other interested congressional committees and the Secretary of Defense. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. Key contributors to this assignment were F. James Shafer, Hynek Kalkus, Beth Hoffman León, Martin DeAlteriis, and Lynn Cothern. As required by section 1206 of Public Law 104-106, we reviewed the Department of Defense’s (DOD) 1999 accounting report to determine if it (1) contained current and complete data on the Cooperative Threat Reduction (CTR) assistance provided (both equipment and services), (2) described how CTR-provided assistance was accounted for and used, (3) provided a description of how DOD plans to account for the assistance during the following year, and (4) listed specific information on Russia’s arsenal of tactical nuclear warheads. On the basis of our review, DOD’s 1999 accounting report covered the legislatively mandated information, yet it did not always convey the information completely and consistently. Specifically: DOD’s 1999 accounting report contained current and complete data on a little over two-thirds of all CTR assistance provided to the recipient countries through September 1999. According to DOD officials, the monies not accounted for in the report were spent on equipment purchased in country; equipment purchased in the United States but not yet shipped; and “other” CTR program costs, such as travel, shipment of equipment, military-to-military contacts, and Defense Threat Reduction Agency contractors. The report lists equipment totaling $314 million, services totaling $1.1 billion, and miscellaneous items totaling almost $16 million, for a combined total of nearly $1.5 billion worth of assistance. By the end of fiscal year 1999, however, the CTR program had provided over $2.1 billion of assistance to the recipient countries. The report lists some of the equipment that was purchased in recipient CTR countries, but it does not distinguish between that equipment and equipment shipped from the United States. According to CTR officials, the draft 2000 accounting report will provide more information about equipment purchased in recipient countries for that year. The 1999 report also included a listing of about $27 million in CTR equipment that DOD provided to recipient states during a 3- month period in 1997 that the 1998 accounting report excluded. In its 1999 accounting report, DOD described how CTR-provided assistance was accounted for and used. Specifically, DOD explained the methods it used to account for CTR-provided equipment—audits and examinations, program management trips, and intelligence obtained through national technical means. The 1999 accounting report listed where the equipment was located at the time of the report and described the value of contractor services provided for each project. Although the report usually provided summary assessments of whether the equipment at the various projects was being used for its intended purposes, it did not detail the services provided and often did not specifically assess whether such services were satisfactory. DOD officials acknowledged that this was the situation but explained that they judged the amount of information on contractor services to be sufficient. Unlike the 1998 report, the 1999 accounting report summarized how the Departments of State and Energy account for their CTR-funded projects and referred the reader to reports submitted by these departments that detail how the assistance was accounted for. The 1999 accounting report provided a description of how DOD plans to account for the assistance in fiscal year 2000. Although DOD had planned to conduct 23 audits and examinations during the fiscal year, it only conducted 14. The remaining nine were either cancelled or postponed due to difficulties with the Russians concerning the agreement governing audit and examination procedures. DOD’s 1999 accounting report did not list specific information on Russia’s arsenal of tactical nuclear warheads as required by section 1312 of the National Defense Authorization Act for Fiscal Year 2000. However, DOD provided this information in a separate report sent to the Congress on January 9, 2001. DOD’s 1999 report accounting for CTR assistance, like its five predecessors, was submitted late to the Congress. The report was due on January 31, 2000, but was not issued to the Congress until January 17, 2001—a delay of almost 12 months. DOD officials attributed the delay to a prolonged internal review process and to the fact that CTR policy officials revised the draft report, late in the review process, to incorporate the recommendations contained in our March 2000 report. The Department’s delay prevented the Congress from knowing the status of CTR-provided assistance while members were considering CTR program funding levels for fiscal year 2001. | Since 1992, Congress has authorized more than $3 billion for the Cooperative Threat Reduction (CTR) program to help Russia, Belarus, Ukraine, Kazakhstan, Uzbekistan, Moldova, and Georgia secure and eliminate weapons of mass destruction. Concerned about proper oversight of equipment and services provided by the program, Congress required the Department of Defense (DOD) to report annually on whether the assistance was being used as intended. This report reviews (1) whether DOD's oversight procedures produce the necessary information to determine if the threat reduction assistance, including equipment provided and services furnished, is being used as intended and (2) whether DOD can improve its oversight. GAO found that DOD has procedures in place that reasonably ensure that at least 95 percent of the assistance is being used as intended and is adequately accounted for. Because of access restrictions imposed by the Russian government, a limited amount of equipment--less than five percent of the total value of assistance provided--is in locations where access by U.S. personnel is not permitted. DOD can enhance the quality of its program oversight by better targeting and expanding the scope of its formal audit and examination procedures. |
Of the TARP performance audit recommendations we have made, some have been program specific, while others have addressed crosscutting issues such as staffing and communications. Our program-specific recommendations have focused on the following TARP initiatives: CPP was designed to provide capital to financially viable financial institutions through the purchase of preferred shares and subordinated debentures. The Community Development Capital Initiative (CDCI) provided capital to Community Development Financial Institutions by purchasing preferred stock. Capital Assessment Program (CAP) was created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program—or “stress test”— requirements. This program was never used. Credit market programs: Term Asset-backed Securities Loan Facility (TALF) provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses. SBA 7(a) Securities Purchase Program provided liquidity to secondary markets for government-guaranteed small business loans in the Small Business Administration’s (SBA) 7(a) loan program. American International Group (AIG) Investment Program (formerly Systemically Significant Failing Institutions Program) provided support to AIG to avoid disruptions to financial markets from its possible failure. Automotive Industry Financing Program (AIFP) aimed to prevent a significant disruption of the American automotive industry through government investments in the major automakers. The Home Affordable Modification Program (HAMP) divides the cost of reducing monthly payments on first-lien mortgages between Treasury and mortgage holders/investors and provides financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program. Principal Reduction Alternative (PRA) pays financial incentives to mortgage holders/investors for principal reduction in conjunction with a HAMP loan modification for homeowners with a current loan-to-value ratio exceeding 115 percent. The Second-Lien Modification Program (2MP) provides incentives for second-lien holders to modify or extinguish a second-lien mortgage when a HAMP modification has been initiated on the first-lien mortgage for the same property. Home Affordable Foreclosure Alternatives (HAFA) provides incentives for short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure for borrowers who are unable or unwilling to complete the HAMP first-lien modification process. Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund or HHF) supports innovative measures developed by state housing finance agencies and approved by Treasury to help borrowers in states hit hardest by the aftermath of the housing crisis. Federal Housing Administration’s (FHA) Short Refinance Program provides underwater borrowers—those with properties that are worth less than the principal remaining on their mortgage—whose loans are current and are not insured by FHA with the opportunity to refinance into an FHA-insured mortgage. As of August 2015, our performance audits of the TARP programs have resulted in 72 recommendations to Treasury. Of the 72 performance audit recommendations, Treasury has implemented 59, or approximately 82 percent; partially implemented 4—that is, taken some steps toward implementation but needs to take more actions; and not implemented 3— that is, Treasury has not taken steps to implement them (see fig.1). Among the 7 recommendations that Treasury has taken some or no steps to implement, 1 was directed at CPP and 6 directed at the MHA housing programs. Finally, 6 performance audit recommendations have been closed-not implemented. Due to Treasury’s inaction and the evolving nature of the programs, we considered 3 of them to be outdated and no longer applicable. Two of these 6 recommendations were related to CPP and 2 were related to the MHA programs. Treasury has taken action on the majority of our recommendations for CPP. Specifically, to date, Treasury has implemented six of our nine recommendations for CPP. For example, Treasury implemented our recommendation that it apply lessons learned from the implementation of CPP to similar programs, such as the Small Business Lending Fund (SBLF), by including a process for reviewing regulators’ viability determinations for all eligible applicants for SBLF. Specifically, Treasury included additional evaluation by a central application review committee for all eligible applicants who had not been approved by their federal regulator. Treasury also took steps to provide information from its evaluation to the regulator when their views differ. These steps should help ensure that applicants will receive consistent treatment in investment decisions across different regulators. However, Treasury has not implemented three of our CPP-related recommendations—one remains open and two have been closed. In 2012, we recommended that Treasury consider analyzing and reporting on remaining and former CPP participants separately. In particular, we noted that the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. For example, the remaining CPP institutions had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although our analysis found differences in the financial health of remaining and former CPP institutions, we noted that Treasury’s quarterly financial analysis of CPP institutions did not distinguish between them. By not distinguishing between remaining and former CPP participants, Treasury misses an opportunity to provide greater transparency about the financial health of institutions remaining in CPP. Treasury stated that it would carefully consider our recommendation and emphasized its ongoing commitment to keeping the public informed of its progress in winding down CPP. While Treasury reported generally on the results of its CPP auctions and the status of institutions remaining in the program, as of August 2015, it had not yet considered analyzing and reporting on remaining and former CPP participants separately and it is not likely to do so, according to Treasury. Treasury believes that providing information about the financial position of institutions remaining in CPP is unnecessary because it is publicly available to interested parties through regulatory filings or other sources. We closed two recommendations for Treasury to periodically collect and review certain information from the bank regulators on the analysis and conclusions supporting their decisions on CPP repayment requests to help ensure consistency of the CPP repayment process. Treasury did not take actions that would address the recommendations because it believed these recommendations raised questions about how to balance the goals of consistency with the need to respect the independence of regulators. Although we disagreed with Treasury’s position, we closed these two recommendations as not implemented because Treasury officials stated that since it is winding down the program, only a few remaining CPP participants are likely to make full repayments. Thus we determined that implementation of these recommendations is not as critical as it was at the time we made them. Since 2009, we have made 27 recommendations aimed at improving MHA’s TARP-funded housing programs. As of August 2015, Treasury had implemented 19 of them. Examples of more recent actions Treasury has taken to implement these recommendations include the following: In June 2010, we recommended that Treasury expeditiously finalize and implement benchmarks for performance measures under the first- lien modification program, as well as develop measures and benchmarks for the recently announced HAMP-funded homeowner assistance programs. Since June 2011, Treasury has been reporting in its MHA program performance reports on the performance of the largest MHA servicers in three categories: (1) identifying and contacting homeowners, (2) homeowner evaluation and assistance, and (3) program management and reporting. Treasury established quantitative and qualitative benchmarks for each of the three performance categories for HAMP first-lien modifications and other TARP-funded MHA programs. In the same report, we recommended that Treasury expeditiously implement a prudent design for the remaining TARP-funded housing programs. In July 2013, Treasury’s MHA risk assessment included measuring internal control activities for 2MP, PRA, and HAFA. In June 2012, we recommended that Treasury and FHA update their estimates of participation in the FHA Short Refinance Program and use the updated estimates to reassess the terms of the letter of credit facility to help ensure that the program is cost-effective. After FHA provided Treasury with updated participation estimates, Treasury amended the letter of credit facility in March 2013, reducing the authorized amount by $7 billion to $1 billion. Treasury also reduced the cap on administrative fees that could be charged by $92 million (from $117 million to $25 million). In March 2015, Treasury amended the purchase agreement for the letter of credit facility for a second time, reducing the amount by an additional $900 million ($1 billion to $100 million). As a result of these two actions, Treasury deobligated approximately $7.9 billion in total, disallowing its use for future obligations. In July 2012, we recommended that Treasury expeditiously conduct a comprehensive risk assessment of HAMP Tier 2, using the standards for internal control in the federal government as a guide. In April 2013, Treasury conducted a risk assessment of MHA programs, including HAMP Tier 2, based on internal control standards. The risk assessment included identifying the types and potential impacts of risks on the MHA program and appropriate mitigating steps taken to address those risks. In February 2014, we recommended that Treasury issue clarifying guidance to servicers on providing effective relationship management to borrowers with limited English proficiency (LEP). Treasury had previously issued guidance to servicers requiring them to develop and implement a policy to identify the requirements and appropriate caseload for the relationship manager position, including a provision for providing effective relationship management to borrowers whose primary language is a language other than English. In April 2014, Treasury issued guidance requiring servicers to ensure that staff are able to effectively communicate with all borrowers, including LEP borrowers, by either employing multilingual individuals or engaging an outside vendor to provide interpretation services. Treasury has not implemented 8 of the 27 recommendations related to MHA’s TARP-funded programs. Six of these recommendations remain open, including 4 of which Treasury has taken some action. Finally, we closed the remaining 2 TARP-funded housing program recommendations as not implemented. The four recommendations that Treasury has taken some action to address are as follows: In June 2010, we recommended that Treasury expeditiously report activity under PRA, including the extent to which servicers determined that principal reduction was beneficial to investors but did not offer it, to ensure transparency in the implementation of this program feature across servicers. Starting with the monthly MHA performance report for the period through May 2011, Treasury began reporting summary data on the PRA program. Specifically, Treasury provides information on PRA trial modification activity as well as median principal amounts reduced for active permanent modifications. In addition, Treasury’s public MHA loan-level data files include information on the results of analyses of borrowers’ net present value under PRA and indicate whether principal reduction was part of the modification. While this information would allow interested users with the capability to analyze the extent to which principal reduction was beneficial but not offered overall, it puts the burden on others to do the analysis and report the results publicly. Also, the publicly available data do not identify individual servicers and thus cannot be used to assess the implementation of this program feature across servicers. Treasury officials stated that they believe they have implemented this recommendation through the reporting described previously. Moreover, the officials stated that it would be neither useful nor helpful to provide these data broken out by specific identified servicer. Because servicers may choose to implement the PRA program under individually developed terms, Treasury officials stated that broken out data would not permit a proper comparison. However, our recommendation was intended to ensure transparency in the implementation of this program feature across servicers, which would require that information be reported on an individual servicer basis to allow comparison between servicers and highlight differences in the policies and practices of individual servicers. As such, we maintain that Treasury has partially implemented this recommendation and should take action to fully implement it. In February 2014, we recommended that Treasury ensure that the compliance agent assess servicers’ compliance with LEP relationship management guidance, once it was established. Treasury issued clarifying LEP guidance to MHA program servicers in April 2014. In July 2015, Treasury officials stated that they had reached out to the seven largest MHA servicers to obtain their policies on implementing the guidance and confirmed that such written policies are consistent with MHA guidance on LEP. In October 2014, we recommended that Treasury conduct periodic evaluations using analytical methods, such as econometric modeling, to help explain differences among MHA servicers in redefault rates. Such analyses could help inform compliance reviews, identify areas of weaknesses and best practices, and determine the need for additional program policy changes. Treasury conducted an analysis to compare redefault rates among servicers and to determine whether servicers’ portfolio of HAMP-modified loans performed at, above, or below expectations for the metrics analyzed. Despite these analyses, Treasury officials maintained that such an analysis is inherently challenging and limited and therefore would not repeat it. Treasury officials gave several reasons for not periodically repeating this analysis. First, they cited data limitations, including a lack of loan origination and current credit profile data. However, Treasury does have access to variables that both it and we have identified in the past as being important for predicting redefault, including the size of any change in payments, delinquency duration, and credit scores and loan-to-value ratios at origination. Second, Treasury indicated that excluding loans due to missing observations could lead to unintended consequences. However, such limitations are not unusual when researchers conduct this type of analysis and researchers can employ measures to correct for or identify biases in the data. In addition, Treasury conducted such analyses when designing the program. Further, Treasury has relied on this dataset to identify factors that they believe influence redefault. And finally, we determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers. Third, Treasury noted that it can rely on compliance reviews, including a review of sampled loans at individual servicers, to ensure that servicers followed program guidance. However, more rigorous analytical methods are a useful tool to supplement and inform ongoing compliance efforts, which by themselves may not detect significant variations in performance across servicers. Such methods would also be useful in identifying areas of weaknesses and best practices and the potential need for additional program policy changes. Treasury disagreed and for the reasons discussed above, questioned the usefulness of such analysis with regard to informing compliance efforts or identifying best practices or areas of weakness. However, in our October 2014 report, we identified large differences among some servicers both with and without controls for certain loan, borrower, and property characteristics. We determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers. By not capitalizing on the information these methods provide, Treasury risks making policy decisions based on potentially incomplete information and may miss opportunities to identify best practices to assist the greatest number of eligible borrowers. Thus, we continue to maintain that Treasury should take action to fully implement this recommendation. In the same report, we recommended that Treasury conduct periodic evaluations to help explain differences in MHA servicers’ reasons for denying applications for trial modifications. Such evaluations could help inform compliance reviews of individual servicers, identify areas of weaknesses and best practices, and determine the potential need for programmatic changes. Treasury put together a list of servicers with reporting anomalies that had been identified and sent them questionnaires asking them to explain the rationale behind using certain codes to report denials (denial codes) of applications for trial modifications. Treasury expects to have answers back by October 2015. Beyond that, Treasury stated that it and the MHA Program Administrator planned to continue to collect data and monitor trends in the data on an ongoing basis and reach out to servicers on an as- needed basis to collect more information. Treasury’s compliance agent has also added procedures for testing denial codes that servicers report. According to Treasury officials, Treasury has used the prevalence of certain denial codes to inform certain policy changes. For example, they said that the most common reason that applications for HAMP were denied is that borrowers did not submit the documentation necessary to evaluate their eligibility for HAMP. In response, Treasury has simplified documentation requirements where appropriate several times. In addition, Treasury told us that they use the denial code information to form the basis for discussions with individual servicers to ensure compliance with program guidelines and reporting practices. Although these are examples of Treasury’s analysis of overall denial rates, Treasury’s actions do not address differences in individual MHA servicers’ reasons for denial. Additionally, it is not clear whether Treasury plans to conduct periodic evaluations of differences in denial rates or how Treasury will use the information it gathers to identify areas of weaknesses and best practices and determine whether additional policy changes are needed. Thus, we continue to maintain that Treasury should take action to implement this recommendation. The two recommendations that Treasury has not implemented are as follows: In February 2014, we recommended that Treasury require its MHA compliance agent to take steps to assess the extent to which servicers had established internal control programs that effectively monitored compliance with fair lending laws applicable to MHA programs. In April 2014, Treasury officials stated that they planned to continue efforts to promote fair lending policies. However, as of August 2015, they did not plan to implement our recommendation. As we noted in the report, both the MHA Servicer Participation Agreement and MHA Handbook require that servicers have an internal control program to monitor compliance with relevant consumer protection laws. According to Treasury officials, the federal agencies with supervisory authority over fair lending remain in the best position to monitor servicers in this area. Representatives of the federal regulators said that their fair lending reviews have a broader overall focus that may not specifically focus on MHA activities. Moreover, our analysis identified some statistically significant differences among four large MHA program servicers in the number of denials and cancellations of trial modifications and in the potential for redefault of permanent modifications for certain protected groups. Evaluating the extent to which servicers have developed and maintained internal controls to monitor compliance with fair lending laws could give Treasury additional assurances that servicers are implementing the MHA program in compliance with fair lending laws. In July 2015, we recommended that Treasury develop and implement policies and procedures that established a standard process to better ensure that changes to TARP-funded housing programs were based on evaluations that comprehensively and consistently met the key elements of benefit-cost analysis. In its written comments on the draft report, Treasury agreed that it was important to assess the benefits and costs of proposed program modifications and noted that it would seriously consider the extent to which it could apply our recommendation going forward. Treasury officials said that they planned to provide an update on actions taken or planned in a required response to Congress in September 2015. We provided Treasury a draft copy of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees. This report will also be available at no charge on our web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov for questions about nonmortgage-related TARP programs, or Mathew Scirè at (202) 512-8678 or sciremj@gao.gov for questions about mortgage- related TARP programs. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. The following table summarizes the status of our TARP performance audit recommendations as of August 28, 2015. We classify each recommendation as implemented, partially implemented (the agency took steps to implement the recommendation but more work remains), open (the agency has not taken steps to implement the recommendation), and closed, not implemented (the agency decided not to take action to implement the recommendation). The recommendations are listed by report. In addition to the contact named above, Harry Medina and Karen Tremba (Assistant Directors), Anne A. Akin (Analyst-in-Charge), Bethany Benitez, Emily Chalmers, John Karikari, and Jena Sinkfield made key contributions to this report. | The Emergency Economic Stabilization Act of 2008 (EESA) authorized the creation of TARP to address the most severe crisis that the financial system had faced in decades. Treasury has been the primary agency responsible for TARP programs. EESA provided GAO with broad oversight authorities for actions taken under TARP and included a provision that GAO report at least every 60 days on TARP activities and performance. This 60-day report describes the status of GAO's TARP performance audit recommendations to Treasury as of August 2015. In particular, this report discusses Treasury's implementation of GAO's recommendations, focusing on two programs: CPP and MHA. GAO's methodologies included assessing relevant documentation from Treasury, interviewing Treasury officials, and reviewing prior TARP reports issued by GAO. As of August 2015, GAO's performance audits of the Troubled Asset Relief Program (TARP) activities have resulted in 72 recommendations to the Department of the Treasury (Treasury). Treasury has implemented 59 of the 72 recommendations (about 82 percent), some of which were aimed at improving transparency and internal controls of TARP. The status of the remaining recommendations is as follows: Treasury has partially implemented four of the recommendations—that is, it has taken some steps toward implementation but needs to take more actions. All four recommendations are directed at the Making Home Affordable (MHA) program, a collection of housing programs designed to help homeowners avoid foreclosure. The recommendations call for Treasury to, for example, issue guidance and monitor servicer compliance on working with borrowers with limited English proficiency. Treasury issued applicable guidance and obtained the policies of the larger MHA servicers, but has not assessed the implementation of those policies at the servicers. Three recommendations remain open—that is, Treasury has not taken steps to implement them. Among these open recommendations are one directed at the Capital Purchase Program (CPP), which provided capital to certain U.S. financial institutions, and two recommendations directed at the MHA housing programs. For example, in July 2015, GAO recommended that Treasury establish a standard process to better ensure that changes to TARP-funded MHA programs are based on comprehensive benefit-cost analyses. Treasury told GAO they would consider these recommendations at the time the recommendations were made. Six recommendations have been closed but were not implemented. Four are related to CPP and MHA and two to other TARP activities. Generally, Treasury did not take action before the programs evolved or began to wind down, and therefore GAO determined that the recommendations were outdated and no longer applicable. GAO continues to maintain that Treasury should take action to fully implement the four partially implemented recommendations and three open recommendations. |
Created in 2008, CPP was the primary initiative under TARP to help stabilize the financial markets and banking system by providing capital to qualifying regulated financial institutions through the purchase of senior preferred shares and subordinated debt. On October 14, 2008, Treasury allocated $250 billion of the original $700 billion in overall TARP funds for CPP. The allocation was subsequently reduced in March 2009 to reflect lower estimated funding needs, as evidenced by actual participation rates. The program was closed to new investments on December 31, 2009. Under CPP, qualified financial institutions were eligible to receive an investment of between 1 and 3 percent of their risk-weighted assets, up to a maximum of $25 billion. generally received senior preferred shares that would pay dividends at a rate of 5 percent annually for the first 5 years and 9 percent annually thereafter. EESA required that Treasury also receive warrants to purchase shares of common or preferred stock or a senior debt instrument to further protect taxpayers and help ensure returns on the investments. Institutions are allowed to repay CPP investments with the approval of their primary federal bank regulator and afterward to repurchase warrants at fair market value. Risk-weighted assets are all assets and off-balance-sheet items held by an institution, weighted for risk according to the federal banking agencies’ regulatory capital standards. In May 2009, Treasury increased the maximum amount of CPP funding that small financial institutions (qualifying financial institutions with total assets of less than $500 million) could receive from 3 to 5 percent of risk-weighted assets. Federal Reserve System, as well as bank and financial holding companies; Federal Deposit Insurance Corporation (FDIC), which provided primary federal oversight of any state-chartered banks that were not members of the Federal Reserve System; Office of the Comptroller of the Currency (OCC), which was responsible for chartering, regulating, and supervising commercial banks with national charters; and Office of Thrift Supervision (OTS), which chartered federal savings associations (thrifts) and regulated and supervised federal and state thrifts and savings and loan holding companies. OTS has since been eliminated. The primary federal regulator is generally the regulator overseeing the lead bank. Primary federal regulators of bank holding companies also consult with the Federal Reserve. referred to an interagency CPP Council composed of representatives from the four banking regulators, with Treasury officials as observers. The CPP Council evaluated and voted on the applicants, forwarding to Treasury applications that received “approval” recommendations from a majority of the council members. Treasury provided guidance to regulators and the CPP Council to use in assessing applicants that permitted consideration of factors such as signed merger agreements or confirmed investments of private capital, among other things, to offset low examination ratings or other attributes of weaknesses. Finally, institutions that the banking regulators determined to be the weakest and thus ineligible for a CPP investment, such as those with the lowest examination ratings, received a presumptive denial recommendation. The banking regulators or the CPP Council sent recommendations for approval to Treasury’s Investment Committee, which was composed of three to five senior Treasury officials, including OFS’s Chief Investment Officer (who served as the committee chair) and the assistant secretaries for financial markets, economic policy, financial institutions, and financial stability at Treasury. The Investment Committee could also request additional analysis or information in order to clear up any concerns before deciding on an applicant’s eligibility. After completing its review, the Investment Committee made recommendations to the Assistant Secretary for Financial Stability for final approval. Once the Investment Committee recommended preliminary approval, Treasury and the approved institution initiated the closing process to complete the investment and disburse the CPP funds. Nine major financial institutions were initially included in CPP.institutions did not follow the application process that was ultimately developed but were included because Treasury and the federal banking regulators considered them essential to the operation of the financial system. At the time, these nine institutions held about 55 percent of U.S. banking assets and provided a variety of services, including retail, wholesale, and investment banking and custodial and processing services. According to Treasury officials, the nine financial institutions agreed to participate in CPP in part to signal the program’s importance to the stability of the financial system. Initially, Treasury approved $125 billion in capital purchases for these institutions and completed the These transactions with eight of them on October 28, 2008, for a total of $115 billion. The remaining $10 billion was disbursed after the merger of Bank of America Corporation and Merrill Lynch & Co., Inc. was completed in January 2009. Repayments and income from dividends, interest, and warrants from CPP investments have exceeded the amounts originally disbursed, but concerns remain about the financial strength of the remaining institutions and their ability to repay and exit the program. As we have reported, Treasury disbursed $204.9 billion to 707 financial institutions nationwide from October 2008 through December 2009. As of January 31, 2012, Treasury had received $211.5 billion in repayments and income from its CPP investments, exceeding the amount originally disbursed by $6.6 billion (see fig. 2). The repayments and income amount included $185.5 billion in repayments of original CPP investments as well as $11.4 billion in dividends, interest, and fees; $7.7 billion in warrants sold; and $6.9 billion in gains from the sale of Citigroup common stock. After accounting for write-offs and realized losses totaling $2.7 billion, CPP had $16.7 billion in outstanding investments as of January 31, 2012. Although this $16.7 billion is still potentially at risk, Treasury estimated a lifetime gain of $13.5 billion for CPP as of November 30, 2011. As of January 31, 2012, 52 percent (366) of the original 707 institutions remained in CPP. These institutions accounted for $16.7 billion in outstanding investments, or 8 percent of the original amount disbursed. About two-thirds of the outstanding investments were concentrated in a relatively small number of institutions (see fig. 3). Specifically, 25 remaining CPP investments accounted for $11.2 billion, or 67 percent of outstanding investments. In contrast, the remaining $5.5 billion (33 percent) was spread among 341 institutions. On a geographical basis, outstanding CPP investments were relatively widely disbursed throughout the United States as of January 31, 2012. All but 3 states and the District of Columbia had at least 1 institution with CPP investments outstanding, and 25 states had at least 5 such institutions (see fig. 4). California had the highest number of remaining CPP institutions with 33, followed by Illinois with 24. These states also had the highest number of original CPP recipients (72 and 45, respectively). In terms of total CPP investments outstanding, however, Alabama had the largest amount ($3.6 billion), followed by Utah ($1.4 billion), Georgia ($1.4 billion), and Puerto Rico ($1.3 billion). Nearly half (341) of the 707 institutions that originally participated in CPP had exited the program as of January 31, 2012. Of the 341 institutions that exited CPP, 43 percent, or 146 institutions, exited by fully repaying their investments. Another 48 percent, or 165 institutions, exited CPP by exchanging their investments under other federal programs: 28 through the Community Development Capital Initiative (CDCI) and 137 through the SBLF program (see fig. 5).CPP recipients that exited the program, 15 went into bankruptcy or receivership, 12 had investments sold by Treasury, and 3 merged with another institution. CPP dividend and interest payments are due on February 15, May 15, August 15, and November 15 of each year, or the first business day subsequent to those dates. The reporting period ends on the last day of the calendar month in which the dividend or interest payment is due. number of institutions missing dividend or interest payments due on their CPP investments increased steadily from 8 in February 2009 to 158 in November 2011, or about 42 percent of institutions still in the program (see fig. 6). This increase has occurred while program participation has declined, and the proportion of those missing scheduled payments has risen accordingly. The number of institutions missing payments has stabilized since February 2011, but most of these institutions continued to miss them. In particular, 119 of the 158 institutions that missed payments in November 2011 had also missed payments in each of the previous three quarters. Moreover, only 7 of the 158 institutions had never missed a previous payment. On July 19, 2011, Treasury announced that it had, for the first time, exercised its right to elect members to the boards of directors of two of the remaining CPP institutions. In considering whether to nominate directors, Treasury said that it proceeds in two steps. First, after an institution misses five dividend or interest payments, Treasury sends OFS staff members to observe board meetings. Second, once an institution has missed six dividend payments, Treasury decides whether to nominate a board member based on a variety of considerations, including what it learns from the board meetings, the institution’s financial condition, the function of its board of directors, and the size of its investment.January 31, 2012, Treasury had elected 12 board members to 7 CPP institutions. At the same time that the number of institutions missing dividend payments has risen, the number of CPP institutions on FDIC’s problem bank list has generally increased. FDIC compiles a list of banks with demonstrated financial, operational, or managerial weaknesses that threaten their continued financial viability and publicly reports the number of such institutions on a quarterly basis. While some CPP funds were disbursed to bank holding companies, FDIC’s problem bank list does not include them. FDIC accounted for bank holding companies participating in CPP when their subsidiary depositories were designated as problem banks. It is possible that a bank holding company CPP recipient downstreamed CPP funds to a subsidiary depository that appeared on the problem bank list. However, it is unclear the extent to which this downstreaming occurred and thus the extent to which subsidiaries on the As of December 31, 2009, 47 list may have benefitted from CPP funds. CPP institutions were on the problem bank list (see fig. 7). This number had grown to 120 institutions by December 31, 2010, and to 130 by December 31, 2011. The number of these institutions increased every quarter from March 2009 to June 2011 and rose even as the number of institutions participating in CPP declined. As figure 7 shows, the number of problem banks fell slightly for the first time in the third quarter of 2011. Federal and state bank regulators may not allow such institutions to make dividend payments in an effort to preserve their capital and promote safety and soundness. Multiple subsidiary depositories of the same CPP bank holding company that were designated as problem banks were counted separately. The financial strength of the participating institutions will largely determine the speed at which they repay their investments and exit CPP and thus is a key factor in the program’s total lifetime income. Institutions will have to demonstrate that they are financially strong enough to repay their CPP investments in order to receive regulatory approval to exit the program. The institutions’ financial strength will also be a primary factor in whether they make dividend payments, and institutions that continue to miss payments may have difficulty exiting CPP. Financial institutions that are on the problem bank list because of their financial weaknesses, as identified by their regulators, may also face challenges exiting the program. In late 2013, CPP dividend and interest rates will begin increasing (as described earlier), and the increase may prompt institutions to repay their investments more quickly. If broader interest rates are low, especially approaching the date that the dividend resets, banks could have a further incentive to redeem their preferred shares. However, the increased dividend rate could make exiting even more difficult for problem banks and those that have missed payments. As we have previously reported, in unwinding TARP programs, Treasury has stated that it strives to protect taxpayer investment and maximize overall investment returns with competing constraints, promote the stability of financial markets and the economy by preventing disruptions, bolster markets’ confidence to increase private capital investment, and dispose of the investments as soon as it is practicable. As we and others have noted, these goals at times conflict—that is, maximizing returns on investments may require Treasury to hold the assets until their value increases, creating a conflict with the goal of exiting as soon as practicable. Treasury officials told us that Treasury’s practice was generally to hold rather than sell its CPP investments. As a result, Treasury’s ability to exit the program would depend on the ability of institutions to repay their investments. However, Treasury officials noted that, if warranted, Treasury could change its practice in the future and sell more of its investments to third parties. Institutions that remain in CPP tend to be financially weaker than institutions that have exited the program and institutions that did not receive CPP capital. Our analysis considered various measures that describe banking institutions’ profitability, asset quality, capital adequacy, and ability to cover losses. The analysis focused on institutions with under $10 billion in assets, a group that constituted nearly all of the remaining institutions. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP through full repayments or conversion to CDCI or SBLF. These two groups accounted for 608 of the 707 institutions that participated in CPP. We compared these two groups to a non-CPP group (i.e., institutions that have not participated in CPP and have less than $10 billion in assets) of 8,040 active financial institutions for which financial information was available. All financial information generally reflects quarterly regulatory filings on December 31, 2011. Profitability measures for remaining CPP institutions were lower than those for former CPP participants and the non-CPP group. From March 2008 to December 2011, the remaining CPP institutions consistently had lower quarterly return on average assets values than the other groups (see fig. 8). This measure shows how profitable a company is relative to its total assets and how efficient management is at using its assets to generate earnings. For the quarter ending December 31, 2011, remaining CPP institutions had a median return on average assets of 0.25, compared with 0.74 for former CPP institutions and 0.69 for the non-CPP group. The return on average equity measure, which shows the profit a company generates with the money shareholders have invested, showed a similar but more pronounced relationship. The median return on average equity was 2.71 for remaining CPP institutions, compared with 7.15 for former CPP institutions and 6.22 for the non-CPP group. Further, the median net interest margin—another important measure of profitability—was consistently lower for remaining CPP institutions than for the other groups, but the differences were less pronounced, particularly in recent quarters (see fig. 9). The net interest margin measures a company’s investment decisions by comparing its investment returns to its interest expenses. A higher margin indicates a more successful business strategy. For the quarter ending December 31, 2011, the median net interest margin was lowest (3.74) for the remaining CPP institutions. However the medians were not significantly higher for the other two groups—3.90 for former CPP institutions and 3.79 for the non- CPP group. Not only were remaining CPP institutions less profitable than former CPP institutions and the non-CPP group, but they also held relatively more poorly performing assets, as measured by several financial indicators. First, remaining CPP institutions had a consistently higher percentage of noncurrent loans than former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 10). While the median noncurrent loan percentage increased over time for each group before leveling off, the rate of growth was steeper and the period of growth lasted longer for the remaining CPP institutions. As of December 31, 2011, a median of 4.18 percent of loans for remaining CPP institutions were noncurrent, compared with 1.68 percent for former CPP institutions and 1.70 percent for the non-CPP group. Second, remaining CPP institutions had a higher median ratio of net charge-offs to average loans (1.22) than both former CPP institutions (0.47) and the non-CPP group (0.30), as of December 31, 2011. Finally, both remaining and former CPP institutions tended to hold loans that were more concentrated in risky business lines than those held by the non-CPP group, although the differences, and the overall percentages of these loans, were relatively small for one loan category. Both remaining and former CPP institutions had higher proportions of commercial real estate and construction and land development loans compared with the non-CPP group (see fig. 11). As we have reported, delinquencies on commercial real estate loans have more than doubled since the onset of the financial crisis in 2008, and such loans are prone to volatility because of high transaction costs, rigid and constrained supply, and a number of other factors. While remaining CPP institutions had about the same proportion of commercial real estate loans overall as the former CPP institutions (about 35 percent), they had a noticeably higher proportion of construction and land development loans compared to the non-CPP group. Although these loans made up only about 4 to 8 percent of the banks’ overall portfolios, construction and land development loans are generally considered to be particularly risky. For example, they often have long development times and can include properties that are built without firm commitments from buyers or lessees. Compared with former CPP institutions and the non-CPP group, remaining CPP institutions held less regulatory capital as a percentage of assets. Regulators require minimum amounts of capital to lessen an institution’s risk of default and improve its ability to sustain operating losses. Capital can be measured in several ways, but we focused on Tier 1 capital, which includes both risk-based and common risk-based measures, because it is the most stable form of regulatory capital. The Tier 1 risk-based capital ratio measures Tier 1 capital as a share of risk- weighted assets, and the common equity Tier 1 ratio measures common equity Tier 1 as a share of risk-weighted assets. Remaining CPP institutions had lower Tier 1 capital levels than former CPP institutions and the non-CPP group. On a quarterly basis, for example, the Tier 1 risk-based capital ratio for remaining CPP participants generally remained well below those for the former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 12). While Tier 1 capital levels of the remaining institutions have trended slightly upward since December 2009, levels for the other two groups rose at a slightly higher rate, increasing the gap between the groups. As of December 31, 2011, Tier 1 capital accounted for 12.38 percent of risk- weighted assets for remaining CPP institutions compared with 14.09 percent for former CPP institutions and 14.81 percent for the non-CPP group. Because Tier 1 capital for the remaining institutions includes funds received through TARP, ratios using common equity Tier 1—which generally does not include TARP funds—may better illustrate these institutions’ capital adequacy. For the remaining CPP institutions, TARP funds comprised a median of 25 percent of the institution’s Tier 1 capital. As was the case with the Tier 1 risk-based capital ratio, the common equity Tier 1 ratio for remaining CPP institutions generally remained well below those for the former CPP institutions and the non-CPP group from March 2008 to December 2011 (see fig. 12). However, the differences between both CPP groups and the non-CPP group were more pronounced possibly because common equity Tier 1 generally does not include TARP funds. While the ratio for remaining CPP institutions stayed relatively stable from March 2008 to December 2010, it has since begun increasing slightly. As of December 31, 2011, the common equity Tier 1 ratio was lower for remaining CPP institutions than the other two groups. In particular, common equity Tier 1 for remaining CPP institutions comprised a median of 10.53 percent of risk-weighted assets, compared with 12.09 percent for former CPP institutions and 14.68 percent for the non-CPP group. In addition to holding less regulatory capital than former CPP institutions and the non-CPP group, remaining CPP institutions also had significantly lower reserves for covering losses. On a quarterly basis, the median ratio of reserves to nonperforming loans was consistently lower for remaining CPP institutions than for the other groups from March 2008 to December 2011 (see fig. 14). The ratio for all three groups declined in 2008 and 2009, and while it began to stabilize for the non-CPP group in 2010, it continued to decline for remaining CPP institutions. As of December 31, 2011, the ratio of reserves to nonperforming loans was lower for remaining CPP institutions (40.87) than for former CPP participants (70.93) and the non-CPP group (59.56). We also compared loan loss provisions to net charge-offs and found that the remaining CPP institutions had lower ratios (74.48) than former CPP institutions (92.47) but higher than the non-CPP group (72.78). Remaining CPP institutions also had noticeably higher Texas Ratios than former CPP institutions and the non-CPP group. The Texas Ratio helps determine a bank’s likelihood of failure by comparing its troubled loans to its capital. The higher the ratio, the more likely the institution is to fail. On a quarterly basis, median Texas Ratios for remaining CPP institutions remained consistently above those for former CPP institutions and the non-CPP group from March 2008 to December 2011 and rose at a faster rate (see fig. 15). Since December 2010, median Texas Ratios for remaining CPP institutions have stabilized, while those for former CPP and the non-CPP group have shown slight decreases. As of December 31, 2011, remaining CPP institutions had a median Texas Ratio of 51.14, compared with 20.06 for former CPP institutions and 17.20 for the non- CPP group. Moreover, about 19 percent (66) of the 352 remaining CPP institutions had a Texas Ratio of more than 100 percent, indicating an elevated likelihood of failure, compared with only about 1 percent (3) of the 256 former CPP institutions. To assess CPP’s effect on lending by depository institutions, Treasury began publishing a quarterly analysis of CPP institutions. The analysis included financial data in three categories: balance sheet and off-balance sheet items, performance ratios, and asset quality measures. Treasury grouped the institutions by asset size and separated institutions that received CPP funds from those that did not. However, Treasury did not compare remaining CPP institutions to former CPP institutions. While Treasury’s analysis is intended to measure CPP’s effect on the financial institutions that participated, its analysis could also provide useful information about the relative likelihood of remaining institutions to repay their investments and exit the program. Our analysis found differences in the financial condition of remaining and former CPP institutions, suggesting that the remaining CPP institutions could face challenges in repaying CPP funds and exiting the program. Treasury said that it did not perform this analysis because the quarterly CPP report was designed only to group banks into categories based on asset size and to analyze the differences between CPP and non-CPP institutions. In our prior work, we noted that Treasury should ensure transparency in providing financial assistance to private market participants, especially given the unprecedented government assistance it provided to the banking industry during the recent financial crisis. We also recommended that Treasury ensure that external stakeholders, including Congress and the public, are informed about the program’s current strategy. Treasury’s quarterly CPP analysis is a useful tool in providing transparency about the public’s investment in financial institutions. In addition, Treasury makes public a variety of products on its website— including transaction reports, dividend and interest reports, and monthly 105(a) reports—that account for all investments and provide program- level summaries for all TARP programs. However, the usefulness and transparency of Treasury’s quarterly CPP analysis—which includes detailed bank financial measures—could be enhanced by distinguishing between former and remaining CPP institutions because the financial characteristics of these two groups differ. As a result, Congress and the public would benefit from a more complete and meaningful picture of the condition of the remaining institutions. CPP repayments and other income surpassed the program’s original investment disbursements, and as institutions continue to exit CPP, this surplus continues to grow. Furthermore, Treasury’s latest estimate (November 30, 2011) projects CPP’s lifetime income to be $13.5 billion. However, a growing number of the remaining institutions have missed scheduled dividend or interest payments or appeared on FDIC’s problem bank list. As a result, there is increased concern regarding the speed at which institutions will be able to repay remaining funds and how much of these funds Treasury will ultimately recover. In particular, our analysis showed that institutions remaining in CPP were generally less profitable, held riskier assets and less regulatory capital, and had lower reserves for covering losses compared with institutions that repaid their CPP investment and those that never participated in the program. Despite the noticeably different financial profiles for remaining and former CPP institutions, Treasury’s quarterly analysis of CPP institutions does not distinguish between these two groups. As we have indicated in past reports on TARP, transparency remains a critical element in the government’s unprecedented assistance to the financial sector. Such transparency helps clarify to policymakers and the public the costs of TARP assistance and the government’s intervention in various markets. Enhancing the quarterly CPP analysis by distinguishing between remaining and former CPP participants will help Treasury provide Congress and the public with a more transparent and comprehensive understanding of the status of CPP and the institutions that participate in it. To provide Congress and the public with more transparent and comprehensive information on remaining CPP institutions and enhance its reporting, the Secretary of the Treasury should consider analyzing and reporting on remaining and former CPP participants separately. We provided a draft of this report to Treasury for its review and comment. Treasury provided written comments that we have reprinted in appendix II. In its written comments, Treasury stated that it would carefully consider our recommendation to further enhance transparency by analyzing and reporting on remaining and former CPP participants separately. Treasury emphasized its ongoing commitment to keep the public informed of its progress in winding down CPP. We believe that implementation of our recommendation would further strengthen Treasury’s reporting to the Congress and the public on the status of CPP. We are sending copies of this report to the Financial Stability Oversight Board, Special Inspector General for TARP, interested congressional committees and members, and Treasury. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov, or Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of our report were to examine (1) the status of the Capital Purchase Program (CPP), including repayments and other proceeds to date, restructuring of investments, and timeliness of dividend payments, and (2) the financial condition of institutions that received investments under CPP compared with institutions that exited CPP and those that did not participate in the program. To assess the status of CPP at the program level, we analyzed data from a number of sources including the Department of the Treasury (Treasury) and the Federal Deposit Insurance Corporation (FDIC). In particular, we used Treasury’s January 2012 Monthly 105(a) Report to Congress to determine the dollar amounts of outstanding investments, the number of remaining and former participants, and the geographical distribution of each as of January 31, 2012. We also used data from Treasury’s Dividends and Interest reports from February 2009 through November 2011 to determine the extent to which participants had missed payments throughout the life of the program. We interviewed Treasury officials to compare our missed payment counts with theirs and noted the reasons for any differences. Finally, we obtained from FDIC summary information on its quarterly problem bank list to show the trend of CPP institutions appearing on the list from December 2008 through December 2011. To assess the financial condition of institutions that received investments under CPP, we reviewed industry documents—including summaries of monitoring data used by banking regulators and Treasury—to identify commonly used financial measures for depository institutions. These measures help demonstrate an institution’s financial health related to a number of categories including profitability, asset quality, capital adequacy, and loss coverage. We obtained such financial data for all depository institutions using SNL Financial—a private financial database that contains publicly filed regulatory and financial reports. We merged the data with SNL Financial’s CPP participant list to create the three comparison groups—remaining CPP institutions, former CPP institutions, and a non-CPP group comprised of all institutions that did not participate in CPP. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP through full repayments or conversion to the Community Development Capital Initiative or the Small Business Lending Fund, accounting for 608 of the 707 CPP participants (see table 1). Our analysis focused on institutions with less than $10 billion in assets, which constituted nearly all of the remaining CPP institutions. Of the 99 CPP institutions excluded from our analysis, 11 were active participants with more than $10 billion in assets; 37 were former participants with more than $10 billion in assets; and 51 had no data available in SNL Financial, had been acquired, or were defunct. We compared the remaining and former CPP institutions to a non-CPP group of 8,040 active financial institutions for which financial information was available. We chose to present median values, but we also analyzed weighted averages and found the results to be similar. Financial data were available from SNL Financial for 427 of the 608 CPP institutions, and we accounted for an additional 181 institutions using the financial information of the holding company’s largest subsidiary from SNL Financial. All financial information reflects quarterly regulatory filings on December 31, 2011, unless otherwise noted. We downloaded all financial data from SNL Financial on February 20, 2012. Finally, we compared our analysis with Treasury’s quarterly analysis of CPP institutions, and we also leveraged our past reporting on the Troubled Asset Relief Program (TARP), as well as that of the Special Inspector General for TARP, as appropriate. We determined that the financial information used in this report, including CPP program data from Treasury and financial data on institutions from SNL Financial, was sufficiently reliable to assess the condition and status of CPP and institutions that participated in the program. For example, we tested the Office of Financial Stability’s internal controls over financial reporting as it relates to our annual audit of the office’s financial statements and found the information to be sufficiently reliable based on the results of our audits of fiscal years 2009, 2010, and 2011 financial statements for TARP. We have assessed the reliability of SNL Financial data—which is obtained from financial statements submitted to the banking regulators—as part of previous studies and found the data to be reliable for the purposes of our review. We verified that no changes had been made that would affect its reliability. We conducted this performance audit from August 2011 to March 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contacts named above, Christopher Forys, Emily Chalmers, William Chatlos, Rachel DeMarcus, Michael Hoffman, Marc Molino, Tim Mooney, and Patricia Moye made significant contributions to this report. | The Capital Purchase Program (CPP) was established as the primary means of restoring liquidity and stability to the financial system under the Troubled Asset Relief Program (TARP). Under CPP, the Department of the Treasury (Treasury) invested almost $205 billion in 707 eligible financial institutions between 2008 and December 2009. CPP recipients have made dividend and interest payments to Treasury on the investments. TARPs authorizing legislation requires GAO to report every 60 days on TARP activities, including those of CPP. This report examines (1) the status of CPP and (2) the financial condition of institutions receiving CPP investments. GAO reviewed Treasury reports on the CPP program and participants and interviewed officials from Treasury and the financial regulators. Using financial and regulatory data, GAO compared the financial condition of institutions remaining in CPP with those that had exited the program and those that did not participate in CPP. While repayments, dividends, and interest from institutions participating in the Capital Purchase Program (CPP) have exceeded the programs original investment disbursements, the number of missed payments has increased over the life of the program. As of January 31, 2012, the Department of the Treasury (Treasury) had received $211.5 billion from its CPP investments, exceeding the $204.9 billion it had disbursed. Of that amount, $16.7 billion remains outstanding, and most of these investments were concentrated in a relatively small number of institutions. In particular, as of January 31, 2012, 25 institutions accounted for $11.2 billion, or 67 percent, of outstanding investments. As of November 30, 2011, Treasury estimated that CPP would have a lifetime income of $13.5 billion after all institutions exited the program. As of January 31, 2012, 341 institutions had exited CPP, almost half by repaying CPP with funds from other federal programs. Institutions continue to exit CPP, but the number of institutions missing scheduled dividend or interest payments has increased. For example, as of November 30, 2011, the number of institutions that had missed their quarterly payments rose to 158, a marked increase from 8 in February 2009, even though CPP had fewer participants. The number of CPP institutions designated as problem banksthat is, demonstrating financial, operational, or managerial weaknesses that threatened their continued financial viabilityalso rose from 47 in December 2009 to 130 in December 2011. Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their CPP investments. GAOs analysis showed that the remaining CPP institutions were financially weaker than institutions that had exited the program and institutions that did not receive CPP capital. In particular, the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. Among other things, they had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although GAOs analysis found differences in the financial health of remaining and former CPP institutions, Treasurys quarterly financial analysis of CPP institutions did not distinguish between them. In prior work, GAO has noted the importance of providing clear information to Congress and the public about the performance of the assistance provided through the various programs within the Troubled Asset Relief Program. By distinguishing between remaining and former CPP participants, Treasury could provide greater transparency about the financial health of institutions remaining in CPP. To provide Congress and the public with more transparent and comprehensive information on institutions remaining in CPP and enhance its reporting, the Secretary of the Treasury should consider analyzing and reporting on remaining and former CPP participants separately. Treasury stated that it would carefully consider our recommendation. |
Congress first authorized the F2F program in the 1985 Farm Bill to provide for the transfer of knowledge and expertise of U.S. agricultural producers and businesses to middle-income countries and emerging democracies on a voluntary basis. Most recently, Congress reauthorized the program in the 2014 Farm Bill. Congress has authorized the F2F program to provide a broad range of U.S. agricultural expertise using U.S volunteers. The 2- to 4-week volunteer assignments are designed, among other things, to improve farm and agribusiness operations and agricultural systems, field crop cultivation, fruit and vegetable growing, livestock operations, marketing, and the strengthening of cooperatives and other farmer organizations (see fig. 1). USAID promotes a secondary goal not specifically noted in the authorizing legislation: to increase the American public’s understanding of international development issues and programs and international understanding of the United States and U.S. development programs. The volunteer nature of the program’s activities provides the opportunity for people-to-people cultural and technical exchange. USAID and its implementing partners give volunteers guidance about their responsibility for conducting public awareness activities about their experiences to promote better understanding of international development issues and objectives upon their return home. For the program’s first 6 years, annual amounts provided to F2F were below $2 million. However, with the dissolution of the Soviet Union, USAID initiated F2F program activities in the newly independent countries, including conducting a substantial number of volunteer assignments in Russia. The additional funding for these countries significantly increased the size of the F2F program. In the 2008 Farm Bill, Congress required that a minimum of $10 million be used to carry out the F2F program for each of the fiscal years 2009 through 2013. Over the fiscal years 2009 through 2013 period, USAID obligated an average of $11.5 million annually to the F2F program, and the program disbursed a total of $57.7 million for that program cycle. In the 2014 Farm Bill, Congress increased the minimum annual F2F funding requirement to $15 million. During the fiscal years 2009 through 2013 F2F program cycle, implementing partners under eight cooperative agreements and one contract made 2,984 volunteer assignments, most to 28 core countries (see fig. 2). Cooperative agreements with each partner typically include work in 2 to 5 core countries where the majority of volunteer assignments will occur. Beginning with the 2009 through 2013 F2F program cycle, USAID missions also began making separate Associate Awards to F2F partners to implement related programs (see app. II for more information on these awards). In addition, the cooperative agreements allowed for “flexible” volunteer assignments outside the core countries. F2F currently limits these flexible assignments to approximately 15 percent of the volunteer assignments for a given partner. USAID is implementing the fiscal years 2014 through 2018 F2F program through a total of nine cooperative agreements. In fiscal year 2014, the program had 296 volunteer assignments in 32 countries. USAID’s Bureau for Food Security administers the F2F program using a funding mechanism known as a Leader with Associate Award Cooperative Agreement. These agreements are global in nature, with core countries identified within defined geographical regions. USAID awards these agreements to implementing partners, typically U.S. nongovernmental organizations, universities, private volunteer organizations, or contractors, for a 5-year funding cycle. USAID uses the agreements to establish objectives, tasks, and responsibilities for the implementing partners. In this way, USAID provides program-wide direction and administration for F2F while relying on implementing partners to manage on-the-ground operations and execution of program activities. In the current program cycle, USAID awarded nine cooperative agreements to seven implementing partners. USAID awarded one of these cooperative agreements to a nongovernmental organization for a F2F Special Program Support project. That partner provides program- wide technical support services for the volunteer programs and finances specialized F2F volunteer projects to bring in smaller implementing organizations, test new approaches, and identify new sources of volunteers. Implementing partners are expected to collaborate with the Special Program Support project when appropriate. F2F has two USAID headquarters staff to handle the daily operations and oversight of the program and the implementing partners. At the beginning of each 5-year cycle, USAID uses a solicitation process and corresponding request for assistance (RFA) to provide a description of the program’s needs and how USAID will evaluate the applicants. In response, implementing partners describe the key components of their proposals, such as the intended country and regional focus, recruitment strategy, and agricultural sector focus. USAID specifies in the RFAs the areas in which USAID will have “substantial involvement” in implementation decisions, such as approval of implementing partners’ annual work plans, key personnel, and the monitoring and evaluation plan. In the most recent RFA, USAID determined the countries that were eligible within prescribed geographic regions. USAID also used the RFA to build in a minimum level of geographical overlap and coordination with U.S. foreign assistance programs. This was accomplished most notably with the U.S. global hunger and food security initiative, Feed the Future, by directing partners to include at least two Feed the Future focus countries within each region. After the competitive award process is completed, USAID continues to inform and approve partners’ annual work plans, which detail specific activities and objectives for each country in which the partner operates. USAID provides further guidance to its implementing partners through a manual, Managing International Volunteer Programs: A Farmer-to-Farmer Program Manual. USAID led the development of this manual in conjunction with implementing partners to collect lessons learned and best practices based on 20 years of F2F program experience and published the manual in 2005. According to the manual, its purpose is to serve as a reference for partners managing international volunteer programs, specifically F2F. It describes best practices on program management, volunteer assignment development and implementation, and public outreach. According to USAID, the F2F program provides this manual to all of its implementing partners. According to USAID officials, the Special Program Support project will assist USAID and the current implementing partners to update the manual later in this program cycle. Implementing partners identify agriculture sectors to focus on, such as horticulture, staple foods, and aquaculture, for individual countries with USAID input. According to USAID, partners consult with the F2F program office and the relevant missions to get their input, review, and approval on F2F activities before the partners begin activities in that country. USAID also said that partners consult with local stakeholders, F2F guidance, and other USAID program documents, such as Feed the Future’s sector analyses to develop these program activities and subsequent volunteer assignments. As the partners implement the program, they continue to work with the missions. However, each mission’s level of involvement can vary, depending on its portfolio of activities and interest. Implementing partners in the current F2F program cycle generally follow consistent practices for designing volunteer assignments, recruiting volunteers, and managing volunteer assignments. All partners work with hosts to develop a scope of work for each assignment, interview candidates, and assess the volunteers’ performance. However, they have inconsistent practices for screening volunteer candidates against terrorist watch lists and do not have a means to systematically report negative assessments of volunteers to USAID or each other. We found that the implementing partners that send volunteers follow consistent practices to design volunteer assignments, recruit volunteers, and manage volunteer assignments, which are outlined in USAID’s F2F program manual. Designing volunteer assignments: Implementing partners’ field staff identify host organizations (hosts) to potentially receive technical assistance through a variety of means, including networking with local government officials, consulting with the USAID mission, and visiting agricultural cooperatives and farming groups. To select hosts, field staff conduct in-depth interviews with potential hosts and assess them against predetermined criteria, such as the potential host’s ability to contribute resources to a volunteer assignment. Afterwards, field staff work with each selected host to assess its needs and identify how a volunteer might be able to provide assistance. They then work with the host to develop a scope of work for a single assignment that identifies the issue to be addressed, the assignment’s objectives, the host’s contributions, and the conditions under which the volunteer will be living and working. If a host would benefit from more than one assignment, field staff work with the host to develop a strategic plan for the multiple assignments. Recruiting for volunteer assignments: To solicit volunteers for assignments, each implementing partner conducts networking activities and posts information about its volunteer assignments on its respective website. Each of the partners employs web-based application forms to collect information about volunteer candidates and manage the information in its database. Field staff send scopes of work to the implementing partner recruiters in the United States as early as 3 months before the start of a volunteer assignment. Recruiters search their databases for candidates based on skills and narrow down candidates based on their dates of availability. They then interview candidates to assess whether their technical expertise matches the assignment’s needs and whether the candidates can adapt to the environment and culture. As part of the interview process, partners contact professional references for all candidates who are new to their program. Recruiters present finalist information to field staff who discuss the candidates with the hosts, and the host then select the volunteer. Managing volunteer assignments: Before the volunteer’s arrival, the field staff, the host, and the volunteer make any adjustments needed to the scope of work and establish an assignment schedule. Field staff provide the volunteer with an in-country orientation, introduce the volunteer to the host, and monitor the volunteer through regular communication during the 2- to 4-week assignment. Upon completion of the assignment, the partners require the volunteer to provide recommendations to the host organization, debrief field staff, and complete a summary trip report. In addition, each implementing partner requires its field staff and hosts to assess the volunteer’s performance and indicate whether they would recommend the volunteer for another assignment. We found that only two of the six partners screen volunteers against terrorist watch lists specified in a standard provision of their cooperative agreements and that the partners follow inconsistent practices for conducting other background checks on F2F volunteer candidates. This standard provision of the cooperative agreements prohibits implementing partners from engaging in transactions with, or providing resources or support to, individuals associated with terrorism, including those individuals or entities that appear on the Department of the Treasury’s Specially Designated Nationals and Blocked Persons List and the United Nations Security designation list. USAID officials stated that this provision applies to volunteers and they expect implementing partners to screen volunteers against these lists. However, USAID’s F2F program manual states only that implementing partners generally check “several references.” We found that two of the six partners screen volunteers against the two watch lists noted in the standard provision, in addition to screening against several other lists and checking professional references. We also found that a third partner conducts another form of background check on all volunteer candidates, in addition to contacting professional references. Specifically, that partner checks to see if candidates’ names are in the U.S. government’s System for Award Management, a free consolidated database of firms and individuals that are ineligible to receive contracts (or similar types of mechanisms) from the U.S. government. If the volunteer candidate has worked with the partner before, two of these three partners said they do not always screen the candidate again; the third partner said it rescreens the candidate if over a year has passed since his or her last assignment. All three of these implementing partners use software or web-based programs to screen candidates against the various watch lists, a process they stated takes a minute or less to complete. According to these three partners, they screen candidates against watch lists because they believe they are required to do by U.S. government regulations and that doing so is critical to their reputations as organizations. The three partners also said that this type of background check is important to reduce the risk of a volunteer engaging in criminal or any other activities that would cause the program to be seen negatively. Specifically, these partners said the volunteer’s character and conduct could affect the volunteer’s ability to achieve the objectives of his or her assignment, an outcome that could undermine the program’s goals, hurt relationships with host organizations, and undermine the program’s reputation. The remaining three implementing partners do not screen candidates against watch lists. They said they believed that USAID does not require them to do so. They also noted that they believed that professional reference checks and Internet research provide them with enough insight into a candidate’s character and conduct. Various forms of background checks are important because they provide recruiters with additional information that the candidate may not have reported, or is not publicly available, and because these checks are a means to verify information that the candidate provided. As a result, partners that do not run the background checks may risk fielding volunteers who could harm the program’s reputation and goals. We found that implementing partners do not have a systematic means of reporting or obtaining information from assessments of repeat volunteer candidates. As a result, partners can be unaware of assessments indicating that another partner would not recommend the volunteer for another assignment. For the fiscal years 2009 through 2013 program cycle, USAID reported that 41 percent of the volunteers were repeat volunteers. According to GAO’s Internal Control Management and Evaluation Tool, internal and external information should be obtained and provided to management as a part of reporting on operational Specifically, information performance relative to established objectives.critical to achieving the agency’s objectives, including information relative to critical success factors, should be identified and regularly reported to management and be used to inform future decisions such as selecting volunteers. While USAID’s F2F program manual encourages implementing partners to share information and contacts for volunteer recruitment, the manual could discourage implementing partners from reporting negative volunteer performance assessments to each other or to USAID. Specifically, with regards to volunteer program evaluation, the manual states: “Due to the fact that volunteers by nature offer their specialized services free of charge, a publicized negative performance evaluation has the potential to be a public relations disaster, damaging future recruitment efforts and perhaps work with hosts. Thus, evaluations of individual volunteers are not performed or reported systematically. Problems are generally identified in regular performance monitoring and management processes, and kept internal to the implementing organization.” As mentioned earlier in this report, all six partners assess the volunteer’s performance upon completion of the assignment and consult with host organizations as part of the assessment. Four of the six use a rating scale to assess a volunteer’s performance, including rating factors such as technical ability, quality of deliverables, and cultural sensitivity. All of the partners indicated that they kept information internally in their electronic databases on whether they would field the volunteer on another assignment. The partners also said that they contact other implementing partners for references on candidates who were previous volunteers. However, the partners said they do not systematically report this information to USAID or each other, and only share the results of assessments only when specifically requested. Without systematic collection and sharing of information, USAID cannot know whether the volunteers received negative assessments on their performance. Given that the volunteers provide the program’s primary input—technical assistance—ensuring the quality of the volunteer’s performance is critical to the success of the program’s goals and reputation. In addition, partners risk fielding volunteers who received negative assessments on assignments with other implementers, which could undermine the program’s goals and reputation. For example, in one instance, a partner told us that it removed a volunteer because of conduct issues and determined not to field that volunteer on another assignment. However, another partner selected that volunteer for an assignment that started shortly after the first assignment. During the second assignment, that partner also had to recall the volunteer because of similar conduct issues. USAID used a program-wide evaluation to adjust the program and conducts ongoing monitoring and evaluation, but USAID does not obtain information on a key aspect of the program’s implementation. After a 2012 program-wide evaluation, USAID revised program indicators, established a committee to discuss best practices, and increased training for implementing partner staff. USAID uses semiannual and annual formal reports and other means to conduct ongoing monitoring and evaluation activities. However, USAID is not collecting information on the extent to which volunteers are successfully completing the specific tasks and objectives that are assigned to them in scopes of work. Since 2003, USAID has conducted three program-wide evaluations of F2F. USAID’s most recent evaluation, in May 2012, found inefficiencies in the program’s data collection and reporting processes. Among other things, the evaluation recommended that USAID revise the list of required program indicators and reduce those less relevant for program management. In response, USAID revised the F2F standard program indicators and their definitions with extensive input from implementing partners and other stakeholders. USAID uses these indicators to track progress and report on changes along the cause-and-effect theory of the program’s development plan—leading from inputs and activities to outputs, outcomes, and impacts. According to USAID, another important use of the indicators and reporting is to maintain the implementing partners’ focus on achieving results. The revised indicators are intended to standardize F2F program reporting. Nevertheless, a challenge for USAID in developing effective F2F monitoring and evaluation indicators is the variety of volunteer assignments. While the F2F program’s primary input for all volunteer assignments is always short-term technical assistance, the type of the technical assistance and the outputs expected can vary significantly among assignments. For example, volunteer assignments range from developing a business plan for an agriculture cooperative to training farmers on practices for soybean cultivation. The 2012 evaluation also recommended that USAID increase support to train implementing partner staff on the appropriate use of the indicators so they can better track indicator data and impacts across the program. In response, USAID formed a working committee, led by F2F’s two program staff and made up of implementing partners, to (1) discuss issues with data collection and data quality and (2) develop and disseminate best monitoring and evaluation practices. Additionally, USAID held a workshop in early 2014 for all F2F implementing partners (including headquarters and field staff) and provided opportunities for training and discussion sessions on all aspects of F2F implementation. Monitoring and evaluation procedures, indicators, issues, and best practices were a particular focus. In addition, F2F Implementing Partners’ Meetings are held each year and, according to USAID, include additional opportunities to cover program topics, including monitoring and evaluation issues. According to implementing partners, the training and workshops helped field staff better understand how to use the indicators consistently. USAID officials told us that the training and workshops also stressed the importance of thoroughly and accurately collecting initial, or baseline, data on host organizations. The F2F office conducts ongoing performance monitoring and evaluation formally through semiannual and annual reports and informally, through ongoing communication with implementing partners. USAID tracks implementation pace, progress, and performance through the following indicators that implementing partners report on in semiannual and annual reports: inputs, such as the number of volunteer assignments, number of volunteer scopes of work, and number of days of volunteer service; outputs, such as the number of persons trained, number of host organizations assisted, and number of volunteer recommendations; outcomes, such as the number of volunteer recommendations adopted and value of resources leveraged by volunteers in the United States; and impacts, such as the value of annual gross sales and value of rural and agricultural lending and the area under improved environmental and natural resource management. USAID aggregates this information for its program-wide analyses. The goal of these monitoring and evaluation processes is to provide F2F management information it can use to guide program design and better target agricultural sectors, thereby increasing the program’s effectiveness. We found that USAID does not systematically obtain information on a key aspect of the program’s implementation. Specifically, USAID does not review information on the extent to which volunteers meet the objectives identified in the scopes of work. According to GAO’s Internal Control Management and Evaluation Tool, information should be obtained and provided to management as a part of reporting on operational performance relative to established objectives. Key to achieving F2F’s goals is the program’s primary input—the technical assistance a volunteer provides while on assignment. F2F guidance states that the scopes of work should translate program plans into specific tasks for volunteers. The guidance also states clearly that written scopes of work make it easier for the partner to recruit and guide volunteers and assess the success of the volunteer assignment. According to USAID officials and implementing partner staff, detailed and focused scopes of work are part of the essential foundation for successful volunteer assignments, and implementing partners give much time and consideration to their development. These scopes of work include the set of objectives and activities that the volunteer is to accomplish while on assignment. According to the six implementing partners, achievement of an assignment’s objectives, as described under the scope of work, contributes to the program’s desired outputs, outcomes, and impacts. All implementing partners require their volunteers to prepare trip reports that summarize the extent to which they achieved the specified objectives and completed activities listed in the scope of work. According to implementing partners, the reasons for not achieving an objective or completing an activity may vary and can be attributed to circumstances outside of the implementing partner staff or volunteer’s control. While conducting our fieldwork, we found an instance in which a volunteer’s objectives were not achieved. Specifically, in that case, the volunteer was unable to oversee the installation of a machine—an objective listed in the scope of work—because required parts needed for its assembly were not delivered by a third-party contractor to the host organization. However, the volunteer productively used his time to improve the output of a grain- processing machine. According to the implementing partners, volunteer trip reports and debriefings are to include information on the extent to which activities and objectives were accomplished. However, we found that none of the partners track the frequency of assignments when the activities in scopes of work are changed or whether the volunteers were unable to accomplish them during an assignment. While USAID obtains some statements of work and volunteer trip reports, it does not review the extent to which volunteers are able to accomplish the objectives specified in their assignments. Reviewing selected trip reports against scopes of work for this information throughout the program cycle could improve USAID’s understanding of the performance of its primary input—the volunteer technical assistance. This information could provide additional insight on the extent to which volunteers achieve established objectives and therefore whether volunteers are being effectively used. The success of the F2F program largely depends on implementing partners that work with hosts to develop appropriate scopes of work and then find volunteers with the technical expertise and skill sets to complete them. Although recruitment efforts focus largely on the volunteer’s skill set and experience, partners are inconsistently screening volunteer candidates to verify information about them. Specifically, four partners do not conduct any screening against terrorist watch lists as expected by USAID. Assessment information on repeat volunteers—especially information on negative assessments—could provide important insights into the volunteer’s ability to execute another F2F assignment. By implementing a consistent process to screen volunteers and by systematically sharing negative volunteer assessments, USAID and its partners could enhance their ability to ensure that volunteers execute their scopes of work without undermining the program’s goals and reputation. USAID took important steps to improve its ability to monitor program performance and evaluate program impact after the most recent evaluation, in 2012. However, USAID is not reviewing information on a key aspect of the program’s performance—the extent to which the specified objectives and activities in scopes of work are accomplished. Achievement of an assignment’s objectives, as described under the scope of work, contributes to the program’s desired outputs, outcomes, and impacts. With this information, USAID could enhance its ability to make better, evidenced-based management decisions. To enhance USAID’s oversight of the program, we recommend that the Administrator of USAID take the following four actions: ensure F2F implementing partners screen volunteer candidates against terrorist watch lists, as described in their cooperative agreements and USAID guidance; develop guidance for the implementing partners on the types of background checks they should perform as they screen volunteer candidates; update the F2F program manual to ensure that implementing partners systematically share negative volunteer assessment information with USAID and each other; and further develop its monitoring process to review the extent to which volunteers accomplish objectives and activities specified in the scopes of work. We provided a draft of this report for comment to USAID. In its written comments, reproduced in appendix III, USAID concurred with our recommendations. USAID expressed appreciation for F2F volunteers, noting that they give generously of their time and expertise. USAID also outlined the steps it plans to take in response to each recommendation, noting that the changes should strengthen the management of F2F. We are sending copies of this report to the appropriate congressional committees, the Administrator of USAID, 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) 512-9601 or MelitoT@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. For this report, we examined (1) how the U.S. Agency for International Development (USAID) administers the John Ogonowski and Doug Bereuter Farmer-to-Farmer (F2F) program, (2) how partners implement volunteer assignments and screen volunteers for the F2F program, and (3) the extent to which USAID uses monitoring and evaluation to manage the F2F program. To address our objectives, we reviewed program documents and information from the previous and current program cycles covering fiscal years 2009 through 2013 and 2014 through 2018, respectively. To determine how USAID administers the F2F program, we analyzed USAID and implementing partner documents such as requests for applications, cooperative agreements, and country program descriptions. We also reviewed USAID’s F2F program manual. In addition, we reviewed USAID data on the number of volunteer assignments. Our analysis of these data found some inconsistencies, but we found the data sufficiently reliable to generally enumerate the number of volunteer assignments by country. We divided those countries into four roughly even groups. We met with officials from USAID’s Bureau of Food Security F2F program in Washington, D.C., to understand their role in administering the program. We also met with the headquarters officials for implementing partners of the current program cycle, either in Washington, D.C., or via teleconference. GAO, Internal Control Standards: Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.: August 2001). addition, we conducted fieldwork in Ghana and Uganda, meeting with USAID mission officials, implementing partner field staff, F2F volunteers, and beneficiary host organizations. In selecting countries for fieldwork, we considered various factors, including the number of volunteers assigned, the implementing partner’s experience with the program and whether Associate Award activities occurred in either the previous or current cycle. To determine the extent to which USAID uses monitoring and evaluation to manage the program, we reviewed documents such as the implementing partner’s semiannual and annual reports, USAID’s 2012 midterm evaluation of the program, and USAID’s list of performance indicators and their definitions. We also reviewed GAO’s Internal Control Management and Evaluation Tool. In addition, we met with officials from USAID’s Bureau of Food Security F2F program in Washington, D.C., and with an implementing partner while conducting fieldwork to understand how the program’s monitoring and evaluation process has changed and the indicators on which the implementing partners currently report. We conducted this performance audit from May 2014 to April 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings conclusions based on our audit objectives. U.S. Agency for International Development (USAID) missions can leverage the Farmer-to-Farmer (F2F) program by making separate awards to F2F partners to implement agricultural programs. According to USAID guidance, a mission can make one or more of these awards, known as Associate Awards, to the recipient of an already existing Leader with Associate Award Cooperative Agreement (LWA) without going through an additional competitive proposal process. Therefore, missions, in consultation with implementing partners and the F2F office, can design and propose programs to implement under the Associate Award mechanism. Mission staff independently administer the Associate Award program and are responsible for financial oversight, monitoring and evaluation, and all other reporting requirements. Nevertheless, according to USAD officials, Associate Award programs are required to report the number of volunteers used in their programs to the F2F office to ensure that volunteers are incorporated into Associate Award programming. According to USAID guidance, F2F Associate Awards must be in alignment with the original program’s purpose and goals. Associate Awards may provide for (1) additional volunteer services in a F2F country or another country, (2) complementary support for F2F projects (i.e., grants, training, equipment and facilities, or other inputs) that can improve F2F program outreach and impact, or (3) volunteer services and complementary support for agricultural projects addressing a specific F2F development objective. Although F2F limits its activities to the provision of volunteer technical assistance, Associate Award programs use other funding sources and may implement other types of development activities in addition to volunteer assistance. LWAs and Associate Awards are considered separate obligating mechanisms; thus, funds from one award cannot be transferred to another. According to USAID officials, the Associate Award process is relatively fast and streamlined because it does not require any further competition. Mission officials noted that Associate Awards are an attractive option when considering funding mechanisms available for agriculture-related programs. During the fiscal years 2009 through 2013 cycle, USAID awarded 15 Associate Awards to three implementing partners, totaling $125 million. For example, a $32 million Associate Award was granted to an agriculture-related program in Ghana. In the current cycle, USAID has awarded 2 Associate Awards, 1 in Burma for $27 million and another in Ethiopia for approximately $3 million. In addition to the contact named above, Valérie L. Nowak (Assistant Director), Brian Tremblay (Analyst-in-Charge), Tina Cheng, Lynn Cothern, Martin De Alteriis, Mark Dowling, and Sushmita Srikanth made key contributions to this report. | First authorized in the 1985 Farm Bill, the F2F program leverages U.S. agricultural expertise by sending volunteers on short-term assignments to provide technical assistance to farmers, farm groups, and agribusinesses in developing and middle-income countries. During fiscal years 2009 through -2013, F2F funded about 2,984 volunteer assignments and obligated an average of $11.5 million annually. In the 2014 Farm Bill, Congress mandated that GAO conduct a review of the F2F program. GAO examined (1) how USAID administers the program, (2) how partners implement volunteer assignments and screen volunteers, and (3) the extent to which USAID uses monitoring and evaluation to manage the program. To address these objectives, GAO reviewed program documents and met with USAID F2F officials and current implementing partners. In addition, we conducted fieldwork in two countries that we selected based on factors, including the number of volunteers assigned. The U.S. Agency for International Development's (USAID) Bureau for Food Security administers the Farmer-to-Farmer (F2F) program through implementing partners under 5-year cooperative agreements. USAID provides overall direction, but relies on partners to execute program activities. USAID uses the agreements to establish the partners' objectives, tasks, and responsibilities. Once selected, partners create work plans for USAID's approval that describe potential volunteer assignments, such as providing expertise on grain processing and storage or groundnut production. Source: GAO. | GAO-15-478 USAID's partners follow consistent practices to implement volunteer assignments, but they have inconsistent practices for screening volunteer candidates against terrorist watch lists. All partners develop a scope of work for each assignment, interview candidates, and assess the volunteer's performance. However, only two partners screen candidates against the terrorist watch lists as expected by USAID. These partners and one other partner screen candidates against other watch lists. In addition, partners do not have a means to systematically report negative volunteer assessments to USAID or each other, even though 41 percent of volunteers in the last program cycle were repeat volunteers. Without conducting required checks and providing information on prior negative assessments, partners risk selecting volunteers who could undermine F2F's goals and reputation. USAID uses its monitoring and evaluation process to adjust the program, but does not review information on a key aspect of the program's implementation. In response to a program-wide evaluation, USAID revised performance indicators, established a committee that discusses best practices, and increased training for implementing partner staff. However, USAID does not systematically review information on the extent to which volunteers meet the objectives identified in the scopes of work. Reviewing volunteer trip reports against scopes of work could improve USAID's understanding of the volunteers' performance and provide additional insight on implementation progress and whether volunteers are being effectively used. GAO is recommending that USAID (1) ensure F2F partners screen volunteer candidates against terrorist watch lists, (2) develop guidance on the other types of background checks implementing partners should perform, (3) ensure that implementing partners systematically share negative volunteer assessment information, and (4) monitor the extent to which the objectives and activities in the scopes of work are accomplished. USAID concurred with GAO's recommendations. |
DHS issued the National Response Framework for federal, state, and local agencies to use in planning for emergencies. It establishes standardized doctrine, terminology, and processes for responding to disasters and other catastrophic events in the United States. The framework is based on a tiered, graduated response; that is, incidents are managed at the lowest jurisdictional levels and supported by additional higher-tiered response capabilities as needed (see fig. 1). Local governments respond to emergencies using their own resources or assistance from neighboring localities. For larger-scale incidents that overwhelm the capabilities of local governments, assistance from the state may be sought. Depending on the circumstances, states have capabilities, such as the National Guard, that can help communities respond and recover. If additional resources beyond what an individual state can provide are required, the state may request assistance from other states through Emergency Management Assistance Compacts or from the federal government. Catastrophic incidents, by definition, result in extraordinary levels of damage or disruption to government functions, and governors have the option to seek federal assistance. The federal government has a wide array of capabilities and resources to assist state and local agencies respond to incidents. In accordance with the National Response Framework and applicable laws including the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), various federal departments and agencies may play primary, coordinating, or supporting roles, based on their authorities and resources and the nature of the incident. In certain instances, national military capabilities may be requested to respond to an incident. Defense resources are committed following approval by the Secretary of Defense or at the direction of the President. According to FEMA planning guidance, plans must be integrated vertically among levels of government (e.g., local, state, and federal) to ensure a common operational focus and horizontally (e.g., health departments and law enforcement) to ensure that individual department and agency operations plans complement the jurisdiction’s plans. This integration enables stakeholders to synchronize the sequence and scope of a planned response in terms of roles and responsibilities, place, and time to a catastrophic incident. Catastrophic incidents include those that are defined in the National Planning Scenarios, which represent examples of the gravest dangers facing the United States, including terrorist attacks and natural disasters, and have been accorded the highest priority for federal planning efforts. FEMA’s primary mission is to reduce the loss of life and property and protect the nation from all hazards, including natural disasters, acts of terrorism, and other man-made disasters, by leading and supporting the nation in a risk-based, comprehensive emergency management system of preparedness, protection, response, recovery, and mitigation. As described in the National Response Framework, planning is one of six activities essential to preparing for an incident. Other activities include training; equipping; exercising; and evaluating and improving to build tribal, local, state, regional, and national capabilities necessary to respond to any type of disaster. As shown in figure 2, FEMA has 10 regional offices nationwide. Each region serves several states, and FEMA regional personnel work generally with the states to help plan for disasters, develop mitigation programs, and meet other needs when major disasters occur. Regional office locations are starred in the figure below, and in some cases are located within a pilot state. Washington, D.C. U.S. Northern Command (NORTHCOM) and U.S. Pacific Command (PACOM) are the combatant commands charged with carrying out DOD’s domestic civil support mission, which involves responding to the needs of 56 separate and often unique state and territorial governments. Additionally, NORTHCOM and PACOM coordinate with numerous federal agencies that also have roles in planning for and responding to a variety of incidents in the homeland. As part of the lessons learned from Hurricane Katrina, both NORTHCOM and PACOM have established Defense Coordinating Officers with staff to serve as DOD representatives to civilian authorities in the 10 FEMA regions. Defense Coordinating Officers are full-time senior-level military officers who provide liaison support and requirements validation, and they serve as single points of contact for state, tribal, local, and other federal authorities that need DOD support. In that way they are able to develop relationships with civilian authorities and gain an understanding of civilian capabilities so that DOD will know what, if anything, it may be called upon to provide in the event of a disaster or other incident. Additional defense resources include Emergency Preparedness Liaison Officers who are senior Reserve officers that are expected to assist the Defense Coordinating Officers in coordinating the provision of military personnel, equipment, and supplies to support the emergency relief and cleanup efforts of civilian authorities. When NORTHCOM and PACOM are called upon to support civilian authorities, in most cases support will be localized, limited, and specific. When the scope of the disaster is reduced to the point where the primary federal agency can again assume full control and management without military assistance, NORTHCOM and PACOM will withdraw. The TFER pilot program was first envisioned by senior DOD leadership to address the National Planning Scenarios through supporting and strengthening the catastrophic disaster preparedness of individual states. However, since DOD is always a supporting agency when responding to catastrophic events in the homeland, DOD leadership did not think it was appropriate for DOD to administer the pilot program, and FEMA administered and funded the pilot program. Although FEMA administered TFER, pilot program guidance stated that the TFER program was to place a special emphasis on coordination and integration between the pilot states, FEMA, and DOD. Further, a key measure of achievement in the pilot program is the degree to which DOD stakeholders are integrated as full partners in the development of states’ plans. FEMA designed TFER to help assess, strengthen, and advance state catastrophic preparedness planning across state and local agencies and the private sector, as well as achieve a fuller integration of state planning efforts with federal agency partners through a deliberate blending of civil- military planning expertise. The TFER pilot program centered on the creation and employment of a dedicated planning team. Specifically, the planning team was to synchronize catastrophic planning efforts at the respective state, regional, and federal levels; prepare planning documents; identify gaps in capabilities; and assist in the overall organization, administration, and improvement of the states’ catastrophic preparedness planning capacity. The three objectives of TFER are to (1) develop plans, (2) build relationships, and (3) document lessons learned. FEMA designed TFER to run 18 months, beginning on September 1, 2008, and ending on March 31, 2010. The pilot program was extended another 6 months to September 30, 2010—for a total time of 2 years—to allow states more time to accomplish their planning goals. As shown in figure 3 , FEMA announced in March 2010 that TFER would not continue past the pilot stage, but allowed the pilot states to draw down the remaining TFER funds and continue to complete initiatives started under TFER through August 2011. FEMA limited the pilot program to five states, each of which received $200,000 in the first year of the pilot program, and an additional $150,000 for the remainder of the program, for overall program funds totaling $1.75 million. It selected applicants to achieve a representative cross-section of geographic differences, FEMA regions, threat of catastrophic events, state emergency management structures, and participation in a separate FEMA catastrophic planning grant. As discussed in appendix II, FEMA provides funds to states and localities for catastrophic planning through other grant programs. For example, FEMA’s State Homeland Security Program provides funding that may be used for planning efforts that enable states to prioritize needs, build capabilities, update preparedness strategies, allocate resources, and deliver preparedness programs across disciplines and levels of government. FEMA administers the pilot program within its National Preparedness Directorate. This directorate is responsible for overseeing the coordination and development of strategies necessary to prepare for all hazards. As part of this mission, the National Preparedness Directorate is to provide policy and planning guidance, training and exercises, and technical assistance that builds prevention, protection, response, and recovery capabilities. In the aftermath of Hurricane Katrina, FEMA began to address the challenges revealed by its response. FEMA’s 2006 Nationwide Plan Review highlighted the need for fundamental planning modernization and observed, among other things, that: catastrophic planning efforts were unsystematic and uneven; planning expertise was insufficient for catastrophic incidents; and collaboration requirements were not well- defined, fostering a tendency to plan internally. In addition, according to FEMA, the 2006 Nationwide Plan Review revealed that 95 percent of state and urban area participants cited the need for federally funded planning support and technical assistance. FEMA also reported that in 2007, states and urban areas ranked planning among their highest grant funding priorities. The Department of Homeland Security’s Office of Inspector General recently reported that while progress has been made, the National Preparedness Directorate needs more effective coordination with state, local, and tribal governments. Our prior work on FEMA, and specifically the National Preparedness Directorate, has highlighted the need for strategic planning that identifies outcomes and performance measures for the Directorate’s programs. In October 2010, we also reported that since April 2009, FEMA has made limited progress in assessing preparedness capabilities and has not yet developed national preparedness capability requirements based on established metrics to provide a framework for these assessments. We reported that until such a framework is in place, FEMA will not have a basis to operationalize and implement its conceptual approach for assessing local, state, and federal preparedness capabilities against capability requirements to identify gaps for prioritizing investments in national preparedness. FEMA responded that it has made much progress since 2009 in meeting its legislative requirements and highlighted some of its specific achievements, such as the establishment of a working group to help consolidate and streamline reporting requirements for state, tribal, and local stakeholders. FEMA developed program objectives and a data collection plan—elements of sound management practices—but did not implement other elements of sound management practices, such as documenting standards for determining the program’s success and did not always follow its stated processes and procedures for TFER. Further, FEMA does not have agencywide policy guidance for FEMA program managers to follow when developing pilot programs. In November 2008, we reported that pilot programs can more effectively inform future program rollout when sound management practices are followed. Consistent with best practices in program management, our guide for designing evaluations, and our prior work, we identified sound management practices to design a pilot, to guide consistent implementation of a pilot, and to conduct analysis of the results. Our assessment of FEMA’s implementation of sound management practices for TFER is shown in table 1. FEMA developed objectives for the pilot states to follow, but did not document standards for determining whether TFER was successful. According to sound management practices, having objectives that reflect the goals of the pilot program can help determine whether the objectives of the pilot have been met. FEMA outlined three objectives for the TFER pilot program—develop plans, build relationships, and document lessons learned—and these objectives reflect TFER’s goals. For example, the “develop plans” and “document lessons learned” objectives reflect the goals of TFER because achieving these objectives may help assess, strengthen, and advance state catastrophic preparedness planning—a stated TFER goal. Further, achieving the “build relationships” objective may enhance the stated TFER goal of integrating state planning efforts with those of federal agency partners. However, FEMA did not define how states’ implementation of the objectives would impact the decision to extend or end TFER. According to sound program management practices, defining standards for determining pilot-program performance is necessary to determine what success level is appropriate for judging the pilot program’s effect. The TFER program manager said that discussions about the expectations for TFER were held at a high level with senior leadership from FEMA, DOD, and the participating states, such as the Adjutants General, before TFER planners were hired. However, FEMA did not include the standards resulting from these conversations in the TFER program guidance. The program manager said that the agency had a limited time frame in which to design the pilot and that if he were to design the TFER pilot now, he would build language into the grant guidance that included standards for measuring performance. By clearly defining standards for determining program performance, FEMA would be better positioned to determine whether TFER enhanced states’ catastrophic planning, as well as achieved a fuller integration of state planning efforts with federal agency partners through a deliberate blending of civil-military expertise. FEMA outlined steps for administering TFER, which aligns with sound management practices, but FEMA did not always adhere to the processes and procedures it developed for the pilot. Sound management practices include developing processes and procedures for approving, reporting, and monitoring and providing program support. Further, according to Standards for Internal Control in the Federal Government, such control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. FEMA outlined steps in two key documents, the TFER Guidance and Application Kit and the TFER Pilot Information Package in which FEMA described the support it would provide the participating states and the procedures for monitoring the program. FEMA developed processes and procedures for providing funding, training, holding a meeting with the pilot states, and approving state project management plans that met certain requirements, and establishing a mechanism for sharing lessons learned among the states, but FEMA did not fully follow the steps it outlined. For example, FEMA provided $1.75 million in funds to the state administrative agencies identified in the TFER Pilot Information Package and established a virtual communication tool for the TFER pilot states to communicate and share lessons learned. However, FEMA provided training for the initial cohort of TFER planners in April 2009, which FEMA officials told us consisted of two-thirds of the planners originally hired by the states. All five states found FEMA’s training useful. However, officials in two states told us additional training would have been useful. For example, one TFER planner who was not hired at the time of the training stated that additional training could have provided planners more opportunities to network and gain knowledge about state and federal resources. Further, FEMA conducted a meeting with the pilot states to accomplish tasks such as establishing support requirements and planning deliverables, but FEMA approved three state project management plans that did not contain all the recommended information, such as specific tasks, milestones, and deliverables. The TFER program manager stated that part of the intent of TFER was to design it in real time, working with the jurisdictions, and that the omissions of the recommended information did not negatively impact the states’ implementation of TFER. However, the states whose project management plans did not include specific deliverables have not completed draft plans. Further, FEMA also established processes and procedures for reporting and monitoring, but did not fully follow them. Specifically, FEMA stated in the TFER Pilot Information Package that the project manager would conduct biweekly conference calls with the states, but state officials in all five pilot states noted that FEMA headquarters involvement was inconsistent. According to the program manager, the purpose of these meetings was to ensure the pilot was functioning smoothly, so FEMA conducted biweekly meetings as TFER became operational but the meetings were discontinued once the pilots were underway. However, officials in four states reported that it would have been helpful if FEMA had provided more guidance on plan development. Further, TFER planners in one state reported that the lack of guidance made it more difficult to write plans. Another planner stated that FEMA did not provide the expected level of meetings and technical assistance. The program manager stated he was available to provide the states with assistance as needed throughout the pilot program. In addition, FEMA established reporting requirements and a plan to conduct a 6-month evaluation. For example, the states submitted reports to FEMA—to include the status of milestones and deliverables—but the program manager told us he did not review all of these reports because not all of these reports were submitted to his office. As a result, the program manager could not monitor progress in meeting milestones and completing deliverables. FEMA also conducted a 6-month evaluation of the pilot program, but four pilot states reported that FEMA did not provide feedback on the evaluation. According to sound management practices, continuous monitoring can be a useful tool for facilitating effective management by providing regular feedback about how well a program is performing its functions. This type of feedback allows managers to take corrective action when problems arise and can also provide stakeholders with regular assessments of program performance. By adhering to the steps outlined in TFER documents, FEMA could have more effectively monitored the pilot program to better ensure that the states receive the level of guidance and support they identified as beneficial in order to enhance their TFER catastrophic planning efforts. FEMA developed a data collection plan but did not reliably collect data for the pilot evaluation, and FEMA did not develop a data analysis plan to describe how it would track TFER’s performance and evaluate its effectiveness based on standards to determine program performance. For example, FEMA developed elements of a data collection plan, following sound management practices such as detailing the type of data necessary to monitor and evaluate the pilot and identifying the timing and frequency of data collection. Further, FEMA’s data collection plan followed reporting requirements specified in its program documents for TFER participants, and also included a data collection tool for evaluation of the pilot, presented in appendix III. However, FEMA did not always identify the source that was to collect the data. Sound management practices say that the source of data should be specified in the data collection plan, and according to program evaluation guidance, the reliability of evaluations can vary depending on who responds. During interviews with officials from participating states and FEMA regional offices, we found inconsistencies in who completed the evaluation questions. For example, two pilot states developed their own responses and three FEMA regions developed the responses for their respective pilot states, even though one of the questions explicitly asked for the opinion of state stakeholders. Further, two of the three states were not cognizant of the fact that their FEMA regional offices had completed the evaluation questions; therefore, these states’ views may not have been accurately captured in the evaluation responses. Moreover, officials in one FEMA regional office questioned whether they were the appropriate FEMA personnel to administer the evaluation questions, since FEMA headquarters had collected all prior information from the states. Collecting data from consistent sources across the five pilot states could have better positioned FEMA to ensure the data were reliable and compare responses across states in order to draw conclusions about states’ experiences in the pilot program. Further, FEMA did not collect information to determine whether all of the pilot program objectives were fully met. Specifically, FEMA changed some of the data collection questions it provided the states in the TFER Pilot Information Package when it released updated questions in the TFER Evaluation Criteria document. For example, FEMA used the same three objectives in both its original and updated documents, and its objectives on developing plans and documenting lessons learned objectives were consistent across documents, but FEMA did not collect information to assess all of the relationships it identified as important for its objective on building relationships in the TFER Pilot Information Package. For instance, FEMA did not evaluate coordination with FEMA, Defense Coordinating Officers, or Emergency Preparedness Liaison Officers—all relationships principal to implementing TFER, according to the TFER Pilot Information Package document. FEMA included a question that asked the pilot states which federal agencies they coordinated with, but did not include any question that would allow it to evaluate the extent to which coordination occurred with these stakeholders. As a result, the evaluation responses we reviewed listed the stakeholders they coordinated with but did not discuss the extent of coordination between state officials and stakeholders. FEMA officials said that because the Defense Coordinating Officer and Emergency Preparedness Liaison Officer positions were not the only relationships explored between states and federal agencies, the evaluation criteria was changed to make it more general to determine with which agencies the TFER states engaged. However, by changing the evaluation question to a general and descriptive question on federal relationships, it will be difficult for FEMA to determine if the states achieved a fuller integration of planning efforts with federal agency partners—one of the goals of TFER. FEMA did not develop a data analysis plan to describe how it would track TFER’s performance and evaluate its effectiveness based on criteria to determine program performance. According to sound management practices, a data analysis plan sets out who will do the analysis and when and how data will be analyzed to measure the pilot program’s performance. FEMA did not finalize a data-analysis methodology describing how FEMA would use information collected from the states to evaluate TFER until after it collected responses to FEMA’s evaluation criteria questions. The TFER program manager stated that FEMA plans to look for trends in the states’ responses to the evaluation questions to discern common threads and outliers. According to the program manager, FEMA did not develop a plan that outlined the overall approach it would use to analyze the TFER data during design of the pilot program because the pilot was not intended to produce quantitative results. He further stated that FEMA wanted to see what worked and what did not work as the pilot evolved. However, a data analysis plan could have helped guide the analysis of the qualitative data FEMA collected from the pilot states and FEMA regional offices. Developing data collection and data analysis plans following sound management practices to establish a methodology for collecting and evaluating the pilot’s results could have provided FEMA with reasonable assurance that it possessed the data and performance information needed to draw reasonable conclusions on the impact of TFER. The TFER program manager told us he is analyzing the data collected for TFER to draw conclusions regarding the pilot program, but FEMA officials stated that TFER would not be continued past the pilot stage. The information on the TFER pilot program’s evaluation stated that the results of the evaluation would determine the prospect for the program’s continuation and level of future funding. However, prior to conducting its evaluation of the pilot, FEMA announced in March 2010 that TFER would not be continued as a stand-alone grant program. According to FEMA officials, the decision to discontinue TFER as a stand-alone grant program was made because DOD may begin a similar initiative and states could allocate other FEMA grant funding for catastrophic planning purposes. Specifically, the TFER program manager noted that the National Guard Homeland Response Force, which is a DOD concept that would place National Guard personnel in each FEMA region, could continue the planning efforts associated with TFER. DOD officials stated that these personnel would be located regionally and not in individual states; therefore, the National Guard Homeland Response Force initiative could supplement but not replace a TFER-like initiative. Also, according to DOD, the National Guard Homeland Response Force would have as its mission response to chemical, biological, radiological, nuclear, and high-explosive incidents and would not have a broad purview like TFER. A FEMA assistant administrator also said that FEMA made the decision to not continue TFER due to changing budget conditions and to focus on its legislative and presidential directive mandates. Other FEMA grant programs available for catastrophic planning are discussed in appendix II. According to the TFER program manager, FEMA leadership will make a decision on whether and how the results of the evaluation are disseminated after the program office finishes the evaluation of TFER. According to sound management practices, results and recommendations that emerge from evaluations must be disseminated in ways that meet the needs of stakeholders. The TFER program manager stated it is not his decision whether the results of the pilot’s evaluation will be shared. According to the TFER program manager, FEMA leadership will make a decision on whether and how the results of the evaluation are disseminated after the program office finishes the evaluation of TFER. FEMA administered the TFER pilot program, but other key stakeholders in federal disaster response, such as the pilot states and DOD, could benefit from the results of FEMA’s evaluation of the TFER pilot program. Disseminating the results, recommendations, and lessons learned from the TFER pilot could assist future state catastrophic planning efforts, whether they be led by FEMA, DOD, another federal agency, or a state. FEMA’s Office of Policy and Program Analysis reported that FEMA does not have a directive on how to design, administer, and evaluate a pilot program. In the absence of this, FEMA does not have a systematic approach for designing, administering, and evaluating such programs. The program manager stated there are no formal guidelines for developing FEMA grants. We previously reported that FEMA faced methodological challenges in assessing capabilities and has not generated meaningful preparedness information from data collected from pilot programs. Standards for Internal Controls in the Federal Government state that management is responsible for ensuring that detailed policies, procedures, and practices are developed and built into and are an integral part of operations. These elements, which are an integral part of an agency’s ability to ensure accountability and achieve effective results, need to be clearly documented to help ensure that management directives are carried out as intended. By developing and implementing policy guidance that includes sound management practices, FEMA could be better positioned to ensure its pilot programs meet their intended goals. All five states have taken steps to follow FEMA’s TFER Information Package and TFER Evaluation Criteria document to address the TFER pilot program’s three objectives—develop plans, build relationships, and document lessons learned—and these efforts are ongoing. First, of the four states committed to developing plans, two states have completed draft plans, and TFER planners in all states reported using FEMA’s CPG 101 planning process to develop initiatives that fill gaps in state catastrophic planning. Second, all five states built relationships with stakeholders, including FEMA and state agencies, but coordination with DOD—specifically, with the Defense Coordinating Officers and Emergency Preparedness Liaison Officers—was limited. Third, all states documented lessons learned from the pilot program, which included the benefit of dedicated funding for catastrophic planning, and establishing longer time frames for states to complete the planning process. However, these efforts are ongoing as four states continue to spend TFER funds. Four of the states are developing plans and all five pilot states reported they are using the planning process outlined in FEMA’s CPG 101. However, two of the four states developing plans have not completed them. The fifth state is focusing on other planning initiatives. FEMA articulated the criteria for this objective in the TFER Pilot Information Package and the TFER Evaluation Criteria document, which focused on organizing plans according to CPG 101 and plan development. Based on audit work conducted in the TFER pilot states, we assessed the states’ progress based on these criteria, and concluded that two of the states have made substantial progress in fulfilling the FEMA objective on developing plans, and the other three have made some progress, as shown in figure 4. Figure 4 further explains this assessment, as well as appendix IV, which provides specific information regarding each pilot state’s TFER initiatives and progress made towards meeting FEMA’s objectives for TFER. Developing plans. The status of the states’ TFER plans varies; Washington and South Carolina have completed some but not all of their plans, while Hawaii and West Virginia have not completed any draft plans. Hawaii and West Virginia officials identified reasons for not having completed draft plans, including delays in hiring qualified planners. One of FEMA’s requirements for TFER was that planners have experience in conducting civil-military support planning and operations with the National Guard and/or military experience. In Massachusetts, South Carolina, and Washington, all planners initially hired for TFER had military backgrounds. These states hired planners as early as February 2009—5 months after the pilot program began. One of the planners initially hired had prior military and civilian experience, and the other had a logistics background. Hawaii hired its first TFER planner in April 2009 but did not hire a second planner until August 2009—11 months after the pilot began. Hawaii officials told us that they found it difficult to hire qualified individuals with a military background because better paying options exist in the state for qualified individuals. One of Hawaii’s two current planners does not have military experience, but state officials told us that the individual is qualified because of his information technology background, which was needed to support logistics planning. Additionally, he worked for the state planning agency. West Virginia officials reported that they hired their planners in the July/August 2009 time frame—10 to 11 months after the pilot began. Two applicants originally applied for the position, one of which West Virginia hired. This individual did not have a military background, but officials stated he was qualified based on his decades of experience as a first responder. West Virginia subsequently hired a National Guardsman. The West Virginia TFER supervisor stated that inadequate planning capacity at the local level also delayed TFER efforts because West Virginia TFER focused on building capacity at the local level. FEMA granted all five states a 6-month extension based on delays the states experienced. As previously discussed, planning continues in four states, as they are still spending TFER funds, as of March 2011 (see fig. 5). Massachusetts TFER planners facilitated planning between different levels of government, but other state planners are developing the plans. Massachusetts initially focused on contributing to Boston’s improvised explosive device planning efforts, but differences in time lines, combined with TFER’s brief performance period, caused the team to change its focus to facilitating collaborative emergency planning among federal, state, local, and private stakeholders. For example, the Massachusetts TFER planners facilitated collaborative planning among the Massachusetts Department of Public Health, the U.S. Department of Health and Human Services, the Massachusetts Emergency Management Agency, and FEMA to create a statewide medical support plan. TFER planners developed interagency relationships and helped the planning team select goals and objectives but did not draft the plan, which state officials said other state planners are developing. State officials decided the TFER planners would not actually write the plans because of the pilot program’s short time frame. Filling gaps in state planning. State officials reported that TFER initiatives fill gaps in existing state plans. For example, South Carolina, Washington, and West Virginia chose to work on a catastrophic incident plan as part of their TFER efforts, and this plan is an annex to the states’ basic emergency operations plan. Further, officials in four of five states reported that TFER initiatives focused on gaps not addressed by other planning initiatives. For example, the FEMA Region X TFER contact stated that Washington successfully integrated TFER with the Regional Catastrophic Grant Planning Program. Two of three West Virginia TFER scenarios pertain in part to scenarios addressed by other planning efforts, but officials stated that TFER planners work collaboratively with the planners involved in these other efforts, as described in appendix IV. Additionally, Hawaii officials anticipate the Regional Catastrophic Planning Grant Program will address hurricanes in 2011—before the state exhausts its TFER funds. State officials expect these efforts to be complementary. FEMA’s planning process. All five states reported that they are following FEMA’s planning process, and states that developed draft plans utilized the structure recommended in FEMA’s CPG 101 (see fig. 6). All of the states reported they are following FEMA’s six-step planning process, but they are in different stages of that process, as of March 2011. Washington has exercised three out of seven of its plans—part of step six. However, most of Washington’s plans remain in draft form, which is associated with step five. Since Hawaii, South Carolina, and West Virginia officials told us their states have not exercised any plans, they are in step five—the step where planners write the plan and the plan is approved. Massachusetts state officials decided that their pilot program would coordinate planning efforts, but that other state planners would develop plans; officials stated they did not move beyond step four in the planning process. Officials in the four states that committed to developing plans reported that they are structuring plans as recommended by CPG 101, but some sections are not included in the states’ draft plans. CPG 101 provides a recommended structure for annexes to a state’s basic emergency operations plan. These annexes comprise half of the 32 TFER initiatives spanning all five pilot states. Ten of 13 annexes we reviewed were missing at least one recommended section. For example, none of the three catastrophic incident plans we reviewed contain a section on direction, control, and coordination. South Carolina and Washington officials noted that their plans did not include all of the recommended sections because other state plans like the basic emergency operations plan contained these sections. Washington officials further stated that TFER-supported planning is part of the state emergency operations plan and is not designed to stand alone. Further, Hawaii officials told us that they are following the FEMA guidance, but its plans are incomplete and work is ongoing. West Virginia officials stated that it is following the structure recommended in CPG 101, but since some of the sections rely on information gathered at the county level, it will take about 5 years before the state has enough information to include each recommended section in its catastrophic incident plan. We were unable to further assess the content of the pilot states’ plans because all but three of the plans TFER states are developing remain in draft form. relevant stakeholders. As discussed in figure 7, all five states have made some progress in building relationships with relevant stakeholders. Our assessment—based on audit work conducted in the TFER pilot states—is summarized in figure 7 and further explained below as well as in appendix IV, which provides specific information regarding each pilot state’s TFER initiatives and progress made towards th is objective. All states have documented lessons learned to date, but four states have not exercised TFER plans to determine their effectiveness in the event of an emergency. As shown in figure 8 and further explained in appendix IV, the TFER pilot states have provided a number of lessons learned and recommendations on how to improve a similar program in the future. One state, Washington, has made substantial progress documenting lessons learned because it has exercised three of its plans to evaluate their effectiveness, one of the components FEMA cited in the objective. FEMA articulated the criteria for this objective in the TFER Pilot Information Package and the TFER Evaluation Criteria document, which focused on documenting lessons learned, including exercising plans to evaluate TFER’s effectiveness. All five pilot states documented lessons learned for a report published by the National Guard Bureau in August 2010, and we obtained additional lessons learned during our interviews with state officials. Further, two of the states provided us with the lessons learned they submitted to FEMA for its evaluation, which is not yet complete. Some of the lessons learned were similar across the pilot states. For example, all five states considered the pilot a success; Hawaii, Massachusetts, South Carolina, and West Virginia officials reported that TFER allowed their states to conduct catastrophic planning that otherwise would not have occurred, and Washington reported that TFER advanced its catastrophic and emergency logistics planning by at least 2 years. Washington officials further stated that the $350,000 the state received in TFER funding generated more return on investment than any other $350,000 in the state’s emergency planning budget. Based on their view of TFER’s success, officials in each of the five pilot states recommended FEMA expand TFER to other states. All states reported three principal reasons for considering TFER a success: (1) autonomy to develop their own work plans, (2) provision of dedicated funds to hire planners, and (3) the background of the TFER planners. (1) State officials reported that they worked collaboratively with FEMA to select catastrophic scenarios. For example, South Carolina chose to work on plans related to terrorism attacks because state officials believe they had adequately planned for hurricanes and earthquakes—the two National Planning Scenarios ranked higher than terrorism attacks in the state’s risk assessment. Officials in all five states highlighted the benefit of this flexibility. (2) Officials in all five states reported that the narrow focus of TFER, dedicated solely to enhance catastrophic planning, was key to the pilot program’s success. State officials told us that state planners are often required to assist emergency planning and response efforts during more routine disasters, such as seasonal floods and forest fires, but since the terms of TFER did not allow states to use TFER funds for these efforts, catastrophic planning continued unabated. (3) Officials in all five states reported that the planners’ military background was beneficial. For example, state officials in Massachusetts told us the planners’ military experience provided them with a level of experience and training not often found in other sectors and gave them credibility. However, officials in three states told us that civilian planning or emergency management experience also provided TFER planners the needed skill set. States also reported challenges they faced, including (1) short time frames that limited their ability to complete the planning process, and (2) not enough guidance for the specialized plans they were developing. (1) All five states reported that the short time frames limited their ability to complete the planning process. FEMA structured TFER as an 18-month program, and states noted that this was an insufficient amount of time to complete the full cycle of planning. Officials in one state thought that an adequate time frame would have been 3 years, noting that this is the time frame FEMA established for the Regional Catastrophic Planning Grant Program. The TFER program manager stated that FEMA’s 6- month program extension—bringing the pilot program time frame to 2 years—provided a sufficient amount of time to complete the TFER initiatives. (2) CPG 101 provides general format and content guidance applicable to all plans, but officials in four of the pilot states said that it would have been helpful for FEMA to provide guidance for specialized plans such as catastrophic incident annexes, terrorism plans, and logistics plans. For example, one TFER planner stated that clearer guidance could have accelerated the planning process. Further, officials in a fourth state said that they are using an unpublished FEMA guide to support their planning efforts. FEMA officials told us that states can request technical assistance and examples of well-developed plans to aid in their own plan development. According to the TFER program manager, FEMA is in the process of developing additional Comprehensive Preparedness Guides that will inform plan content for future state planning efforts. The process of documenting lessons learned is ongoing because Hawaii, South Carolina, Washington, and West Virginia are still developing TFER plans and spending TFER funds. Hurricane Katrina highlighted gaps in the nation’s preparedness to respond effectively to catastrophic incidents. By their nature, catastrophic events involve extraordinary levels of casualties, damage, or disruption that will likely immediately overwhelm state and local responders— circumstances that make sound planning for catastrophic events all the more crucial. Planning is a key component of national preparedness. Planning provides a methodology to determine required capabilities and helps stakeholders learn and practice their roles for building and sustaining national preparedness capabilities against terrorist attacks and other hazards. As state and local governments continue to develop and improve plans for catastrophic events and identify potential resource shortfalls, the federal government will be in a better position to understand the nature of the gaps it may be called upon to fill if state and local resources are overwhelmed. The TFER pilot program was one such effort to enhance catastrophic preparedness and provide federal stakeholders with valuable information regarding local, state, or regional response capability. However, by not consistently following sound management practices to design, administer, and evaluate the TFER pilot program and by not following its processes and procedures for administering the pilot, it is unclear whether TFER achieved its intended purpose. As we have reported, FEMA has piloted other efforts that have not generated meaningful preparedness information from the data collected. Future pilot programs at FEMA could benefit from policy guidance that includes sound management practices to design, administer, and evaluate pilot programs. In addition, future state catastrophic planning efforts could benefit from the dissemination of the evaluation results of the TFER pilot program to relevant stakeholders. We recommend the Administrator, Federal Emergency Management Agency, take the following two actions. To help ensure future pilot programs achieve their intended results and provide the performance information needed to make effective management decisions for broader implementation, develop and implement policies and guidance for pilot programs that follow sound management practices. This guidance should include, at a minimum, requirements for a clearly articulated methodology with objectives reflective of overall program goals and standards for determining program performance; procedures for monitoring program performance; a data collection plan; a data analysis plan; and a process to disseminate the results and lessons learned that emerge from the pilot. To help ensure stakeholders receive valuable information regarding catastrophic preparedness from lessons learned during the TFER pilot program, disseminate the evaluation results and recommendations that emerge from the TFER pilot program in ways that meet the needs of current and future stakeholders. We provided a draft of this report to FEMA and DOD for review and comment. FEMA provided oral comments on the draft report on April 5, 2011. FEMA fully concurred with both of our recommendations but did not specify how it planned to address them. DOD did not provide comments on the draft report because the report did not include recommendations to DOD. Both FEMA and DOD provided technical comments, which we incorporated throughout our report as appropriate. As agreed, 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 are sending copies of this report to the Administrator, Federal Emergency Management Agency, and Secretary of Defense. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact Bill Jenkins at (202) 512-8777 or by e-mail at jenkinswo@gao.gov, or Davi M. D’Agostino at (202) 512-5431 or by e-mail at dagostinod@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. To identify the extent to which the Federal Emergency Management Agency (FEMA) followed sound management practices in developing, administering, and evaluating the Task Force for Emergency Readiness (TFER) pilot program, we analyzed program guidance and other key documents including the TFER Pilot Information Package and the Guidance and Application Kit. We analyzed prior GAO work on pilot programs and program management as well as social science literature to determine elements of sound management practices. We considered other criteria, consulting checklists on elements of program management, but determined some of the characteristics identified in this literature were not appropriate or suitable to the type of study performed by FEMA We grouped the elements of sound management practices that we identified as relevant into three categories: design, administration, and evaluation. We then analyzed the information obtained from our interviews and site visits and compared the results of our analysis with th identified elements of sound management practices. Furthermore, we analyzed prior GAO reports and Department of Homeland Security (DHS) Office of Inspector General reports on FEMA grants administration and catastrophic preparedness to identify any past challenges. . We reviewed and analyzed FEMA grant program guidance and met with FEMA officials in the Grants Program Directorate to determine whether other grant programs, in addition to TFER, allow for funds to be used for catastrophic planning. We identified four major grant programs states can use for catastrophic planning purposes: the Regional Catastrophic Planning Grant Program, the State Homeland Security Program, the Urban Areas Security Initiative, and the Emergency Management Performance Grants. Other grants, such as the Port Security Grant Program (PSGP) were considered, but discussions with officials in the Grant Programs Directorate helped to clarify and narrow the scope of our review to the most appropriate candidates for the types of catastrophic planning described in the TFER grant. We collected fiscal year 2010 funding levels for these grants, as well as information about how funds could be used for planning, funding restrictions, and eligibility requirements. To identify the extent to which the five states participating in FEMA’s TFER pilot program addressed the pilot program’s stated objectives, we analyzed information that FEMA provided in the Pilot Information Package and further defined in its TFER Evaluation Criteria document. The pilot program’s three stated objectives were building relationships, developing plans, and documenting lessons learned, and FEMA provided several criteria to measure progress towards addressing each of these objectives. Additionally, FEMA identified key components to each objective. We used FEMA’s criteria to assess states’ progress toward addressing the three program objectives. Moreover, we identified additional criteria for the building relationships objective in FEMA’s TFER Pilot Information Package, including whether pilot states coordinated with other states and with FEMA. These components were identified as key components in the TFER Pilot Information Package, but were not identified in the TFER Evaluation Criteria. Therefore, we included the additional criteria in assessing the states’ progress toward addressing the building relationships objective. We assigned a numerical ranking to represent states’ progress for each objective’s components based on interviews we conducted and our review and analysis of documents we obtained during our site visits that included draft plans, progress reports, and status briefings. We gathered information related to the lessoned learned objective from state submissions to a report published by the National Guard Bureau in August 2010, and we obtained additional lessons learned during our interviews with state officials. Further, two of the states provided us with the lessons learned they submitted to FEMA for its evaluation, which is not yet complete. If the state met the criterion for a particular component, we assigned it a ranking of ‘5’, if the state partially met the criterion, we assigned it a ranking of ‘3’, and if the state did not meet the criterion, we assigned it a ranking of ‘0’. Next, we averaged the components for each of the three objectives to obtain an overall objective score. We then assigned designations to the overall percentages of scores as follows: averages greater than 80 percent were designated as ‘substantial progress’; averages from 20 percent to 80 percent were designated as ‘some progress’; and averages less than 20 percent were designated as ‘little or no progress.’ We did not assign designations to four criteria pertaining to developing plans and six criteria pertaining to lessons learned because we determined that these criteria do not inform the extent to which states met the objective and/or there was not enough information to quantify the results. States did not receive a designation of “substantial progress” for each objective unless they met the criteria related to the key component of that objective, that is, (1) developing actual plans—measured by the completion of draft plans; and (2) building relationships with FEMA officials, Defense Coordinating Officers, and Emergency Preparedness Liaison Officers. FEMA did not identify key components of the third objective, documenting lessons learned. In instances where states received an average above 80 percent but did not meet the criteria related to these key components, we assigned a designation of “some progress” for that particular objective. For example, by adding the rankings assigned to South Carolina for building relationships, the state received a score of 31 out of 35, or 89 percent. However, South Carolina did not fully meet the criteria for coordinating with DOD and FEMA; so the state received the designation of ‘some progress.’ Where possible, we used the Comprehensive Preparedness Guide (CPG) 101 to determine the extent to which the states’ plans adhered to FEMA’s suggested guidelines regarding plan structure and content. About one half of the TFER states’ 32 planning initiatives involved developing plans. Specifically, CPG 101 recommends that basic emergency operations plans and their annexes include the following sections: purpose, situation overview, and planning assumptions; concept of operations; organization and assignment of responsibilities; direction, control, and coordination; information collection and dissemination; administration, finance, and logistics; and authorities and references. CPG 101 provides additional guidance for the structure of the concept of operations section for hazard- specific annexes—plans South Carolina developed—and functional annexes—one of which Washington developed. We did not evaluate the content of these plans because the plans remain in draft form. CPG 101 does not offer specific content guidance for the other plans types of plans TFER states developed. We did not assign a progress designation for the criterion that asked the extent to which states’ plans adhered to CPG 101 because all but 3 of the plans TFER states are developing remain in draft form. To address these objectives, we interviewed officials and obtained information and related documents from federal agencies, the five pilot states, and other relevant entities. Within FEMA, we met with officials from the National Preparedness Directorate, the Grants Programs Directorate, the Response Directorate, and officials in FEMA Regions I, III, IV, IX, and X. Within the Department of Defense (DOD), we met with representatives from the Office of the Assistant Secretary for Homeland Defense and America’s Security Affairs and the Joint Chiefs of Staff. We also met with U.S. Northern Command and U.S. Pacific Command officials because they are the combatant commanders whose areas of responsibilities include the United States and its territories. Further, we met with the U.S. Department of Homeland Security, the National Guard Bureau, the Institute for Defense Analyses, and the National Governor’s Association. We conducted site visits to all five participant states from June through September 2010. During our site visits, we met with the planners hired through the TFER pilot program and other state, local, National Guard, and DOD regional officials to discuss FEMA’s management of the TFER pilot program and the states’ implementation of it. We conducted this performance audit from May 2010 to April 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We identified four primary FEMA grant programs that states and localities can use for catastrophic planning purposes, as shown in table 2. Table 3 shows that these FEMA grant programs provide the states and other eligible recipients significantly more funds than TFER provided the pilot states. For example, in fiscal year 2010 two of the TFER pilot states received more than $6 million from the Emergency Management Performance Grant program compared to the $350,000 they each received for TFER over a 24-month period. According to FEMA officials, the TFER grant represents at most 3 percent of the grant money spent on planning by the pilot states, as of March 2010, and all TFER activities are allowable under other grant programs. TFER has unique attributes from other FEMA grants. The primary difference between TFER and these other grant programs is that the TFER pilot states are required to use the grant funds exclusively for planning efforts. In contrast, states may use the other FEMA grant program funds for a full range of activities such as planning, equipment, training, and construction and renovation. Like TFER, the Emergency Management Performance Grants Program provides funding to states with no requirement to pass through funding to local governments. The Regional Catastrophic Planning Grant Program provides funds directly to urban areas, but beginning in fiscal year 2010, states were allowed to withhold up to 20 percent of the funds to implement or integrate the urban areas’ approved project plans throughout the state, or with neighboring states. According to the TFER program manger, FEMA provided the TFER pilot states with the option of continuing their efforts using Regional Catastrophic Planning Grant Program funds; however the four states that received funds under both programs chose not to pursue this option. Similarly, the State Homeland Security Program requires states to pass through at least 80 percent of the funding to local governments. Further, the Urban Area Security Initiative provides the funding to urban areas, and any funds retained by the state must be used to directly support the urban area. Consequently, states cannot use most Regional Catastrophic Planning Grant, Urban Areas Security Initiative, and State Homeland Security Program funds to conduct statewide catastrophic planning. However, officials in one state told us they used 2009 Emergency Management Performance Grant funds to hire planners to continue planning begun under TFER, and officials in two other states told us they may use State Homeland Security Program grant funding to continue the catastrophic planning efforts begun under TFER. The TFER pilot program was to emphasize integration of planning efforts across sectors, jurisdictions, and functional disciplines, as well as integration among state, regional, and federal agencies. The Federal Emergency Management Agency (FEMA) developed the following questions in collaboration with the participating states to evaluate TFER. The evaluation questions were structured around FEMA’s stated objectives for TFER—to develop plans, build relationships, and document lessons learned. Our assessment of the extent to which each state addressed FEMA’s stated objectives for the TFER pilot is presented in appendix IV. We did not assess four criteria pertaining to developing plans and six criteria pertaining to lessons learned because we determined that these criteria do not inform the extent to which states met the objective and/or there was not enough information to quantify the results. Further, we did not assess the administrative elements of the data collection process or administrative elements in appendix IV. Those criteria which we did not assess are italicized below. FEMA’s TFER Pilot Program Evaluation 1. Development of well coordinated and integrated preparedness plans through an effective planning process. a. Please provide a summary of the primary TFER accomplishments. b. Describe efforts to coordinate and integrate plans with state and federal partners. c. Does TFER supported planning reflect the National Preparedness Guidelines and the full cycle of planning steps outlined in CPG 101? d. Is TFER planning responsive to the National Planning Scenarios and/or other threats identified through the state’s own all-hazards risk assessment? e. Are the structure, organization, and content of TFER-developed plans / annexes / appendices consistent with that recommended in CPG 101? f. How are TFER efforts coordinated and integrated with resourcing efforts (e.g., training, exercises, grants, etc.)? g. Are TFER developed plans consistent with current state emergency plans? Are they integrated and not duplicative? h. Have actual plans been produced? If so, what is their impact on state emergency readiness? i. In what areas have TFER supported plans been developed (e.g., logistics, coordination, etc.)? 2. Establishment of cross-sector and interagency relationships and protocols. a. Does TFER supported planning reflect the formation and involvement of the sort of integrated and collaborative planning teams described in CPG 101? b. Have mechanisms been established / augmented and employed to ensure cross-sector, multijurisdictional, and interagency planning coordination and integration? c. Have TFER supported plans been coordinated with local jurisdictions? Which ones? State agencies? Which ones? Federal partners? Which ones? d. Has a blending of TFER civil-military planning expertise been fully exploited to assess, strengthen, and advance state catastrophic preparedness planning? e. How have TFER efforts incorporated the capabilities of the private sector as partners in planning activities? 3. Documentation of lessons learned and recommendations for improvement. a. In the opinion of state stakeholders, has the TFER Program resulted in demonstrable improvement in state planning capability? b. To what degree has state-level TFER planning been synchronized with and improved the overall quality and effectiveness of planning efforts? c. How were TFER planners integrated into the state emergency management structure and process? d. Has the TFER Program resulted in meaningful recommendations for the improvement of catastrophic preparedness planning doctrine? e. Are TFER lessons learned exportable and useful to other states and regions to further the evolution and strengthening of their own planning programs? f. Has the pilot identified any additional planning / protocol / procedure shortfalls due to integration / synchronization efforts? g. Have any exercise After-Action Reports (AARs) or assessment documents been developed by the site in the course of the TFER Pilot implementation to evaluate the effectiveness of the pilot? h. Please provide recommendations for improvements to increase the effectiveness of the catastrophic planning programs. FEMA also requested copies of plans developed and collected feedback on the administrative aspects of the pilot program. 1. Data collection process. a. Please provide copies of completed / draft plans. b. Please provide an update of the program plan, to include the steps necessary to complete ongoing projects. 2. Administrative elements. a. Describe any challenges faced managing the TFER funds. b. Describe the hiring and retention process for your TFER planners. Include time lines, training, and other elements as appropriate. c. Describe additional administrative successes and challenges in managing the pilot. The Federal Emergency Management Agency (FEMA) launched the Task Force for Emergency Readiness Pilot Program (TFER) to improve the capacity and integration of efforts to plan a response to catastrophic disasters. Under the TFER pilot, FEMA was to grant $350,000 to each of five participating states—Hawaii, Massachusetts, South Carolina, Washington, and West Virginia. FEMA designed TFER to run 18 months, beginning on September 1, 2008, and ending on March 31, 2010, but extended the pilot program by an additional 6 months to allow the states more time to accomplish their goals. The TFER pilot was to emphasize horizontal integration of planning efforts across sectors, jurisdictions, and functional disciplines, as well as vertical integration among state, regional, and federal agencies. For example, regarding vertical integration, states were to integrate planning efforts with the Department of Defense (DOD) through its Defense Coordinating Officers and Emergency Preparedness Liaison Officers. To help develop plans to respond to catastrophic disasters, states could hire up to three full-time planners ideally with civilian and military planning expertise. FEMA’s stated objectives for the TFER pilot were to build relationships, develop plans, and document lessons learned, and states were to focus their planning on the National Planning Scenarios, which represent examples of the gravest dangers facing the United States, including terrorist attacks and natural disasters, and have been accorded the highest priority for federal planning efforts. FEMA articulated these objectives in the TFER Pilot Information Package and the TFER Evaluation Criteria document that was ultimately to be used to evaluate the TFER pilot. Both of these documents refer to FEMA’s Comprehensive Preparedness Guide (CPG) 101 as a source states were to use to guide their planning process. In our assessment of the extent to which each state had addressed FEMA’s stated objectives for the TFER pilot, we reviewed those documents, used the criteria in them that we determined were measurable and appropriate to assess the states’ progress towards meeting each objective, assigned a numerical ranking to each objective’s criteria, and then averaged the rankings for each objective’s criteria. Finally, we assigned designations to these averages. When a state addressed more than 80 percent of the criteria for an objective this was designated “substantial progress”; from 20 percent to 80 percent, “some progress”; and below 20 percent, “little or no progress.” We gathered information related to the lessoned learned objective from state submissions to a report published by the National Guard Bureau in August 2010, and we obtained additional lessons learned during our interviews with state officials. Further, two of the states provided us with the lessons learned they submitted to FEMA for its evaluation, which is not yet complete. We did not assign designations to four criteria pertaining to developing plans and six criteria pertaining to lessons learned because we determined that these criteria do not inform the extent to which states met the objective and/or there was not enough information to quantify the results. Four of the five pilot states are still spending TFER funds, and the states’ status in meeting TFER’s stated objectives may change as catastrophic planning continues. We assessed states’ progress as of March 2011. In figure 9, we summarize Hawaii’s TFER initiatives, note their status, and describe the role of the planners working on them. Hawaii is still spending TFER funds and has two TFER planners. As of March 2011, Hawaii had made some progress in addressing FEMA’s stated pilot program objectives. In figure 10, we depict the funding expenditure status of the Hawaii TFER pilot and our assessment of the progress made in the pilot program towards addressing FEMA’s stated pilot program objectives. Ste offici reported tht TFER plnning integrte with the te' exiting hrricne plnning effort, which relte to Ntionl Plnning Scenrio. Ste offici told us tht TFER plnner re following the teptlined in CPG 101, but hve not completed the fll cycle of plnning tep for it prodct, as Hii has not completed it pl. Hii developed plnning te tht inclded plnner from the te civil defene diviion nd other te gencie, as well as relevnt conty, federl, nd privte ector keholder. Ste plnner told us they hd little contct with DOD entitie. According to te offici, the TFER plnner’s prior militry experience was helpfl, but not necessary for civilin plnner to successl. Hii offici provided recommendtion, inclding: continnd expnd the progrm to other te, mintin flexiility to determine work pl, nd dedicte fnding for castrophic plnning. Addition- lly, te offici recommended tht fre castrophic plnning progrve longer time frme thn the TFER pilot progrm, provide more clerly defined gidnce, nd greter coordintion etween FEMA nd DOD. Frther, fnding was not enogh to provide competitive sarie. Hii has not exercied ny of it pl to determine if they will e effective in the event of astrophe. In figure 11, we detailed figure 10’s assessment of the progress made in the Hawaii TFER pilot program towards addressing FEMA’s stated objectives by (1) listing the criteria from the TFER Pilot Information Package and the TFER Evaluation Criteria document used to evaluate the progress of each objective and (2) providing our assessment score for each criterion. We gathered additional information on Hawaii’s efforts to develop plans and document lessons learned for the criteria we were unable to quantify. For example, we analyzed two Hawaii draft plans, which did not contain all of the CPG 101 components. However, we were unable to fully assess the content of the plans because they are incomplete and work is ongoing. Further, Hawaii officials stated that TFER allowed Hawaii to focus on logistics planning, and without TFER, Hawaii would not be able to undertake this planning. Hawaii reported that TFER has clearly contributed to the development of planning task forces and has provided a significant contribution towards state catastrophic planning. Additionally, Hawaii officials stated that the TFER logistics planning can be used by island territories such as Guam and Puerto Rico with similar logistical challenges. In figure 12, we summarize Massachusetts’s TFER initiatives, note their status, and describe the role of the planners working on them. Massachusetts spent all of its TFER funds and therefore does not have any TFER planners employed. As of March 2011, Massachusetts had made some progress in meeting FEMA’s stated pilot program objectives. In figure 13, we depict the funding expenditure status of the Massachusetts TFER pilot and our assessment of the progress made in the pilot program towards addressing FEMA’s stated pilot program objectives. Massachusett focused on inititive pertining to rricne nd other prioritie identified te emergency mgement offici nd TFER plnner. The bance of it effort did not pecificlly pertin to Ntionl Plnning Scenrio. Ste offici said the plnner followed the teptlined in CPG 101, but cold not complete the fll cycle of plnning ecauste offici decided tht the Massachusett TFER plnner wold coordinte plnning effort but pl wold e completed y other te gencie. Rther thn developing pl, TFER plnner erved as lion to help formte plnning te tht worked to improve the te’sastrophic prepredness. Plnner worked within the te Ntionl Guard. According to te offici, plnning te inclded plnner from the te emergency mgement diviion nd other te gencie, as well as relevnt locl, federl, nd privte ector keholder. Ste offici told us the plnners’ militry plnning experience gve them crediility in militry circle. However, te offici told us tht DOD entitie were minimlly involved. Massachusett offici recommended tht FEMA continnd expnd the progrm to other te, mintin flexiility to determine work pl, nd dedicte fnding for castrophic plnning. Offici ted the TFER plnner ll home level of militry experience, which helped them cope with the logiticl chllenge nd hve crediility with certin audience. Additionlly, offici recommended tht fre castrophic plnning progve longer time frme thn the TFER pilot progrnd provide more clerly defined gidnce. According to te offici, they hve not exercied ny pl. In figure 14, we detailed figure 13’s assessment of the progress made in the Massachusetts TFER pilot program towards addressing FEMA’s stated objectives by (1) listing the criteria from the TFER Pilot Information Package and the TFER Evaluation Criteria document used to evaluate the progress of each objective and (2) providing our assessment score for each criterion. We gathered additional information from Massachusetts on developing plans and documenting lessons learned, but were unable to quantify this information using FEMA’s evaluation criteria. For example, Massachusetts TFER planners told us they often attended state and regional training and workshops, which integrated them with resourcing efforts. However, we did not assess progress towards meeting this objective because it is unclear how these training and workshops inform plan development. Further, Massachusetts officials stated that TFER was successful and proved valuable in bringing state, local, and county agencies together with nongovernmental organizations under the umbrella of state emergency planning. Additionally, TFER officials stated it would have been beneficial to have TFER planners in other New England states available to coordinate with for events that would likely impact the entire region. South Carolina focused its TFER pilot on planning in response to terrorist attacks. In figure 15, we summarize South Carolina’s TFER initiatives, note their status, and describe the role of the planners working on them. South Carolina is still spending TFER funds and currently has two TFER planners employed. As of March 2011, South Carolina had made some progress in addressing FEMA’s stated pilot program objectives of building relationships and documenting lessons learned and had made substantial progress in developing plans. In figure 16, we depict the funding expenditure status of the South Carolina TFER pilot program and our assessment of the progress made in TFER towards addressing FEMA’s stated pilot program objectives. Sth Crolin focused on the Ntionl Plnning Scenrio relted to terrorittck. The te has completed reviion of it Castrophic Incident Annex nd it has completed drft of it Terrorim Prevention nd Repone Plnd three other pl relted to terrorittck, which offici told us fill g in te plnning. Plnner reported they re following the teptlined in CPG 101, but hve not finihed the fll cycle of plnning for ny of it prodct, as Sth Crolinas not exercied them. Sth Crolin provided er of recommendtion, inclding: continnd expnd the progrm, mintin flexiility to determine work pl, nd dedicte fnding for castrophic plnning. Additionlly, Sth Crolin offici recommended tht fre castrophic plnning progrve longer time frme thn the TFER pilot progrm, nd tht FEMA hold provide more clerly defined gidnce. Offici identified coordinting ecrity clence cross DHS nd DOD as chllenge thhold e reolved in imilr progr in the fre. The ring of lesson lerned nd techniq/procedre with other te wold hve een helpfl in developing castrophic pl throgh the TFER pilot progrm. Sth Crolin o cited good initil trining opportnitie throgh TFER; however thee opportnitie did not extend throghot the life of the progrm, nd thus were not ilable to ll Sth Crolin TFER ff. Sth Crolin provided er of recommendtion, inclding: continnd expnd the progrm, mintin flexiility to determine work pl, nd dedicte fnding for castrophic plnning. Addition- lly, Sth Crolin offici recommended tht fre castrophic plnning progrve longer time frme thn the TFER pilot progrm, nd tht FEMA hold provide more clerly defined gidnce. Offici identified coordinting ecrity clence cross DHS nd DOD as chllenge thhold e reolved in imilr progr in the fre. The ring of lesson lerned nd techniq/procedre with other te wold hve een helpfl in developing castrophic pl throgh the TFER pilot progrm. Sth Crolin o cited good initil trining opportnitie throgh TFER; however, thee opportnitie did not extend throghot the life of the progrnd thus were not ilable to ll Sth Crolin TFER ff. Offici ted thn exercie i chedled for Mrch 2011 nd thfter-ction report will subseqently e developed. In figure 17, we detailed figure 16’s assessment of the progress made in South Carolina’s TFER pilot program towards addressing FEMA’s stated objectives by (1) listing the criteria from the TFER Pilot Information Package and the TFER Evaluation Criteria document used to evaluate the progress of each objective and (2) providing our assessment score for each criterion. We gathered additional information from South Carolina on developing plans and documenting lessons learned, but were unable to quantify this information using FEMA’s evaluation criteria. For example, we were unable to fully assess South Carolina’s plans because seven of eight TFER- developed plans are in draft form. However, all four of the plans state officials provided are missing at least one of the recommended sections described in CPG 101. State officials told us that omitted sections are included in other state planning documents. Additionally, state officials reported that the state used TFER to continue work on its existing work plan, and South Carolina has developed plans and responses to some of the threats that they would not have otherwise been able to address. Washington focused its TFER pilot on developing logistics plans and on a catastrophic incident plan. In figure 18, we summarize Washington’s TFER initiatives, note their status, and describe the role of the planners working on them. Washington is spending TFER funds and as of March 2011 had one TFER planner employed. As of March 2011, Washington had made some progress in addressing FEMA’s stated pilot program objectives. In figure 19, we depict the funding expenditure status of the Washington TFER pilot and our assessment of the progress made in the pilot towards addressing FEMA’s stated pilot objectives. Washington elected as it primry Ntionl Plnning Scenrio astrophic erthquake nd ccompnying tsumi. Washington integrted TFER logitic pl nd astrophic incident pln with exiting te pl nd filled g in the te pln compendim, ccording to te offici. The te has finlized two of it even pl nd has finl drft for three other. Washington offici told us they re following CPG 101 plnning process nd re trctring pln content ccordingly. Washington offici ted they developed plnning te tht inclded plnner from the te Emergency Mgement Diviion nd other te gencie, as well as relevnt locl, federl, nd privte ector keholder. Ste offici told us the plnners’ militry plnning experience ccelerted the lerning of civilin plnning protocol nd helped the progrdvnce the te logitic nd castrophic plnning. However, ccording to te offici, DOD entitie were minimlly involved. Washington provided recommendtion, inclding: continnd expnd the progrm to other te, mintin the rocope of the project eligile to ddressed throgh TFER, nd dedicte fnding for castrophic plnning. Additionlly, te offici recommended tht fre castrophic plnning progrve longer time frme thn the TFER pilot progrnd FEMA provide more gidnce. Frther, FEMA cold improve in mgement of grnt like TFER. Washington has exercied three ot of even of it TFER pl. In figure 20, we detailed figure 19’s assessment of the progress made in Washington’s TFER pilot program towards addressing FEMA’s stated objectives by (1) listing the criteria from the TFER Pilot Information Package and the TFER Evaluation Criteria document used to evaluate the progress of each objective and (2) providing our assessment score for each criterion. We gathered additional information from Washington on developing plans and documenting lessons learned, but were unable to quantify this information using FEMA’s evaluation criteria. For example, Washington selected projects for TFER which were previously identified as part of the state’s future emergency planning work. Washington’s TFER planning also synchronized with catastrophic planning efforts undertaken through the Regional Catastrophic Preparedness Grant Program as both efforts included evacuation and logistics components. However, we were unable to assess the degree to which TFER efforts were synchronized with other planning efforts because we did not have a basis for measuring how this synchronization improved the effectiveness of planning efforts. Further, Washington’s TFER plans contain some but not all of the recommended sections described in CPG 101, but state and FEMA officials stated that omitted sections are included in other state planning documents. We could not fully assess the content of Washington’s plans because five out of seven of the plans are in draft form. According to state officials, accomplishments included drafting both catastrophic logistics plans and developing a closer working relationship with Hawaii, Oregon, and California by participating in Hawaii’s annual hurricane exercise. West Virginia focused its TFER pilot on developing response plans for three scenarios: a chemical incident, a mass evacuation of the National Capital Region, and a dam failure. In figure 21, we summarize West Virginia’s TFER initiatives, note their status, and describe the role of the planners working on them. West Virginia is still spending TFER funds and currently has one TFER planner employed. As of March 2011, West Virginia had made some progress in meeting FEMA’s stated pilot objectives. In figure 22, we depict the funding expenditure status of the West Virginia TFER pilot program and our assessment of the progress made in the pilot program towards addressing FEMA’s stated pilot program objectives. Wet Virgini identified three possle cenrio: chemicl incident, ass evuation of the Ntionl Cpitl Region, nd m filre. Thee event cold e caused rricne or terrorittck, which pertin to everl Ntionl Plnning Scenrio. According to te offici, Wet Virgini' TFER plnning effort fill g in castrophic plnning nd inclde development of astrophic incident pln. Ste offici said tht plnner re following the teptlined in CPG 101, but hve not finihed the fll cycle of plnning for ny of it prodct, as Wet Virginias not completed drft pl. Wet Virgini offici said they developed plnning te tht inclded TFER plnner, the Deprtment of Militry Affir nd Public Safety, the Ntionl Guard’s plnning office, other te prtner, nd conty prtner, as well as the privte ector. Ste offici told us the militry-civililend of plnning experience was eneficil in Wet Virgini. However, only one of the two plnneras militry backgrond nd te offici told us coordintion with DOD entitieas miniml. Wet Virgini recommended FEMA continnd expnd the progrm, mintin flexiility to determine workpl nd dedicted fnding to hire plnner. Additionlly, offici recommended tht the new progrm hve longer time frme thn the pilot nd provide more clerly defined gidnce. Wet Virgini reported there was ignificnt difficlty in hiring people with the reqite militry/civilin castrophic plnning kill nd experience ecause of the hort dtion of the progrm, which delyed the rt-p of Wet Virginia’s TFER progrm. Wet Virginias not exercied ny of it pl. Subsntil progress Some progress Little to no progress One of the TFER planners is a National Guardsman who was mobilized in September 2010. He is expected to resume his TFER planning position when he returns. West Virginia hired another TFER planner in December 2011. In figure 23, we detailed figure 22’s assessment of the progress made in West Virginia’s TFER pilot program towards addressing FEMA’s stated objectives by (1) listing the criteria from the TFER Pilot Information Package and the TFER Evaluation Criteria document used to evaluate the progress of each objective and (2) providing our assessment score for each criterion. We gathered additional information on West Virginia’s efforts to develop plans and document lessons learned for the criteria we were unable to quantify. For example, we analyzed West Virginia’s Catastrophic Incident Annex, which did not contain all of the CPG 101 components. West Virginia reported that the development of this draft annex fulfilled one of the main objectives of the pilot program. However, we were unable to fully assess the content of the annex because it is incomplete and work is ongoing. Additionally, West Virginia TFER planners determined during their assessments that there were insufficient personnel available at the county level to accomplish the tasks necessary during an incident response. In some cases, key individuals were identified as having multiple roles and/or responsibilities, which would be impossible to fulfill during an actual catastrophic incident. Further, West Virginia reported the “bottom up” approach of the West Virginia TFER pilot program is highly effective in communicating and working with local jurisdictions, but may prove to be less useful in an urban setting. According to state officials, West Virginia’s TFER efforts are synchronized with the Regional Catastrophic Preparedness Grant Program to ensure efforts are not duplicative, particularly for the mass evacuation scenario. In addition to the contacts named above, the following individuals made significant contributions to this report: Marc Schwartz and Leyla Kazaz (Assistant Directors), Courtney Reid, Susanna Kuebler, Paul Hobart, Jena Whitley, Katrina Moss and Cody Loew; Mae Jones, Lara Miklovek, Amie Steele, Cynthia Saunders, Kate Lenane, and Tracey King. Disaster Response: Criteria for Developing and Validating Effective Response Plans. GAO-10-969T. Washington, D.C.: September 22, 2010. Homeland Defense: DOD Can Enhance Efforts to Identify Capabilities to Support Civil Authorities During Disasters. GAO-10-386. Washington, D.C.: March 30, 2010. Homeland Defense: DOD Needs to Take Actions to Enhance Interagency Coordination for Its Homeland Defense and Civil Support Missions. GAO-10-364. Washington, D.C.: March. 30, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing. GAO-09-904SP. Washington, D.C.: September 25, 2009. Homeland Defense: U.S. Northern Command Has a Strong Exercise Program, but Involvement of Interagency Partners and States Can Be Improved. GAO-09-849. Washington, D.C.: September 9, 2009. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369.Washington, D.C.: April 30, 2009. Emergency Management: Observations on DHS’s Preparedness for Catastrophic Disasters. GAO-08-868T. Washington, D.C.: June 11, 2008. National Response Framework: FEMA Needs Policies and Procedures to Better Integrate Non-Federal Stakeholders in the Revision Process. GAO-08-768. Washington, D.C.: June 11, 2008. | Hurricane Katrina in 2005 highlighted gaps in the nation's preparedness to respond effectively to catastrophic incidents. The Department of Homeland Security's (DHS) Federal Emergency Management Agency (FEMA) designed the Task Force for Emergency Readiness (TFER) pilot program to advance and integrate state and federal catastrophic planning efforts. TFER, first envisioned by the Department of Defense (DOD), ran from September 2008 to September 2010, and FEMA provided the five participating states--Hawaii, Massachusetts, South Carolina, Washington, and West Virginia--with $350,000 each to develop plans, build relationships with stakeholders, and document lessons learned (i.e., TFER's stated objectives). As requested, GAO evaluated the extent to which (1) FEMA followed sound management practices in designing, administering, and evaluating TFER and (2) the five participating states satisfied TFER's stated objectives. GAO analyzed FEMA guidance, such as the TFER Pilot Information Package, conducted site visits to all five participant states, and met with relevant FEMA and DOD officials, to evaluate FEMA's management of TFER and the states' implementation of it. FEMA developed program objectives and procedures for administering the TFER pilot, but did not develop other elements of sound management practices in designing, administering, and evaluating pilot programs that GAO identified from its prior work and social science literature. FEMA developed objectives for the pilot, but did not document standards for determining the pilot's success. FEMA also provided resources such as funding, training, and support, but FEMA did not always follow the procedures it established for TFER. For example, FEMA did not consistently conduct biweekly conference calls with the states, and four states reported that it would have been helpful if FEMA provided more guidance. FEMA did not develop a data analysis plan, which could have better ensured FEMA collected data on the extent to which the pilot states coordinated with key stakeholders and provided reasonable assurance that FEMA conducted a systematic assessment of TFER using comparable data across the five pilot states. In Spring 2010, FEMA announced TFER would not continue past the pilot stage before evaluating TFER on its merits in strengthening and advancing state catastrophic planning, but FEMA allowed the states to draw down the remaining TFER funds and continue to complete initiatives started under TFER through August 2011. GAO previously reported in April 2009 that FEMA faced challenges in assessing pilot program data, and FEMA officials reported the agency does not have pilot program policy guidance. In the absence of this, FEMA lacks a systematic approach to developing, administering, and evaluating pilot programs. FEMA could better ensure other pilot programs meet their intended goals by developing policies and guidance that include sound management practices. All five states have taken steps to follow FEMA's guidance to address TFER's objectives, but no state has fully addressed them all. First, two of the five states have completed draft catastrophic plans, and all five states reported following FEMA's planning process. Second, all five states built relationships with stakeholders such as state agencies and FEMA, but state officials said coordination with DOD--a key federal stakeholder who may be called upon to assist in disaster response--was limited. State officials reported not coordinating with DOD because they did not have draft plans for DOD officials to review. Third, all states have documented lessons learned to date, but four states have not exercised TFER plans to determine their effectiveness in the event of an emergency. GAO recommends that FEMA develop policies and guidance that follow sound management practices for future pilot programs, and share TFER results with stakeholders. FEMA agreed with GAO's recommendations. |
The Military Whistleblower Protection Act of 1988, as amended, and its implementing directive, Department of Defense Directive 7050.06, establish the basic concepts and framework for the investigative process and establish the roles and responsibilities of the various affected organizations. DODIG is the central organization for DOD’s military whistleblower reprisal program and has a directorate responsible for investigations into military whistleblower reprisal allegations. This directorate also conducts or oversees investigations into allegations of improper referrals of servicemembers for mental health evaluations and conducts investigations into reprisal allegations involving civilians, contractors, and nonappropriated fund employees, although historically military whistleblower reprisal cases make up approximately 80 percent of its caseload. Under the law, the service IGs and other DOD component IGs can also investigate military whistleblower reprisal allegations and make recommendations regarding the disposition of cases. However, DODIG is responsible for reviewing and approving the results of all investigations of military whistleblower reprisal allegations. DODIG publicly reports on its military whistleblower protection program activities in its required semiannual report to Congress, including consolidated data on all of the cases the reprisal directorate received and closed—numbers that include military whistleblower reprisal cases.description of some of the key organizations and individuals and their roles in the military whistleblower reprisal process can be found in table 1. DODIG has taken multiple steps, in collaboration with the service IGs in some instances, to improve DOD’s ability to process military whistleblower reprisal cases in a timely manner. However, DOD has generally not met statutory requirements to provide reports on completed investigations within 180 days of the date the allegation was made or alternatively, to provide notice to the complainant and the Secretary of Defense. The July 2009 Department of Justice IG report found that lingering investigations leave complainants without resolution to their concern and could hold up a potential promotion for a subject. In addition, DODIG’s May 2011 review of its military whistleblower reprisal process raised concerns that some complainants withdrew their cases because of the length of time it takes to complete investigations. Further, DOD’s efforts to improve processing time have been hindered by unreliable and incomplete data. Moreover, DODIG does not report data on timeliness in its semiannual reports, thereby limiting the information Congress could use to provide oversight of the military whistleblower reprisal program. DODIG and the service IGs have faced challenges to processing military whistleblower reprisal cases in a timely manner which they attribute to staffing shortages and process inefficiencies. Although DODIG has taken multiple steps, in collaboration with the service IGs in some instances, to improve processing time, these efforts have not yet resulted in meeting the statutory requirement to provide reports on completed investigations within 180 days of the date the allegation was made.challenge and an important factor in completing quality investigations because, without timely resolutions, the reliability of evidence could suffer, and the careers of both the complainants and subjects could be negatively impacted. Timeliness is a key DOD Directive 7050.06 addresses the need to conduct investigations expeditiously. Officials at DODIG and the service IGs stated that staffing levels are a key factor in determining the timely processing of reprisal cases. According to DODIG, the military whistleblower reprisal caseload has grown significantly since the enactment of the Military Whistleblower Protection Act, and staffing has not kept up with the increased caseload. Further, service IG officials told us that DODIG’s review of service investigations can be slow because of understaffing. DODIG has taken action on this issue, increasing the staffing of its whistleblower reprisal directorate from 17 staff in fiscal year 2006 to 30 staff in fiscal year 2011 to accommodate the increased caseload. In January 2012, DOD’s Acting Inspector General authorized a further increase of staff for its whistleblower reprisal directorate from 30 to 42 (see fig. 3 for staffing at DODIG from fiscal years 2006 through 2011). Some service IG officials also indicated that staffing shortages are a factor in their ability to process cases in a timely manner. In a December 2011 letter, the DOD Inspector General asked the secretaries of the military departments to consider favorably any requests from the service IGs to increase their staffing in order to deal with the increased number of whistleblower reprisal cases. DODIG has also undertaken multiple efforts to reform its investigative process to improve timeliness. For example, in late 2010, DODIG eliminated an investigative phase which required formal reports that recommended whether or not a case should be fully investigated. Earlier that year, DODIG eliminated the committee charged with reviewing and approving whether cases should be fully investigated. DODIG also changed its process for taking in complaints. The Defense Hotlineto document the original complaint, gather additional information from complainants, and send it to the directorate at DODIG responsible for used military whistleblower reprisal investigations. The Defense Hotline also was responsible for communicating with complainants if their cases were determined not to be whistleblower reprisal cases. Now the Defense Hotline passes the reprisal allegation to the directorate at DODIG responsible for military whistleblower reprisal investigations and investigators from that directorate establish direct contact with the complainant to assess the validity of the reprisal allegation(s). DODIG officials stated this new intake process is faster and increases the quality of the investigations because experienced reprisal investigators are in charge of information gathering. DODIG also started testing a new approach in evidence gathering to determine whether it can close cases more quickly. The 2009 Department of Justice IG report recommended that DODIG consider whether it should take responsibility for conducting the initial review for the incoming complaints from all of the services, not just those from the Army. In its October 2011 action plan, DODIG stated it would assess how well the service IGs are performing intake of reprisal complaints in late fiscal year 2012 and that DODIG would evaluate the Department of Justice IG recommendation that DODIG consider conducting initial reviews of all service reprisal complaints after it has implemented some of its other reforms. investigations would suffer.affirmed its decision to end the agreement with the Army. However, in December 2011, DODIG Although DODIG has undertaken these and other efforts to improve its timeliness, it has generally not been completing investigations within the 180-day time frame provided by law. From our analysis of a random sample of 91 cases closed between January 1, 2009 through March 31, 2011, we estimate that 70 percent of the cases were not completed within 180 days; moreover, we estimated that it took DOD a mean of 451 days (+/- 94 days) to process the cases. Our random sample included a subset of 61 inquiries closed before full investigation, which took a mean of 469 days to close, and a subset of 28 full investigations, which took a mean of 395 days to close. investigative phase. Although case processing time for the full sample is generalizable, it is not generalizable for any subset. Additionally, the case processing time data reported for the two investigative phase subsets are based on 89 of the 91 cases we analyzed. For the investigative phase subsets, we excluded 2 additional cases because we could not identify the investigative phase in which they were closed based on the evidence in the case file. For the subset of inquiries closed before full investigation, the median days to close a case was 249, with a range from 14 to 2,215 days. For full investigations, the median days to close a case was 349, with a range from 51 to 1,181 days. Our random sample of 91 cases (out of a total of 871 cases closed during this time period) included 61 inquiries closed before full investigation and 28 cases closed after a full investigation. We were unable to determine the investigative phase in which 2 cases were closed. Although data from the full sample are representative within the given parameters, any subset of these data cannot be assumed to be representative. That is, data specific to the cases closed before full investigation and the data specific to full investigation are not generalizable and apply only to the actual cases reviewed. In addition to not completing investigations in 180 days in most cases, DOD has not complied with the statutory reporting requirement to provide notification in those instances where the investigations go beyond 180 days, although it is taking steps to do so. The Military Whistleblower Protection Act requires the IG investigating an allegation of reprisal to submit to the Secretary of Defense and the complainant a notice if it cannot provide a report on the completed investigation within 180 days of the date the allegation was made to an IG in DOD. The notice should include the reason for the delay and an expected completion date for the investigation. DODIG officials acknowledged that they and the services had not been making the required notifications. The officials stated they used to submit these reports to the Secretary of Defense, but stopped doing so at some point because they were told by officials at the office receiving the notifications that they did not know what to do with the information. Because this notification is not being provided, as required by statute, the Secretary of Defense has had reduced visibility of cases that exceed the investigative time limit, and complainants have not been receiving information regarding their cases to which the law entitles them. During the course of our review, DODIG changed its practice and started reporting this information in October 2011. According to its October 2011 action plan, DODIG is taking steps to ensure that it and the service IGs follow the statutory reporting requirements. Although DOD has taken some steps to improve the timeliness of investigations, its efforts are hampered because DODIG does not have key timeliness data that would allow it to identify process areas requiring improvement or evaluate the impact of reforms. According to the quality standards for investigations, developed by the Council of the Inspectors General on Integrity and Efficiency, organizations should store data in a manner that allows for effective retrieval, referencing, and analysis. This enhances an organization’s ability to conduct pattern and trend analyses and assists in the process of making informed judgments on investigative program development, and in the implementation of the investigative process. Further, our prior work has shown that tracking timeliness is important for accountability and for making improvements to investigative processes. In our assessment of its data, we found that DODIG has not consistently or accurately recorded key dates to track how long investigations take to complete. From our analysis of a random sample of cases closed between January 1, 2009 through March 31, 2011, we estimate that DODIG’s database understated the amount of days it took to close cases by a mean of 193 days (+/-76 days). The understated number of days was a result of DODIG officials recording the date that they received a complaint in their office rather than the original date the complainant made the allegation to an IG in DOD. In addition, our case file review found that DODIG identified three cases as closed in its database when it actually referred these cases to a service for further investigation, resulting in an understatement of the amount of time it took to close cases. In one of these three cases, it took an additional 872 days to close the case. Moreover, our case file review found that 7 full investigations out of 28 had correct dates recorded in DODIG’s database. Table 4 provides timeliness accuracy by investigative phase. DODIG’s data practices have inhibited its ability to accurately identify the age of cases and therefore also prevented it from identifying cases in danger of exceeding the 180 days provided for investigations by the Military Whistleblower Protection Act. DODIG has acknowledged it has problems with data reliability, calling the integrity of its data “questionable at best” in its October 2011 action plan for reforming the military whistleblower reprisal program. Further, during the course of our review, DODIG officials acknowledged that some of their dates for tracking cases were inaccurate. DODIG changed its approach starting in fiscal year 2012 so it now accurately records total case processing time. DODIG officials said they also planned to train investigators to ensure they consistently enter this information into DODIG’s database. In addition, DODIG has not been tracking the time the separate phases of the investigative process take. We found that the DODIG database includes fields for tracking dates by phases in the process. For example, there are date fields for referring cases to services for investigation and date fields for receiving those investigations from the services, but these were generally not filled out. Further, DODIG was not tracking the amount of time between when a complaint was filed with the Defense Hotline to when it was assigned to an investigator. We have previously found that comprehensive information is needed to identify reasons for delays in investigative processes.timeliness data by process phases using their current systems and that doing so would enable them to understand the entire life cycle of military whistleblower reprisal investigations. Without identifying, collecting, and tracking accurate data, DODIG does not have reliable information to identify the scope of the challenge it faces with overall timeliness and cannot report accurate data to internal and external stakeholders, including data it reports in its semiannual reports to Congress. Moreover, DODIG may be unable to identify possible areas in the investigative process needing improvement, or assess the impact on timeliness of recent changes made to its process or of other actions taken to improve timeliness. During the course of our review, DODIG developed a plan to improve its practices associated with collecting and tracking timeliness information, including identifying date fields it should track, and training investigators to consistently enter this information. DODIG began to initiate these improvements starting in fiscal year 2012. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999). the Secretary of Defense—cannot provide organizational oversight of DODIG. DODIG officials stated that, although other offices within DOD cannot provide this type of oversight, the reporting requirement acts as a helpful internal check for DODIG on its timeliness progress. Congress is therefore the primary oversight body for DODIG. DODIG is required to keep Congress fully and currently informed through, among other things, its semiannual reports to Congress. That report is required to include information on fraud, abuses, and deficiencies relating to the administration of programs and operations managed or financed by DOD. DODIG has not previously interpreted this requirement as applying to the military whistleblower reprisal program and does not provide information on military whistleblower reprisal case processing time, including the proportion of cases that exceed the 180-day time period provided by law, in the semiannual reports. However, the absence of timeliness information in these reports limits congressional decision makers’ ability to thoroughly evaluate and identify whether delays continue to exist within DOD’s whistleblower reprisal investigative process. As a result, Congress lacks information it could use to provide oversight of the military whistleblower reprisal program. In an effort to improve its whistleblower program, DODIG has taken steps such as responding to the 2009 Department of Justice IG recommendations, completing an internal review, restructuring the organization primarily responsible for providing program oversight, and developing a plan of action. However, DODIG’s oversight of this program still faces challenges because of the lack of performance metrics, outdated and inconsistently followed guidance, and the lack of standard monitoring processes and procedures for investigative cases. DODIG has taken steps to improve the whistleblower reprisal process, including acting on prior recommendations. The 2009 Department of Justice report highlighted weaknesses in the military whistleblower program and made recommendations for improvements such as creating and updating written policy guidance regarding whistleblower law. DODIG conducted an internal review, completed in 2011, to assess the progress it had made since beginning to take actions to address the findings of the Department of Justice report.recommendations to help improve DODIG’s oversight of the whistleblower reprisal program, including that DODIG conduct an internal audit of its case tracking system to help ensure timely case processing. In October 2011, DODIG developed an action plan that outlined its strategy to address the program weaknesses identified in the 2009 Department of Justice report and its 2011 internal review, and has begun to implement that strategy. We have already mentioned some of the changes DODIG is undertaking based on the action plan, including changes to the report review processes. As part of the reform plan, DODIG restructured its directorate in charge of military whistleblower reprisal investigations in October 2011, merging it with the directorate responsible for civilian whistleblower reprisal investigations. One of the goals of this merger is to increase the consistency of reprisal investigations within DOD. Additionally, the merger is intended to eventually create a pool of investigators that can work on both military and civilian reprisal cases, thereby maximizing DODIG’s flexibility to adjust to spikes in reprisal cases and clear any case backlogs. The immediate past DOD Inspector General also told us that one of the most significant changes he made was putting a robust new leadership team in place dedicated to improving the military whistleblower reprisal program and transforming it into a model program. DODIG has also revised its case intake process as part of its reform efforts. Reprisal allegations that are made directly to DODIG rather than a service can come in through the Defense Hotline over the phone or using an automated web-based form. DODIG has made multiple changes in the last several years to its process for taking in and initially assessing if these cases qualify as reprisal cases. The 2011 internal review found that DODIG’s intake process was still requiring complainants to provide a significant amount of documentary evidence to support their reprisal allegations. The internal review concluded the emphasis on documentation at this very early stage just to determine if the allegations warranted investigation was inconsistent with the basic information required when filing complaints with the Defense Hotline. Further, the internal review found that the documentation demands required at this stage could produce an onerous burden for the complainant and were inconsistent with DODIG guidance. In response, DODIG is instituting changes to quickly assign an investigator to a case, who then makes direct contact with the complainant and initiates an investigation based on the standard that, “the alleged fact, if true, would raise the inference of reprisal.” Although DODIG has taken steps to improve its military whistleblower reprisal program, its ability to provide oversight continues to face key challenges due to the lack of performance metrics, outdated and inconsistently followed guidance, and inconsistent monitoring processes and procedures to track all reprisal allegations. According to Standards for Internal Control in the Federal Government, oversight mechanisms are an integral part of an entity’s planning, implementing, reviewing, and of the accountability for stewardship of government resources and achieving effective results.the written policies, procedures, techniques, performance measures, and mechanisms that enforce management’s directives and help ensure that actions can be taken to address risks. While DOD’s action plan offers many important steps towards achieving a model whistleblower reprisal program, these actions are ongoing, and to date have not been fully implemented. Oversight mechanisms include, among other things, DODIG has not yet fully established performance metrics for whistleblower investigations although it is taking steps to do so. Federal internal control standards say metrics are important for identifying and setting appropriate incentives for achieving goals while complying with law, regulations, and ethical standards. DODIG officials recognize the importance of metrics and have told us that they are currently working to create timeliness metrics that focus on case processing time. However, they have not yet formalized these metrics. We have previously found that timeliness alone does not provide a complete picture of an investigative process and that metrics on quality, such as completeness of investigative reports and the adequacy of internal controls, enhance the ability of organizations to provide assurance that it is exercising all of the appropriate safeguards for federal programs. Further, measuring timeliness alone may provide incentive to close cases prematurely. For example, DODIG could theoretically close and report on all cases before they reach 180 days in order to meet the timeliness standard. However, meeting that standard alone would not ensure that cases were properly investigated. DODIG currently lacks metrics to measure quality, but DODIG officials recognize that metrics on quality are important and indicated that they plan to develop them as part of their effort to improve case management and outcomes. The officials said that such metrics could include measuring whether interviews are completed and documented and whether conclusions made about the case are fully supported by evidence. Our review of case files revealed that documents that could be used to support the conclusions of a case were not always present in DODIG’s case files. For example, according to DODIG’s investigations manual,every case file should have some sort of documented investigative analysis that lays out the evidence and conclusions the evidence supports. The level of investigative analysis we looked for in each case file depended on how far the case proceeded. For cases that were closed in the very early stages of the investigation, an oversight worksheet summarizing the reasons for closing a case was sufficient for the purpose of our file review. For cases that went to full investigation, we looked for a formal record of investigation. We found evidence of investigative analysis in 79 (87 percent) of the 91 case files. Additionally, DODIG requires that investigations that go beyond the initial review include a record of testimony from the complainant. Full investigations are also required to include a record of an interview with the subject. When reviewing the cases for this document, we found evidence of a record of testimony in 38 (49 percent) of the 77 cases that required it. Although we looked in our case file review for the types of documents that would support DODIG’s conclusions, we did not determine whether the evidence in each file actually supported DODIG’s conclusions for each case. However, an internal DODIG review found that some cases DODIG adjudicated contained insufficient documentation to support the findings or evidence that necessary investigative steps were completed. The internal review team further noted that they did not disagree with the final outcomes of the cases, only that they could not affirm the decisions because the information in some of the file did not support it. Without clear quality metrics, DODIG will continue to lack valuable information it could use to improve oversight of the whistleblower reprisal investigative process. Although DODIG is updating its outdated guidance related to the whistleblower program, the updates have not yet been formalized and the existing guidance is inconsistently followed. According to the framework set out in quality standards for investigations, organizations should establish appropriate written investigative policies and procedures through handbook, manual, directives, or similar mechanism to facilitate due professional care in meeting program requirements. Further, that guidance should be regularly evaluated to ensure that it is still appropriate and working as intended. DODIG has guidance regarding the whistleblower reprisal process in place but has not updated it to reflect changes in its investigative practices or ensured that certain provisions have been carried out consistently. For example, DODIG’s primary investigative guide distributed to investigators conducting whistleblower reprisal investigations has not been updated since 1996 and does not reflect some current investigative practices. The investigative guide directs investigators to appendices that no longer exist and states that whistleblower reprisal investigation reports must be completed and issued within 90 days of the receipt of the allegation instead of the 180 days provided under the statute as amended in 1998. Officials from the service IGs told us that the old guidance still provides them with some benefit regarding general investigative approaches but said that it would be beneficial to them if it was updated. Additionally, DODIG officials acknowledge that the current guidance reflects old investigative approaches that have since been revised, such as the investigator checklist, or that no longer exist. The lack of updated guidance has been a recurring issue for DODIG. A 2002 DODIG briefing stated that the investigative guide required updating and that the update was nearing completion. The 2009 Department of Justice IG report also found that guidance for service IGs had not been adequate and that DODIG could improve oversight of service IG work by creating and updating written policy guidance regarding whistleblower law, including recurring and emerging issues, best practices, and precedent. Moreover, the 2011 internal review came to a similar conclusion and recommended that DODIG update the investigative guides to ensure consistency and objectivity in processing cases. DODIG indicated that it planned to revise its investigative guidance in both its response to the Department of Justice report as well as in its response to the 2011 internal review. DODIG officials told us that they are working with internal stakeholders to revise the guidance to reflect current practices and plan on updating the 1996 investigative by the third quarter of fiscal year 2012. Without updated guidance on investigations, DODIG does not have a documented consistent investigative standard for its whistleblower program. In addition to being outdated, DODIG’s existing guidance related to the whistleblower program is not consistently followed. We have reported that program guidance should be regularly evaluated to ensure that it is still appropriate and working as intended. The guidance related to certain key provisions of the investigative process is unclear, leading to inconsistent implementation among the service IGs. For example, the service IGs have adopted different interpretations of the 180-day reporting requirement as it is set out in the guidance. As noted earlier in the report, the Military Whistleblower Protection Act requires that IGs conducting investigations issue a report of investigation to the complainant and the Secretary of Defense within 180 days of the receipt of an allegation or provide appropriate notice if unable to do so. The law also requires DODIG to approve the report of investigation before the report is issued. Further, officials from DODIG and the service IGs emphasized that whistleblower reprisal cases are not closed until DODIG has reviewed the complaint and the evidence to support the investigators’ conclusions and formally agrees with the disposition of the case. However, DOD Directive 7050.06 sets out additional time frames for reporting. The directive requires the service IGs to provide DODIG with a report of investigation within 180 days of receiving the complaint or receiving a request for an investigation from DODIG and requires them to provide a report of investigation to the complainant and the Secretary of Defense not later than 30 days after the DODIG approves the report. A service IG could meet the first requirement but at the same time leave no time for DODIG to review and approve the report in time to issue it within the 180 days provided by law. As a result, the service IGs have adopted different interpretations of the directive’s 180-day reporting requirement. For example, Air Force IG officials told us that the Air Force recently reinterpreted the reporting requirement. The Air Force had set an internal goal of completing reprisal investigation within 135 days to allow 45 days for DODIG review and approval. However, the Air Force told us that it now sets its internal investigation deadline to 180 days and therefore no longer accounts for DODIG review time. The Army IG stated that it had the same interpretation of the 180-day reporting requirement as the Air Force IG. Officials from the Navy and Marine Corps IGs told us they generally include DODIG review in their interpretation of the 180-day reporting requirement. DODIG officials are aware of some of the different interpretations among the services and the conflicts that exist in the current directive. According to DODIG, it will be sending written guidance to the services to reemphasize that the 180-day statutory time frame is prescribed as from the time the complaint is filed until the time the report is submitted to the complainant. DODIG reported that it will also incorporate the clarifying language into the directive and will begin the process of revising DOD Directive 7050.06 in the second quarter of 2012. DODIG also has not been consistently adhering to standards regarding the maintenance of its case files and, as a result, its case files are generally incomplete. Quality Standards for Investigations outline standards related to case file management and state that the file folders used to document an investigation should be accurate and complete, and the investigative report findings and accomplishments must be supported by adequate documentation and maintained in the case file. According to DODIG’s standards related to the management of these files, it is important for case files to adequately represent the investigative work and evidence underlying the conclusions and recommendations in the final report, and to be thoroughly documented to ensure that the files will be able to withstand scrutiny. Based on a review of DODIG’s process, relevant statutes, directives, and other standards, and in consultation with DODIG officials, we identified 18 key elements that we believe should be present in case files to provide support for conclusions, document compliance with the law or directives, or help manage the case. Using our sample of 91 cases, we assessed the presence of the key elements as indicators of the completeness of the file. Based on the presence in the file of the elements we selected, we found that most of DODIG’s case files were incomplete (56 percent) or partially complete (38 percent) and only a small portion of the case files were complete (5 percent). See table 5 for further details. We also found that the guidance regarding a key investigative question is unclear. According to DODIG’s investigative guide,complete when the four questions of the “Acid Test” have been answered (see fig. 2). We estimate that 65 percent of the cases closed between January 1, 2009 and March 31, 2011, were closed, at least in part, because DODIG concluded that the personnel action would have occurred even if the protected communication had not been made— question 4 of the Acid Test (see app. II for further details on the reasons an investigation is DODIG closed cases). The departmental guidance for addressing all four questions instructs the investigator to investigate the complaint, and not the complainant, noting that investigators should avoid the tendency to examine the reputation, background, or performance of the complainant in order to determine the credibility of the complainant’s claim. However, in answering the fourth question, the guidance requires, among other things, an examination of the reasonableness of the unfavorable personnel action(s) taken, withheld, or threatened considering the complainant’s performance and conduct. DODIG officials acknowledged that there may be some tension between these two requirements. Further, in its October 2011 action plan, DODIG stated that current guidance for question 4 has resulted in investigators closing cases prematurely without fully considering whether the subject’s actions are consistent with actions taken in similar situations with other employees. As a result, DODIG officials are revising guidance for the investigative questions. However, until DODIG carries out these actions, the lack of clear guidance hinders efforts to ensure consistent program implementation. DODIG officials acknowledge the importance of standard case monitoring processes and procedures, but currently lack such processes and procedures, which may hinder their ability to consistently assess the status of outstanding reprisal cases. According to federal internal control standards, monitoring of internal controls should be conducted to assess the quality of performance over time. DODIG has responsibility for not only conducting its own investigations, but also for overseeing and approving the investigations conducted by service and other component IGs. It can be challenging for DODIG to maintain visibility on all cases because a reprisal allegation can be made to and investigated by one of several IGs in DOD. DODIG has not established standard monitoring processes and procedures and instead has been relying on ad hoc and inconsistent efforts. For example, some service IG officials told us that they had not reconciled cases with the DODIG in several years and some service IG officials have recently been queried about cases that date back 5 years. DODIG and service officials told us that DODIG had not required service IGs to regularly report on the status of open cases. Additionally, our file review included a case where the DODIG identified an investigation begun by a service IG 6 years prior but never closed. DODIG was unable to establish contact with the complainant after 6 years and later administratively closed the case. Although this could be an extreme case, it may be indicative of a larger issue dealing with the tracking and management of complaints. Further, DODIG officials told us that the review of whistleblower reprisal cases involving senior level officials had in the past been handled by another office within DODIG and that the whistleblower reprisal directorate had limited visibility on the status of these cases. However, according to DODIG, it changed this procedure in late fiscal year 2011 so that the directorate responsible for whistleblower reprisal investigations also investigates or oversees service reprisal investigations involving senior officials. Moreover, DODIG’s action plan outlines its approach to providing more consistent monitoring of all reprisal cases, including investigations of senior officials that include reprisal allegations. The first step in this plan has been to establish a team of investigators dedicated to providing oversight of service investigations. DODIG officials told us that once this team has worked through the backlog of cases, it will also implement more efforts to consistently monitor and reconcile cases to help ensure that all reprisal allegations are appropriately addressed in a timely manner. Until it further addresses the weaknesses in its monitoring practices of military whistleblower reprisal cases and the challenges it faces in its other oversight mechanisms, DODIG cannot be sure that it is adequately conducting its oversight responsibilities or implementing the whistleblower reprisal program as intended. DOD’s efforts to ensure that appropriate corrective action is taken after investigations are completed—both for whistleblowers and against those who reprise against whistleblowers—are hampered by disconnected investigative and corrective action processes and the limited visibility of corrective actions taken. Individuals with substantiated military whistleblower reprisal cases generally receive relief from the negative impacts caused by reprisal when they seek it from the BCMRs (80 percent of those who apply). However, few individuals with substantiated cases apply to the BCMRs for relief (19.1 percent). DODIG and the service BCMRs are also not consistently identifying and tracking data on corrective action taken to undo the damage done to the complainant by the reprisal. Further, unreliable data regarding corrective action taken against the subject are hindering oversight of this key aspect of whistleblower protection. Most servicemembers with substantiated cases who seek relief from BCMRs receive it, but few apply for relief and so the secretaries of the military departments and the heads of the other DOD components are not generally able to take action to make the complainant whole in the vast majority of cases. The DOD directive governing the military whistleblower reprisal process, DOD Directive 7050.06, includes a largely service- centered process for obtaining corrective action that is separate from the investigative process centered on DODIG. Specifically, the directive charges the secretaries of the military departments and the heads of the other DOD components with taking corrective action based on the IG investigation. Corrective action includes: (1) any action deemed necessary to make the complainant whole, (2) changes in agency regulations or practices, (3) administrative or disciplinary action against offending personnel, or (4) referral to the U.S. Attorney General or court- martial convening authority of any evidence of criminal violation. Although DODIG can investigate allegations of reprisal, makes all final determinations on investigations, and can make recommendations regarding appropriate corrective action, it does not have the authority to take corrective action, either for the complainant or against the subject. In order for servicemembers to receive relief from the negative impacts caused by reprisal—even for cases substantiated by DODIG—the law requires that servicemembers must file a separate application to their service BCMR.DODIG provides the appropriate service BCMR with the same case outcome notification it provides to the complainant. However, the DODIG notification letter does not automatically trigger a BCMR review of the case and/or corrective action. For cases that are substantiated and those that are not, For cases that servicemembers bring to the BCMRs, the Military Whistleblower Protection Act requires the BCMRs to review the whistleblower reprisal report approved by DODIG. However, BCMRs have authority to make independent determinations on military whistleblower reprisal cases and to engage in additional fact finding. Among other things, the statute also allows the BCMRs to request that DODIG or the service IGs gather additional evidence for the BCMR’s consideration and hold hearings, although BCMR and DODIG officials told us that, to their knowledge, this authority had not ever been exercised. Further, it is up to the BCMR to make its own determination whether personnel action was in reprisal and recommend to the secretary of the military department appropriate actions to correct the record of those who have been reprised against. However, BCMR officials told us that they put significant credence in DODIG’s findings and that their offices place a high priority on military whistleblower reprisal cases even though they make up only a small proportion of their total work. In our review of all substantiated reprisal cases submitted to BCMRs between fiscal year 2006 and the first half of fiscal year 2011, we found that the servicemembers with substantiated whistleblower reprisal allegations that applied for relief were generally successful in obtaining some relief. Eighty percent of servicemembers (20 of 25) with substantiated reprisal cases—closed between fiscal year 2006 through the first half of 2011—who sought relief from a BCMR received some sort of remedy (see table 6). The most common corrective action taken by the services in response to applications filed by complainants with substantiated military whistleblower reprisal allegations was amending or removing a rating from the complainant’s personnel record. This occurred in 14 of the 25 substantiated cases brought to the BCMRs. For example, in 1of the cases a servicemember with a substantiated whistleblower reprisal case requested that the Army BCMR remove two ratings from his record. The Army BCMR decided to remove the one rating that the DODIG found was done in reprisal. The second most common corrective action taken by the services was providing payment, benefits, awards, or training that was denied as a result of the reprisal. This occurred in 6 of the 25 substantiated cases brought to the BCMRs. For example, in one of the cases, a servicemember was given a Bronze Star that had been denied to him because of a reprisal. The third most common corrective action taken by the services was amending or removing disciplinary actions from an individual’s personnel record. For example, the Air Force BCMR removed a letter of reprimand from a servicemember’s file that DODIG found was a result of an act of reprisal. This occurred in 4 of the 25 substantiated cases brought to the BCMRs. There were also a number of cases where the service took more than one corrective action. For example, a Navy petty officer had a disciplinary action removed from his record, a promotion backdated, and retroactive pay instated to go along with the backdated promotion. Although 80 percent of servicemembers with substantiated whistleblower reprisal allegations who applied for relief received some relief, only about 1 in 5 servicemembers with whistleblower reprisal allegations substantiated by DODIG applied to the BCMRs for relief during the time period we reviewed. As shown in table 7, only 25 of the 131 (19.1 percent) of complainants with substantiated cases submitted applications for relief with their BCMR. As a result, only 15 percent of servicemembers with reprisal allegations substantiated by DODIG received some relief through their BCMRs. We found that there were differences between the services regarding the proportion of cases submitted to the BCMRs, with more than half of the substantiated Navy cases being brought to the Navy BCMR and only approximately 1 in 10 substantiated Army cases being brought to the Army BCMR. Officials from DODIG, the service IGs, and the BCMRs indicated that they did not know the exact reason why so few servicemembers with substantiated reprisal allegations apply for relief. There are some cases for which the BCMRs cannot provide relief. For example, a BCMR cannot correct the record for an individual where DODIG substantiated that the individual was threatened with reprisal but where no actual harm was done to that individual’s record. Similarly, a BCMR cannot correct the record for an individual where DODIG substantiated that the individual was restricted from making a lawful communication to an IG in DOD or Member of Congress. We identified nine Army cases where the Army BCMR was not in a position to provide relief. Discounting those nine cases would increase the percentage of servicemembers with substantiated claims that submitted cases to the Army BCMR from 11.1 percent to 13.3 percent (see table 7 and associated notes for further details). However, the overall impact of such cases appears to be minimal due to the relatively low number of substantiated cases involving only restriction or threats of reprisal. Officials from the Air Force and Army BCMRs also said that some servicemembers may be seeking relief from other lower-level service boards, such as the Air Force Evaluation Report Appeals Board or the Army’s Enlisted Special Review Board, even though servicemembers are told in their letter from DODIG to obtain relief from the BCMRs. The officials did not know of any such incidents but said it was a possibility. Data obtained from the Army BCMR shows four such incidents, with the other board providing relief to the servicemember in one of the four cases. Discounting those four cases would increase the percentage of servicemembers with substantiated claims that submitted cases to the Army BCMR from 11.1 percent to 12.0 percent. Based on these data, the impact of complainants taking cases to boards other than BCMR is relatively modest and does not explain the large difference between the number of substantiated cases and the number of cases brought to the BCMRs. Service and DODIG officials also stated that the length of time it takes for servicemembers to get their reprisal allegations substantiated may impact their willingness to engage in yet another process. Servicemembers frequently rotate to other assignments at different locations around the world and so could be in a completely new work environment with a different chain of command by the time the reprisal investigation is completed. The officials also said that servicemembers may have left the service during the time it takes to substantiate a claim. Our case file review included a nongeneralizable subset of seven substantiated whistleblower reprisal cases that took a mean of 614 days to close and with a range of 439 days to 796 days. Only one of the seven servicemembers with a substantiated case from our file review applied for relief with their BCMR, and DODIG took 750 days to substantiate that one claim. A further factor that could impact the willingness of those with substantiated reprisal claims from pursuing remedy from their service BCMR is a lack of understanding regarding the available remedies. The Military Whistleblower Protection Act allows a report of investigation to include recommendations regarding the corrective action. According to DODIG’s investigative guide, recommendations should be made if there is a substantiated reprisal allegation. It states that recommendations can be general or specific but that the corrective action “should be sufficient to make the complainant ‘whole’ and restore the complainant to the same or equal status he or she would have attained if the reprisal had not occurred.” According to DODIG officials, DODIG used to provide detailed recommendations regarding what it thought would be appropriate remedies for the complainant. For example, the 1996 investigative guide includes an example of a case that recommends a specific evaluation report be voided and the complainant be reinstated to his former position or one commensurate to it. Nevertheless, DODIG’s current practice is to provide a more general recommendation that appropriate corrective action be taken. DODIG officials did not know when or why this change in practice occurred but acknowledged that it would be appropriate and helpful to provide more detailed recommendations for how to make the complainant whole. Without knowing more about when and how this practice changed, we were not able to identify if there is an association between the level of detail in recommendations and the proportion of individuals who apply to the BCMRs. However, it is reasonable to assume that without detailing in the investigative report the types of remedies that could be appropriate, the servicemember may not be aware of the full benefit realized by applying for relief to the BCMR. The service BCMRs are not consistently identifying applicants who have substantiated reprisal cases as such and are therefore not providing all reprisal victims with the procedural privileges to which they are entitled. The Military Whistleblower Protection Act provides whistleblowers with unique procedural privileges that are generally not afforded to other applicants to the BCMRs. These privileges include: 1. direct application for corrective action may be made to the service BCMR instead of first going to a lower level of administrative appeal;2. 180-day deadline for the BCMR to review and the secretary of the military department concerned to render a final decision in the case, which differs from other cases processed by BCMRs; and 3. right to appeal BCMR decisions to the Secretary of Defense. Further, according to federal internal control standards, agencies need operating information to determine whether they are achieving their compliance requirements under various laws and regulations. BCMR officials also told us that whistleblower reprisal cases are high-priority cases for the BCMRs, even though they receive only a few a year compared to the many thousands of other cases they process. They therefore make a special effort to track reprisal cases. Although the Military Whistleblower Protection Act provides unique procedural privileges to whistleblowers who apply to BCMRs for relief, the BCMRs are not consistently identifying applicants with substantiated whistleblower reprisal cases as such and are therefore not always aware when these procedural privileges should apply.BCMRs did not identify 10 of the 25 applicants with whistleblower reprisal cases substantiated by DODIG as whistleblower reprisal cases (see table 8). Additionally, we found in the aggregate that cases that are not identified as whistleblower reprisal cases took longer. This was true for each BCMR but was more pronounced with the Navy BCMR. Data provided by the Navy BCMR showed that it processed in 40 days (mean) the six cases that were identified as reprisal in their database but took 235 days (mean) to process four cases not identified as reprisal (see app. III). Between those cases identified as reprisal and those that were not, we did not observe a difference in overall proportion of applicants who were provided remedy by the BCMRs. However, complainants who do not receive remedy or are not satisfied by the remedy they received from the BCMR and who the BCMR did not identify as a whistleblower reprisal case are not informed of their right to appeal to the Secretary of Defense. Instead, these individuals are treated as non-whistleblower applicants and so told that their administrative appeals options have been exhausted within the service, unless they have new information to provide to the BCMRs. The applicants are also advised that they may seek remedy in a court of appropriate jurisdiction. Whistleblowers play an important role in safeguarding the federal government against waste, fraud, and abuse, and Congress has enacted legislation to provide military whistleblowers with protections against reprisal. The requirements of the Military Whistleblower Protection Act provide complainants with a means to redress wrongs committed against them as a result of their whistleblowing; establish processes for holding subjects accountable; and provide the Secretary of Defense and decision makers with visibility over the military whistleblower reprisal investigative process and its outcomes. Recognizing problems with the process, and in response to its own internal review and a Department of Justice report it requested, the DODIG has expressed a renewed commitment to meeting the statutory timeliness and reporting requirements and ensuring quality investigations. Further, it has taken some steps to achieve these goals and to improve oversight of its investigations into allegations of reprisal against whistleblowers. Additional actions are needed, however. For example, recording, collecting, and tracking accurate, relevant data on case processing times would aid DOD in its efforts to identify inefficiencies or challenges to meeting timeliness requirements and in reporting to internal and external stakeholders. Finalizing the development and implementation of performance metrics for whistleblower reprisal investigations, such as ensuring case files contain evidence sufficient to support conclusions, would provide DOD with a means of ensuring that DOD is meeting its own standards for completing quality investigations. In addition, oversight actions—such as updating and adhering to the guidance governing investigations—could help improve the quality and oversight of reprisal cases. Finally, the overall purpose of DOD’s whistleblower reprisal program is to identify servicemembers who have been reprised against, make them whole, and ensure that there are appropriate consequences for those who reprised against the whistleblower. This could be furthered if the DODIG and the service BCMRs develop processes and procedures to facilitate consideration of all substantiated allegations by the appropriate service BCMR. Increasing the completeness and reliability of data on corrective action could also provide DOD and Congress with information they need for oversight. Without addressing these issues, military whistleblowers may not be getting the full protection and resolution they deserve and DOD may not be reaping the full benefits whistleblowers could provide the department. To assist DOD with improving processing times of these investigations, we recommend that the Secretary of Defense work in coordination with DODIG to: implement policies and procedures to ensure accurate and complete recording and consistent tracking of total case processing time and processing time for various phases of the investigation; track and analyze timeliness data to identify reforms that could aid in processing cases within the 180 days provided by law; and regularly report to Congress on the timeliness of military whistleblower reprisal investigations, including the number of cases exceeding the 180 days provided by law. DODIG could do so in its semiannual reports. To assist DOD in improving oversight over the whistleblower reprisal investigative process, we recommend that the Secretary of Defense work in coordination with DODIG to: develop and implement performance metrics to ensure the quality and effectiveness of the investigative process, such as ensuring that the case files contain evidence sufficient to support the conclusions; update whistleblower reprisal investigative guidance and ensure that it is consistently followed, including clarifying reporting requirements, responsibilities, and terminology; and consistently monitor the status of whistleblower reprisal investigations. DODIG should work in close consultation with the service IGs when implementing these recommendations. To better ensure that whistleblowers obtain the relief they are due, we recommend that the Secretary of Defense work in coordination with DODIG to identify best practices and develop the necessary processes and procedures to ensure that all whistleblower reprisal allegations substantiated by DODIG are considered under the whistleblower statute by the appropriate service BCMR. For example, DODIG could provide more detailed recommendations regarding corrective action for the complainant. DODIG should work in close consultation with the service IGs and the BCMRs when implementing this recommendation. To ensure that the BCMRs are treating military whistleblower reprisal cases appropriately, given the unique procedural privileges provided by the Military Whistleblower Protection Act, we recommend that the Secretary of Defense direct the secretaries of the military departments to take action to ensure that military whistleblower cases are correctly identified and processed by the BCMRs. Such actions could include modifying the form used to apply to the BCMR; additional training so that BCMR staff can better identify cases; or developing methods for identifying cases for which the BCMRs have received DODIG substantiated case notifications. To assist DOD in improving oversight of all corrective action taken in response to substantiated military whistleblower reprisal claims, including command action, we recommend that the Secretary of Defense work in coordination with DODIG to: establish standardized corrective action reporting requirements; consistently track and regularly reconcile data regarding corrective action; and regularly report to Congress on the frequency and type of corrective action taken in response to substantiated reprisal claims. DODIG could do so, for example, in its semiannual reports to Congress. DODIG should work in concert with the service IGs and BCMRs when implementing these recommendations. In commenting on a draft of this report, DOD concurred with each of our recommendations. DOD’s comments are reprinted in appendix IV. DOD also provided technical comments, which we considered and incorporated where appropriate. In concurring with our recommendations that DODIG implement policies and procedures to ensure accurate and complete tracking of total case processing times and processing time for various phases of the investigation, track and analyze timeliness data, and regularly report to Congress on the timeliness of military whistleblower reprisal investigations, DOD stated that DODIG recognized the necessity of policies and procedures to ensure accurate and complete tracking of processing time for all phases of investigations and was taking multiple steps to address the GAO recommendations. These steps include modifying internal processes and updating policy manuals, redesigning the case management database, relying on data analysis to evaluate reforms and identifying further reforms, and reporting timeliness data to Congress. We believe that these steps, when fully implemented, could provide the department and the Congress with enhanced visibility over the status of military whistleblower reprisal investigations. In concurring with our recommendations that DODIG develop and implement performance metrics, update and consistently follow guidance, and consistently monitor the status of military whistleblower reprisal cases, DOD stated that DODIG is taking steps to address each one of these areas, including revising its manual for administrative investigations to include clearly defined performance metrics, the required contents of investigative case files, as well as defining reporting requirements, responsibilities, and relevant terminology. It has also established a new oversight team which reviews and approves the determinations reached by the service IGs. DODIG is also in the process of establishing procedures that will directly monitor the progress of investigations and track command actions taken. We believe that the steps that DOD noted in its response could improve DOD’s means of ensuring that DOD is meeting its own standards for completing quality investigations. In concurring with our recommendation that DODIG, in close consultation with the service IGs and the BCMRs, identify best practices and develop the necessary process and procedures to ensure that all substantiated military whistleblower reprisal cases are considered by the appropriate BCMR, DOD stated that the mentioned organizations will begin meeting together within the next six weeks to identify best practices and develop an effective way forward. We acknowledge the department’s stated commitment to these steps and encourage it to work toward the broad range of recommended steps, including that DODIG provide more detailed recommendations regarding corrective action for complainants. In concurring with our recommendation that the service BCMRs take action to ensure that military whistleblower reprisal cases are correctly identified and processed by the BCMRs, DOD stated that the BCMRs will consider how to best ensure that whistleblowers with substantiated reprisal complaints are provided with all the information they need to determine if an application to a BCMR is appropriate. Although providing information to whistleblowers is a positive step, this alone will not address our finding that the service BCMRs are not consistently identifying applicants who have substantiated reprisal cases as such and are therefore not providing all reprisal victims with the procedural privileges to which they are entitled. Our recommendation included examples of possible actions the BCMRs could take to ensure that they are correctly identifying cases, including modifying the application form, additional training for BCMR staff, or developing methods for using the DODIG notification to BCMRs of substantiated cases as a way to flag military whistleblower reprisal cases, much like the Army BCMR does. We believe that improving the BCMRs’ ability to properly identify substantiated military whistleblower reprisal cases could help to ensure that such cases are properly considered under the military whistleblower statute by the appropriate service BCMR. In concurring with our recommendations that DODIG establish standardized corrective action reporting requirements, track and reconcile such data, and regularly report such information to Congress, DOD indicated that DODIG is redesigning its case management database to better enable it to record and report on such information. The overall purpose of DOD’s whistleblower reprisal program is to identify servicemembers who have been reprised against, make them whole, and ensure that there are appropriate consequences for those who reprised against the whistleblower. We believe that the department’s stated commitment to collecting and maintaining reliable data on corrective action—both for the remedies provided to complainants and command actions taken against subjects—and also regularly reporting such information to Congress could enhance oversight of the outcomes of the military whistleblower reprisal program. We are sending copies of this report to the appropriate congressional committees. We are also sending copies to the Secretary of Defense. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 or merrittz@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 V. During our review of the Department of Defense’s (DOD) military whistleblower reprisal program, we reviewed relevant documentation, gathered and assessed data, and met with representatives from numerous agencies, including the DOD Inspector General (DODIG), and Inspector General (IG) officials from the services (Army, Navy, Air Force, and Marine Corps).Table 9 lists all of the organizations we met with during our review. To determine DOD’s process for investigating military whistleblower reprisals cases, we reviewed documents outlining investigative processes of DODIG and service IGs, including DODIG’s investigative guide, and agency briefings and memoranda, and we spoke with officials from those organizations. Two primary sources of data used in several of our objectives were military whistleblower reprisal data from DODIG’s database and from a random selection of DODIG closed military whistleblower reprisal case files. DODIG provided us with information for all military whistleblower reprisal cases opened and closed between fiscal year 2006 and the first half of fiscal year 2011 from the two databases they used to record these data. We combined the information from the two databases into one complete dataset, eliminating duplicate cases as per directions provided by DODIG. We also consulted with DODIG officials to ensure that we were properly identifying the various data elements. In addition, we based our case file selection on the consolidated dataset of DODIG military whistleblower reprisal data. Specifically, a GAO statistician determined that a random sample of 97 cases from a list of the 871 military whistleblower reprisal cases DODIG closed between January 1, 2009 and March 31, 2011, would be appropriate. Our sample size of 97 cases was chosen to be generalizable, with a margin of error of 10 percentage points at the 95 percent confidence level for percentage estimates. We chose this time period because it represented DOD’s most recent efforts and because DODIG had these files on site. Based on our review of whistleblower reprisal policies and procedures, we created a data collection instrument to identify the key characteristics of whistleblower reprisal cases, check the data reliability of the database information, and assess the completeness of files. We also developed a standard approach to reviewing files to ensure we reviewed all cases consistently. We refined this data collection instrument and our approach by first reviewing 12 case files that were not part of the 97 identified. Our methodology for reviewing the random sample required two analysts to review each case file, enter the information for each field in the data collection instrument, and transfer their information for each case to a central spreadsheet. We compared the two scores for each case, and highlighted the elements for which there was disagreement. Reviewers discussed the areas of disagreement and resolved any differences by identifying the necessary evidence in the case files. During the course of the case file review, our original sample size was reduced from 97 to 91 because 3 of the cases were found to be ongoing investigations, 2 cases were not military whistleblower reprisal cases, and DODIG could not locate 1 of the case files. However, this reduced sample is still generalizable, with an 11 percent margin of error at the 95 percent confidence level. Case file review results based on probability samples are subject to sampling error. The sample we drew for our case file review is only one of a large number of samples we might have drawn. Because different samples could have provided different estimates, we express our confidence in the precision of our particular sample results as a 95 percent confidence interval. This is the interval 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. The margin of error associated with the confidence intervals of our case file review proportion estimates is no more than plus or minus 11 percentage points at the 95 percent level of confidence. The margin of error for any mean values based on our case file review will vary depending on the variability of the data and so is reported along with the mean. In order to determine the extent to which DOD is meeting timeliness requirements for investigating military whistleblower reprisals, we reviewed relevant documents including The Military Whistleblower Protection Act, and its implementing directive on military whistleblower protections, DOD Directive 7050.06, Military Whistleblower Protection (Jul. 23, 2007). To identify possible challenges DOD faces in meeting these requirements, we reviewed key documents, including internal agency memos and briefings; the July 2009 Department of Justice Inspector General report; A Review of the Department of Defense Office of Inspector General’s Process for Handling Military Whistleblower Reprisal Allegations; and DODIG’s May 2011 Review of the Office of Deputy Inspector General for Administrative Investigations, Directorate for Military Reprisal Investigations. We also reviewed the 2010 DODIG report to Congress on progress made regarding recommendations from the Department of Justice review, and DODIG’s October 2011 action plan in order to identify the steps DODIG has taken to address timeliness challenges. In order to determine if DOD was meeting statutory timeliness and reporting requirements, we conducted analysis of 91 randomly selected case files for cases closed between January 1, 2009 and March 31, 2011, (see above) and recorded the opening and closing dates indicated in the documentation for each case. We further reviewed those case files for evidence regarding timeliness reporting requirements. In order to determine the reliability of timeliness information in DODIG’s database, we compared the opening and closing dates we determined by reviewing the case files to the opening and closing dates recorded for those cases in DODIG’s database. We conducted checks to see whether DODIG database timeliness fields were filled out to determine if DODIG had reliable information on the time it takes to complete various investigative phases. In addition, we spoke with officials from DODIG and officials from the service IGs and the Office of the Under Secretary of Defense for Personnel and Readiness – Enterprise Services regarding timeliness issues, including compliance with timeliness reporting requirements. Some of these elements included specific documents. For example, the Army oversight worksheet (item 14 above) was a specific document. Other elements could be reflected in multiple documents. For example, the sequence of key events (item 8 above) could be in a larger report, be in a summary, or be its own document. Once we established the list, we further consulted with the director of DODIG’s directorate responsible for conducting military whistleblower reprisal investigations to ensure that the elements selected were appropriate indicators of file completeness. The 18 elements were included in the data collection instrument and we used the methodology described above to gather information on these elements from the file. The completeness of each case file was determined individually since not all 18 elements were necessary in every case. For example, some of the 18 elements would only need to be present in a file if an investigation was conducted by a service, went beyond 180 days, or was a full investigation. We adjusted the required number of elements based on the specific circumstances of each case and calculated completeness based on that adjusted baseline. We categorized the case files as either complete (files with at least 85 percent of the case-specific elements present), partially complete (files with between 70 and 84 percent of the case-specific elements present), or incomplete (files with less than 70 percent of the case-specific elements present). To assess DODIG’s monitoring of whistleblower reprisal investigations, we interviewed officials from DODIG as well as the IGs in each of the services. In order to determine the roles and responsibilities of DODIG and the military services in providing corrective action, including the processes and procedures used by the Boards for Correction of Military Records (BCMRs) to provide relief to servicemembers who were reprised against, we reviewed applicable laws and regulations, including the Military Whistleblower Protection Act and DOD Directive 7050.06, and spoke with officials from DODIG, the service IGs, the three service BCMRs, and the Office of the Under Secretary of Defense for Personnel and Readiness – Enterprise Services. In order to determine the extent to which servicemembers with substantiated cases apply for and receive relief from the service BCMRs, we compared a list of military whistleblower reprisal claims substantiated by DODIG between fiscal year 2006 and the first half of fiscal year 2011 to information in the databases of the service BCMRs. We created the list of substantiated military whistleblower reprisal claims from the database data provided by DODIG for cases closed between fiscal year 2006 and the first half of fiscal year 2011 and created a data collection instrument. We then went to each of the three service BCMRs with a list of substantiated cases specific to each BCMR’s service. BCMR officials reviewed their database and provided resultant information for each individual case, which we then recorded in the data collection instrument. We also used the data collection instrument to identify the extent to which the service BCMRs were identifying military whistleblower reprisal cases as such in their case tracking system, the processing times for such cases, and the actions taken by the BCMRs to provide remedy to the complainant. In order to determine the reliability of the data, we spoke with BCMR officials to determine how the data in their database are processed. We also reviewed the data and performed logic checks. We found that the data were sufficiently reliable for our purposes. In order to identify the extent to which DODIG was tracking the relief provided to military whistleblowers, we spoke with officials from DODIG and the service IGs. In order to determine the extent to which the services took command action against those who have reprised against military whistleblowers, we reviewed DODIG data for cases closed between fiscal year 2006 and the first half of fiscal year 2011. We also obtained information from the service IGs regarding command action for all cases closed between January 1, 2009 and March 31, 2011. We chose this time frame based on the data retention practices of the service IGs. We determined the reliability of the DODIG and service IG data on relief by comparing them and through discussions with the officials and determined that the data were not reliable enough for our purposes. In order to describe the military reprisal caseload for the period we reviewed, we obtained a copy of data from DODIG’s database using the method described above. We assessed the reliability of the data, and then coded and derived statistical output. We determined some to be reliable for our purposes, including the number of closed complaints, cases closed before full investigation, and not substantiated or substantiated cases. Other data were found to be not reliable enough for our purposes because they were either inaccurate or incomplete. To obtain additional information about DODIG’s caseload, we conducted a case file review of military reprisal cases using the method described above. We developed a data collection instrument and used it to record information on case characteristics located in the case files, including information about the complainant, the type of protected communication, unfavorable personnel action alleged to have occurred, and the reason for closing the case. As noted above, two analysts reviewed each case file and resolved any differences by identifying the necessary evidence in the case files. We conducted this performance audit from April 2011 through February 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. This appendix provides information on the characteristics of military whistleblower reprisal cases based largely on both our review of files of cases closed between January 1, 2009 and March 31, 2011, as well as data from DODIG’s database for cases closed between fiscal year 2006 and the first half of fiscal year 2011. Generally, neither the complainants’ status as officer or enlisted nor their service matched their overall proportions in the military population. For example, complaints filed by officers made up approximately 31 percent of cases closed between fiscal year 2006 and the first half of fiscal year 2011, while officers constitute approximately 16 percent of the total military population. Further, servicemembers from the Air Force filed approximately 37 percent of the complaints for cases closed between fiscal year 2006 and the first half of fiscal year 2011, but made up only 22 percent of the military population. Servicemembers from the Navy and Marine Corps had the fewest closed complaints during this time period— 12 percent and 1 percent, respectively, while making up 17 percent and 11 percent of the military population. The total number of closed reprisal complaints from servicemembers from the Army during this time period was higher than the other services but it was proportionate to the size of the Army. So although approximately 50 percent of military whistleblower reprisal complaints came from the Army during this time period, servicemembers from the Army also made up approximately 50 percent of the total military population. See figure 4 for a comparison of the servicemember population proportion by service compared to the proportion of reprisal cases closed. According to DOD Directive 7050.06, a servicemember who makes or prepares to make a protected communication is a whistleblower. Our review of case files revealed that the primary reasons for making a protected communication are to report allegations of a violation of law or regulation (66 percent) or abuse of authority (44 percent).told us that regulations cover virtually every aspect of military life, including how to conduct personnel ratings, so complainants often cite violations of regulations in their complaints. Officials from DODIG and the service IGs also told us that the vast majority of protected communications are not about allegations of significant fraud, waste, or abuse, such as reports of unnecessarily high costs of equipment or overpayment of contracts, but rather about relatively minor issues that only impact the individual complainant, such as supervisors not following regulations regarding a performance review. Our case file review revealed that this perception is not entirely accurate. We found that approximately one-third of complaints (36 percent) were concerned solely with personal issues; one-third of complaints (33 percent) concerned fraud, waste, or abuse issues; and one-third of complaints (31 percent) were a mix of the two. The protected communications regarding allegations of fraud, waste, and abuse in the case files we reviewed tended to be about costs associated with misuse of government property, such as personal use of a government vehicle, or abuse of authority by commanders. A whistleblower reprisal complaint must also include an allegation that an action was taken in reprisal against a servicemember. DOD Directive 7050.06 defines reprisal as taking or threatening to take an unfavorable personnel action, or withholding or threatening to withhold a favorable personnel action, for making or preparing to make a protected communication.January 1, 2009 and March 31, 2011, the most common forms of reprisal alleged by complainants were that they received an unfavorable Based on our file review of cases closed between assignment or reassignment (50 percent), a poor performance evaluation (46 percent), or some sort of disciplinary action (42 percent). DODIG evaluates cases and generally closes them based on the answers to the four questions, referred to as the Acid Test (see fig. 2). Our review of randomly selected case files revealed that the most common reasons for closing a case were that DODIG determined that the complainant’s actions not related to the protected communication justified the unfavorable personnel action (question 4 - 65 percent of closed cases), or that there was no unfavorable personnel action (question 2 - 41 percent of closed cases).complaints before conducting a full investigation and writing the resulting report of investigation (66 percent). DODIG data on cases closed between fiscal year 2006 and the first half of fiscal year 2011 show DOD closed a mean of 286 (71 percent) cases per year before conducting a full investigation, which is within the margin of error for our case file review. DODIG closed a mean of 405 military whistleblower reprisal cases a year between fiscal year 2006 and the first half of fiscal year 2011, ranging between a low of 325 closed cases and a high of 448 cases according to data provided by DODIG (see fig. 5). We were not able to report on the military whistleblower reprisal cases received because we found that DODIG’s data were not reliable for our purposes. As noted earlier, during our case file review, we observed that the case opening dates in DODIG’s database did not match the opening dates documented in the case files. Without data on when cases were opened, we were unable to compare case opening and closure rates and determine if more cases were being opened or closed in any given year. Although we found the DODIG data to be reliable enough for our purposes in reporting total cases closed in a year, these figures do not match the data reported by DODIG in its semiannual reports to Congress. Those figures include more than military whistleblower reprisal cases, but adjusting for these additional cases does not fully make up the discrepancy between the figures in the semiannual reports and the data provided to us by DODIG. DODIG officials were not certain of the exact cause for the discrepancy and said that they did not have auditable data for their semiannual report figures for the time period we examined. Our analysis of DODIG data on military whistleblower reprisal cases closed between fiscal year 2006 through the first half of fiscal year 2011 shows that DOD fully investigated a mean of 119 cases a year (29 percent of all cases), with 25 of those full investigations substantiated (6 percent of all cases), and 94 of those full investigations not substantiated (23 percent of all cases). DODIG determined that a mean of 286 cases a year (71 percent of all cases) did not warrant full investigation over the time period we reviewed. The number of full investigations ranged from a high of 156 in fiscal years 2006 and 2007 to a low of 69 in fiscal year 2009 and the number of substantiated cases ranged from a high of 40 in fiscal year 2006 to a low of 12 in fiscal year 2009 for cases closed during this time period. Further, the number of full investigations and substantiated cases closed during this time period tended to be higher in the earlier fiscal years than the later fiscal years, with fiscal year 2009 being the lowest for both. Figure 6 shows the total cases closed by investigative phase for each fiscal year. Further, the mean number of military whistleblower reprisal cases closed per year over this time period along with the number of cases fully investigated and substantiated varied by investigating organization according to data provided by DODIG. For example, the Army closed the highest number of cases per year (158 cases per year) and the Marine Corps closed the fewest cases per year (4 cases per year) over this time period.cases per year) and the Marine Corps fully investigated the fewest cases per year (2 cases per year) between fiscal year 2006 and the first half of fiscal year 2011. The Air Force and the Army substantiated the most cases per year (10 cases per year each) during this time period. The Marine Corps and DODIG substantiated the fewest cases per year (1 case per year each) over this time period. See figure 7 for the mean yearly number of closed cases by investigative phase and investigating organization for fiscal year 2006 through the first half of fiscal year 2011. Appendix III: Comparison of Whistleblower Reprisal Cases That Were and Were Not Identified as Reprisal by Service BCMRs Based on DODIG data for cases that included military whistleblower reprisal allegations substantiated by DODIG between October 1, 2005 and March 31, 2011, and BCMR data regarding the cases submitted to them, including case outcomes. Data do not include cases in which, according to DODIG data, the military whistleblower reprisal allegations are not substantiated but an improper referral for mental health evaluation (IMHE) is substantiated. The Navy BCMR reviews cases for the Department of the Navy and therefore handles cases from both Navy personnel and Marine Corps personnel. Two Navy BCMR cases—one from the Marine Corps and one from the Navy—were included and considered as not having received remedy although the Navy BCMR data are unclear whether or not it provided remedy. The Marine Corps case was not identified by the Navy BCMR as being a military whistleblower reprisal case. The Navy case was identified as a military whistleblower reprisal case. Remedy provided indicates that the complainant received at least partial remedy. It does not indicate that the complainant received the exact remedy they were seeking. In addition to the contact named above, Assistant Director Marie Mak, Joanna Chan, Nicolaas Cornelisse, Justin Fisher, Julia Kennon, K. Nicole Willems, Michael Silver, Sheena Smith, Amie Steele, Emily Suarez- Harris, and Erik Wilkins-McKee made major contributions to this report. | Whistleblowers help guard the federal government against waste, fraud, and abuse. The Military Whistleblower Protection Act provides servicemembers with a means to seek relief from reprisals and to hold subjects accountable. GAO was asked to determine the extent to which the Department of Defense (DOD) has (1) satisfied statutory timeliness requirements for processing military whistleblower reprisal cases, (2) established and implemented oversight mechanisms for its process, and (3) taken corrective action in cases where the DOD Inspector General (DODIG) substantiated reprisal claims. GAO also analyzed case characteristics. GAO examined laws, regulations, and guidance documents; interviewed officials from DODIG, service IGs, service Boards for the Correction of Military Records (BCMRs), and the Office of the Undersecretary of Defense for Personnel and Readiness; and collected and analyzed case data. GAO also conducted a detailed file review using a representative sample of cases closed between January 1, 2009 and March 31, 2011. DODIG has taken multiple steps, in collaboration with the service IGs in some instances, to improve DOD’s ability to process military whistleblower reprisal cases in a timely manner. Timeliness is important to ensure the reliability of evidence and appropriate resolution of reprisal allegations. However, DODIG has generally not met statutory requirements to report on investigations within 180 days, or to provide alternative notification. DODIG has undertaken efforts to improve timeliness by, for example, eliminating a time-consuming phase of its investigative process. However, DOD’s efforts are hampered by unreliable and incomplete data. For instance, GAO found that DODIG has not consistently or accurately recorded key dates to track how long investigations take to complete. Without key timeliness data, DODIG may have difficulty in identifying process areas requiring improvement and evaluating the impact of reforms. Further, the absence of this information limits congressional decision makers’ ability to provide oversight of DOD’s whistleblower reprisal investigative program. DODIG has begun executing an action plan that includes acting on prior external and internal review recommendations in order to improve its oversight of the department’s whistleblower reprisal process, but implementation of this plan is not yet complete and challenges exist in three areas: Performance metrics. DODIG has not yet established performance metrics to ensure the quality of reprisal investigations. Guidance. DOD’s guidance related to the whistleblower program is outdated and does not reflect current investigative processes. Additionally, some of the guidance is unclear, leading to inconsistent implementation among the service IGs. Moreover, DODIG has not been consistently adhering to standards regarding the maintenance of its case files, resulting in generally incomplete files. Case monitoring processes and procedures. DODIG lacks standard case monitoring processes and procedures, which may hinder its ability to consistently maintain visibility and assess the status of outstanding reprisal investigations including those conducted by service and component IGs. Until it further addresses the challenges it faces in regard to oversight mechanisms, DODIG cannot be assured that it is effectively conducting its oversight responsibilities or implementing the whistleblower reprisal program as intended. DOD’s efforts to ensure that appropriate corrective action is taken—both for whistleblowers and against those who reprise against whistleblowers—are hampered by disconnected investigative and corrective action processes and the limited visibility of the corrective actions taken. DODIG and the service BCMRs are not consistently identifying and tracking data on action taken to undo the reprisal damage done to whistleblowers. Further, unreliable data regarding corrective action taken against those found to have reprised against whistleblowers is hindering oversight of this key aspect of whistleblower protections. Without addressing these issues, whistleblowers may not be getting the full protection and resolution they deserve. GAO recommends that DOD implement procedures to track and report data on its case processing timeliness, take actions to improve oversight of its investigative process, and develop processes to ensure appropriate corrective actions are taken in substantiated cases. DOD concurred with all of GAO’s recommendations. |
Prevention is the most effective and efficient way to minimize fraud, waste, and abuse in any federal program, including disaster assistance, and is also a key element described in the Standards for Internal Control in the Federal Government. The most crucial element of fraud prevention is to substantially diminish the opportunity for fraudulent access into the system through front end controls. Figure 2 displays how preventive controls fit within a larger fraud, waste, and abuse prevention program. Fraud prevention can be achieved by requiring that registrants provide information in a uniform format, and validating that information against external sources. In the current environment, agencies have at their disposal a large number of data sources that they can use to validate the identity and address of registrants. However, our work related to FEMA’s management of the IHP program for hurricanes Katrina and Rita found that their limited use of a third-party validation process left room for substantial fraud. Effective fraud prevention controls require that agencies enter into data-sharing arrangements with organizations to perform validation. System edit checks are also key to identifying and rejecting fraudulent registrations before payments are disbursed. In addition, an effective fraud prevention system is not complete without adequate fraud awareness training of all personnel involved in the distribution of relief. Finally, any new systems or processes need to be field tested to ensure that the system is working properly prior to implementation. Prior to a disaster registrant gaining access to relief payments, key registrant information must be validated. For this program, data such as names, social security numbers (SSN), primary residences, citizenship status, and any other information which determines eligibility must be validated upfront, prior to agencies accepting the registration, or at least prior to disbursements being made. Obtaining releases from registrants which allow an agency to validate data with other sources such as social security records, tax records, and other information is an important step that can facilitate effective validation of data. Depending on the turnaround time needed for a payment, agencies can chose to validate records with federal government databases, or validate information with third-party contractors who can confirm key information with publicly available data from credit reports and other sources almost instantaneously. When using these third-party sources it is also important to at least periodically authenticate the data within the program with the source of the information such as Social Security Administration (SSA) or Internal Revenue Service (IRS) records. Regardless of the sources used, all key data concerning a registration has to be validated to minimize the risks to acceptable levels prior to the registrant being accepted in the program. For example, because FEMA lacked basic identity validation controls, they accepted thousands of IHP registrations from registrants who provided social security numbers that had never been issued or belonged to deceased individuals. In addition, because FEMA failed to validate damaged address information, we found thousands of dollars were paid to individuals for bogus damaged addresses. For data to be properly validated, it should be recorded in a uniform format. Once key data elements relating to disaster relief eligibility are determined, our work has shown that it is important to record the information in a format that will facilitate data validation with external sources. Otherwise, agencies may be faced with thousands or tens of thousands of registrations being rejected or placed in a manual review status because data was not recorded accurately. This is also particularly important when recording names, identity information, and addresses in order to prevent registrants from getting multiple payments by changing the spelling of their address or name. For example, data collected by hotels providing lodging that was paid for by FEMA did not record occupant’s SSN or FEMA registration ID numbers. Thus, there were no common data elements that could be used to ensure people already staying at FEMA paid hotels did not also improperly receive rental assistance. Within the federal government, many organizations such as SSA, United States Postal Service (USPS), and IRS maintain information on disaster assisted registrants. These are all data sources that we have used in prior forensic work to identify fraudulent and improper payments. However, proactive actions are necessary on the part of agencies responsible for providing disaster assistance to enter into data-sharing agreements with organizations that own the data. Agreements have to be in place prior to any disaster occurring for agencies to take advantage of data-validation sources. Also for tax information, consent must be requested from the registrant at the time of registration. Finally, whenever possible, registration data and specific loss claims should be validated by a physical inspection of the disaster damage prior to payment. In some cases, as with the massive destruction caused by Hurricane Katrina, physical inspections in a timely manner are not possible, and therefore acceptance of data must be done through electronic verification. However, within the FEMA IHP program we found significant fraud related to expedited assistance payments that were made prior to any physical inspection being performed. In the cases we found, many fraudulent registrations could have been identified and rejected if inspections were performed because they would have seen that properties did not even exist, as we found when performing our own inspections. For example, FEMA failed to perform physical inspections on our undercover registrations, which used completely bogus property addresses and vacant lots. Had a physical inspection been performed, FEMA could have identified the fraudulent information and denied the expedited and rental assistance payments. Disaster relief programs must also have a network of system pre-payment edit checks in place to ensure that obviously false or duplicate information is not used to receive disaster relief payments. System edit checks can be performed before or after a registration is accepted into the system, but to be an effective preventive control, they must be performed prior to the distribution of a payment. Edit checks should include items such as ensuring that the same SSN was not used on multiple registrations, or that the registrant provides a verifiable physical address for which the disaster damaged is based on. In the case of FEMA’s IHP program, we found the lack of effective system edit checks allowed numerous individuals to fraudulently register numerous times and receive multiple payments using the same name, social security number, or address. In one case, the lack of controls allowed an individual to register eight times using the same name and SSN and receive multiple disaster assistance payments. In addition, accepting applications with obviously inaccurate data exposed FEMA to the risk that disbursements would be made based on obviously false data. For example, we found during our work that FEMA paid millions of dollars in IHP payments to individuals who used a Post Office Box as their damaged physical address in order to receive assistance. In those cases system edits should have identified the Post Office Box as an invalid physical address and forced the applicant to provide a valid street address for the damage property in order to be considered for disaster assistance. Results of our work also showed that agencies must follow through and accurately implement—and not short-change—existing system edit checks to provide assurance that the program is protected. We found in the course of our work that FEMA had designed controls that may have prevented some fraudulent payments. However, our work also indicated that these controls were circumvented, for example, when FEMA designed scripts to override system edit checks that had identified registrations as potential duplicates, in an effort to disburse funds as quickly as possible. Adhering to existing control procedures is therefore also crucial when maintaining effective fraud prevention. Beyond the uniform recording and validation of data, other controls, including a well-trained work force that is aware of the potential for fraud, can help prevent fraud. Personnel involved in a disaster program, including government employees and call center and inspection contractors, should receive training about the potential for fraud within the program and the likely types of fraud they could encounter. Fraud awareness training with frontline personnel is crucial because they are part of the first line of defense and therefore play a key role in fraud prevention. If the personnel accepting registrations and performing physical inspections of properties and documents are aware of fraud indicators and suspicious activities, they will help to identify potentially fraudulent activity as soon as it occurs. Where possible, incentives can be provided to contractors not just to process registrations and claims quickly, but also to prevent fraud. In addition, when implementing any new controls, it is important to field test all systems prior to putting them in place. As stated in a recent testimony on the IHP program, FEMA acknowledged that they had instituted several new processes that had not been tested. Weaknesses in these new processes, including the lack of validation controls over key data elements, resulted in our findings of approximately $1 billion dollars in potential fraud in the IHP program. On top of reducing the risk of untested controls allowing substantial fraud, field-testing also helps to ensure that new controls do not improperly deny benefits to valid registrants. A safety net for those registrants who are wrongly denied disaster relief due to preventive controls should always be in place to ensure they receive assistance. This process should include staff who are adequately trained to expeditiously handle exceptions. Even with effective preventive controls, there is substantial residual risk that fraudulent registrants are likely to gain access to a disaster relief program and begin to receive payments. Therefore, after a registrant has successfully passed through upfront controls and begun to receive payments, our work at FEMA illustrated that agencies must continue their efforts to monitor the execution of the disaster relief program. Detection and monitoring efforts are addressed in the Standards for Internal Control in the Federal Government and include such activities as data-mining registrations, which have received payments, ensuring accountability over funds and monitoring how the disaster assistance is being spent, and establishing mechanisms to identify the existence of fraud. Figure 3 provides a perspective on how these controls fit into an overall fraud prevention program. Data-mining of registration data within the program should be done to look for suspicious information after payments have been made. Along with data-mining efforts, proper accountability controls over the distribution of funds and the monitoring of fund usage is key to obtaining reasonable assurance that relief payments are being used to mitigate the effects of a disaster. Also, setting up hotlines to identify potential frauds is an important activity that should be in place when distributing disaster funds. Finally, any lessons learned from detection and monitoring efforts should be used to improve preventive controls to reduce the risk for fraud, waste, and abuse in the future. Despite effective preventive controls, there is still risk for fraud, waste, and abuse within disaster programs once payments are made. Therefore, it is important that program managers continuously data mine registrations for suspicious activity. A robust data-mining program can include many different efforts. Examples of fraud indicators include but are not limited to searching for anomalies like those found at FEMA, including multiple payments sent to the same address or bank account. Abnormalities such as numerous residents in a damaged apartment building all relocating to the same location may also suggest fraud. Comparing recipient data against other government assistance programs such as databases containing information on Red Cross or FEMA paid for hotel rooms can help to identify duplication of benefits between programs. However, due to the difficulties of collecting overpayments, system edit checks that occur prior to payments being made are preferable to data-mining after payments have occurred. The data-mining we performed on FEMA’s IHP program showed how important constant monitoring and detection can be. We searched for and found examples where the same individual received several rental assistance checks from FEMA while at the same time residing in a hotel room paid for by FEMA. We also found instances where multiple family members from the same household registered numerous times and received duplicate payments. Using external databases of federal and state prisoners, we found instances where prisoners had fraudulently registered for and received disaster relief payments while incarcerated. As shown by our examples, data-mining efforts should be done in a manner that uses creative solutions to search for potential fraud using all available data sources. To the extent that data-mining identifies systematic fraud, that intelligence should be fed back into the fraud prevention process and system edits so that for future disasters the fraud is detected before money is disbursed. When part of the disaster assistance comes in the form of cash or a cash equivalent such as a debit card, our work at FEMA shows that it is crucial for agencies to maintain strict accountability over who has received the assistance. This can be achieved by obtaining signatures of release from an agency official and, if appropriate, from the issuing bank official, along with a signature of acceptance from the relief recipient. Agencies should also be able to link each distribution of cash to a specific applicant. In the case of FEMA and their distribution of debit cards, adequate accountability was not maintained, resulting in more than $1 million worth of debit cards being distributed without a record of who received them. In addition, depending on the type of assistance provided and the means in which the assistance was distributed, it can be important for an agency to monitor the usage of disaster relief funds. Our review of FEMA’s IHP program found that almost all money was distributed via check or EFT, which did not allow us to review whether the money was spent on disaster-related needs. A small amount, approximately $80 million, of IHP money was distributed via debit cards, which allowed us to see whether funds were being used appropriately. In this case, the vast majority of debit card money was still withdrawn as cash, but the remaining amount appeared to have been used for disaster-related needs. However, we did find a small number of purchases for nondisaster items such as football tickets, alcohol, massage parlor services, and adult videos. By monitoring these types of uses and contacting and possibly penalizing those who misuse funds, agencies may be able to ensure that disaster funds are used to help mitigate losses and not for inappropriate items. To detect existing fraud and prevent new cases in the future, agencies should also set up mechanisms to identify and investigate existing cases. The use of hotlines where individuals can anonymously call and report potential fraud can provide valuable investigation leads. The Department of Homeland Security (DHS) Office of Inspector General set up one such hotline specifically dedicated to fraud related to hurricanes Katrina and Rita. Similar hotlines are useful within any disaster relief program to help identify any fraudulent activity not caught by controls. In conjunction with fraud identified through data-mining or hotline tips, agencies should have in place teams ready to investigate leads, not only for future prosecution, but also to provide suggestions for how the fraud can be prevented in the future. The final aspect of a program designed to reduce fraud in a disaster assistance program is the investigation and aggressive prosecution of individuals who have fraudulently received disaster assistance. Suspicious cases identified through preventive, detective, and monitoring controls, along with hotline tips, should be referred to investigators for further review. In the course of our work performed on IHP fraud for hurricanes Katrina and Rita, we identified tens of thousands of potentially fraudulent registrations. We have already referred thousands of those cases to FEMA and the Katrina Fraud Task force for further investigation and expect to refer others for additional investigation and possible prosecution. While the criminal investigative process is general a lengthy process, we are aware that several individuals that we referred have already been indicted. This included one individual indicted for fraudulently obtaining over $25,000 from FEMA based on bogus registrations. Figure 4 displays how investigations and prosecutions fit into an overall fraud prevention program. While investigations and prosecution can be the most visible means to deal with fraudsters, they are also the most costly and should not be used in place of other more effective controls. Instead, agencies need to focus on prevention before money is spent. Still, by successfully prosecuting fraudsters, agencies can deter others who are thinking of taking advantage of disaster programs. In the end, investigations and prosecutions are a necessary part of an overall fraud prevention and deterrence program, but should be a last resort when all other controls have failed. In addition, knowledge from these investigations and prosecutions should be fed back into the fraud prevention process to better handle future disasters and enhance existing fraud prevention and detection programs. Managers of federal disaster assistance programs face a dual challenge— delivering aid as quickly as possible while at the same time ensuring that relief payments go only to those who are truly in need. To meet this dual challenge, managers must recognize that fraud prevention and the rapid distribution of assistance are not conflicting mandates; instead, both can be accomplished if effective controls are in place and operating as intended. Of the controls discussed today, fraud prevention controls are the most useful and cost-effective means of reducing the loss of money due to fraud, because payments, once out the door, have proven extremely difficult to recover. Implementing an effective system of fraud prevention controls including upfront controls, post payment detection and monitoring, and prosecuting those who have exploited control weaknesses are crucial to building the American taxpayer’s confidence that federal disaster assistance is given to those in need. Mr. Chairman and members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee have at this time. For further information about this testimony please contact Gregory Kutz at (202) 512-7455 or kutz@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. 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. | Federal agencies spend billions of dollars annually to aid victims of natural and other disasters and acts of terrorism. Managers of federal disaster assistance programs face a dual challenge--delivering aid as quickly as possible while at the same time ensuring that relief payments go only to those who are truly in need. Due to the very nature of the government's need to quickly provide assistance to disaster victims, federal disaster relief programs are vulnerable to significant risk of improper payments and fraudulent activities. On February 13, 2006, and on June 14, 2006, GAO testified concerning extensive fraud, waste, and abuse in the Individuals and Household Program (IHP), a component of the Federal Emergency Management Agency's (FEMA) disaster assistance programs. GAO identified significant internal control weaknesses that resulted in FEMA making tens of thousands of Expedited Assistance payments that were based on bogus registration data. GAO also found numerous other internal control failures in FEMA's IHP disaster assistance program, resulting in an estimate that FEMA made $600 million to $1.4 billion in improper and potentially fraudulent payments to registrants. The purpose of this testimony is to establish a framework for preventing, detecting, and prosecuting disaster assistance fraud. Recent GAO audits have illustrated the importance of an effective fraud, waste, and abuse prevention system in federal disaster assistance programs. GAO's Standards for Internal Control in the Federal Government provide a framework for internal control that can be used to minimize fraudulent, wasteful, and abusive activity regardless of whether dealing with the effects of natural disasters like hurricanes Katrina and Rita, or coping with the destruction left by the terrorist attacks of September 11, 2001. A well-designed fraud prevention system should consist of three crucial elements: (1) upfront preventive controls, (2) detection and monitoring, and (3) investigations and prosecutions. Upfront preventive controls can help screen out the majority of fraud, and are the most effective and efficient means to minimize fraud, waste, and abuse. Detection and monitoring, and aggressive prosecution of individuals committing fraud, while also crucial elements of an effective system, are less effective and generally cost more. Audit work has long confirmed that upfront preventive controls are most effective when they require validation of data provided by disaster registrants against other government or third-party sources, and physical inspections when possible. Preventive controls should also include procedures designed to identify problem registrants prior to payments. Training personnel on fraud awareness and potential fraud schemes is also an integral component in preventive controls. Collectively, these preventive controls can help improve program integrity and safeguard tax dollars. An effective fraud deterrence program must also include resources to continually monitor and detect potential fraud, and aggressively investigate and prosecute individuals who received assistance fraudulently. Monitoring and detection include data-mining for suspicious registrations and payment usage, and setting up fraud hotlines. Finally, program integrity is enhanced by investigating and prosecuting individuals who take advantage of program weaknesses. However, the high costs of prosecutions highlight our conclusion that upfront preventive controls are most effective in preventing fraud, and that lessons learned from detection and prosecutions should be used to improve preventive controls. |
In 1968, Congress created NFIP to address the increasing cost of federal disaster assistance by providing flood insurance to property owners in flood-prone areas, where such insurance was either not available or prohibitively expensive. The 1968 law authorized subsidies to encourage community and property owner participation. To participate in the program, communities must adopt and agree to enforce floodplain management regulations to reduce future flood damage. In exchange, NFIP makes federally backed flood insurance available to homeowners and other property owners in these communities. Since NFIP was established, Congress has enacted legislation to strengthen certain aspects of the program. For example, the Flood Disaster Protection Act of 1973 made the purchase of flood insurance mandatory for properties in Special Flood Hazard Areas (SFHA)—areas at high risk for flooding—that are secured by mortgages from federally regulated lenders and located in NFIP participating communities. This requirement expanded the overall number of insured properties, including those that qualified for subsidized premiums. The National Flood Insurance Reform Act of 1994 expanded the purchase requirement for federally backed mortgages on properties located in an SFHA. FEMA bases premium rates for NFIP policies on a property’s risk of flooding and other factors. FEMA studies and maps flood risks, assigning flood zone designations from high to low depending on the risk of flooding. For example, SFHAs are high-risk areas that have a 1 percent or greater annual chance of flooding and are designated as zones A, AE, V, or VE. Areas designated as V or VE are located along the coast and are at risk of 3 foot or higher breaking waves. Areas designated as A or AE can be located along the coast or inland. Zones B, C, or X are areas with a moderate-to-low risk for flooding. Zone D denotes areas for which flood risk analysis has not been conducted. FEMA also uses property characteristics in setting premium rates, such as elevation of the property relative to the property’s base flood elevation (BFE)—the level relative to mean sea level at which there is a 1 percent or greater chance of flooding in a given year—and building type (residential or nonresidential). Additionally, FEMA uses policy characteristics in setting premium rates, such as coverage and policy deductible amounts. NFIP has two types of premium rates: those that reflect the full risk of flooding to the group of properties within a rate class (full-risk rates) and those that do not reflect full risk (subsidized rates). The largest number of subsidized policies has been for properties built before FIRMs became available. Even with highly discounted rates, subsidized premiums are, on average, higher than full-risk premiums. Full-risk rated structures have been built to flood-resistant building codes or have mitigated flood risks and generally are at or above BFE. However, FEMA can calculate full- risk rates for structures that are up to 15 feet below BFE in A zones, and 10 feet below BFE in V zones. Pre-FIRM subsidized properties generally were not constructed according to the program’s building standards or were built without regard to BFE. Therefore, subsidized structures generally are assumed to be more prone to flooding (that is, riskier) than other structures and premiums are higher, even with the subsidy. For example, according to FEMA’s flood insurance manual effective October 1, 2014, the costs of building and contents coverage for subsidized policies in an AE zone were higher than coverage for a similar full-risk policy at 1 foot above BFE. Although the percentage of policies that is subsidized and percentage of premiums from these policies relative to all NFIP policies has decreased over time, the number of subsidized policies has not changed greatly. In 2012, subsidized policies accounted for about 20 percent of NFIP policies. From 1978 through 2012, the percentage of policies that was subsidized decreased because the number of total policies increased, but the numbers of subsidized policies stayed fairly constant (see fig. 1). Similarly, the percentage of premiums from subsidized policies decreased from 1978 to 2012. In 2012 premiums from subsidized policies represented 38 percent of all NFIP premiums (see fig. 2). The Biggert-Waters Act and HFIAA affected NFIP’s ability to charge subsidized premium rates on certain types of properties and will change the number of policies that are subsidized as well as the size of the subsidy. For example the Biggert-Waters Act prohibited subsidies from being extended for homes sold to new owners after July 6, 2012 (date of enactment) and removed them if properties lapsed in coverage as a result of the policyholders’ deliberate choice. Under the changes in the Biggert-Waters Act, the number of subsidized policies could have decreased over time. HFIAA reinstated premium subsidies for properties that were purchased after July 6, 2012, and properties not insured as of July 6, 2012. Thus, new policies may join NFIP and receive subsidized rates and the number of subsidized policies could increase over time. However, provisions under both acts changed the status of subsidies and decreased the size of subsidies by annually increasing subsidized rates. The Biggert-Waters Act required FEMA to phase out subsidies—annually increasing premiums by 25 percent until full-risk rates were reached—for certain types of properties, including business properties, residential properties that are not a primary residence, properties that have experienced or sustained substantial damage or improvement, and severe repetitive loss properties. HFIAA did not affect the phase out schedule of these subsidies—which represented about 41 percent of all subsidized policies, as of September 30, 2013 (see fig. 3). Under HFIAA, FEMA also generally must increase premium rates on other subsidized policies by 5–15 percent annually. The time that will be required for subsidized rates to reach full-risk rates varies by flood zone, coverage amounts, and elevation relative to BFE. At the level of the rate increases to phase out certain subsidies required under the Biggert-Waters Act (25 percent per year), some policyholders could continue to benefit from subsidized rates for 12 years or more. For annual increases of 15 percent under HFIAA, phase-out times for subsidies will be longer. For annual increases of 5 percent, policyholders could continue to benefit from subsidized rates for more than 30 years. For example, figure 4 shows the different timelines for a subsidized single-family policy in an AE flood zone to reach the full-risk rate (with the number of years varying according to amount of coverage, elevation relative to BFE, and the percentage of the annual rate increases). As FEMA increases subsidized rates, at some point a policyholder may have an incentive to obtain an elevation certificate and pay the full-risk rate rather than the subsidized rate because the full-risk rate would be lower. For example, a policyholder choosing $250,000 in building coverage for a currently subsidized AE zone policy at BFE would pay a lower full-risk rate than the subsidized rate if the policyholder documented the elevation with an elevation certificate. If a policyholder chose to supply an elevation certificate, FEMA would charge the lower of the full-risk and subsidized rates. FEMA sells and services NFIP policies primarily through private insurance companies that participate in the Write-Your-Own (WYO) program. Insurance agents from these companies are the main point of contact for most policyholders. FEMA compensates the companies based on a percentage of the premiums and claims for policies they manage. WYOs adjust, settle, and pay flood claims, as well as handle lawsuits arising from claims. Based on information the insurance agents submit, WYOs issue policies, collect premiums, deduct an allowance for commissions and operating expenses from the premiums, and remit the balance to NFIP. When flood losses occur, policyholders report them to their insurance agents, who notify the WYOs. The WYOs review the claims and process approved claims for payment. FEMA reimburses WYOs from the National Flood Insurance Fund for the amount of the claims plus a percentage of the claims to cover adjusting and processing expenses. FEMA has modified its WYO compensation methodology over time. Although WYOs handle most flood policies, FEMA also contracts with a company that serves as FEMA’s direct agent. The direct agent sells and services standard policies, but also exclusively sells and services repetitive loss and group policies. The direct agent is compensated through the contract rather than with a percentage of premiums and claims. The WYOs and FEMA’s direct agent submit information on new and renewed policies and claims to FEMA’s policy and claims data system. As part of its monitoring and oversight responsibilities, FEMA conducts operational reviews of the direct agent annually, and WYO companies about every 3 years. FEMA funds NFIP primarily through insurance premiums and fees paid by policyholders. FEMA uses NFIP premiums to pay insurance claims (losses) and all program expenses, including salaries, outreach, research, and operating expenses. When premiums are insufficient to cover these losses and expenses, FEMA may borrow money from Treasury. NFIP’s program expenses are either variable (increase with premium increases) or fixed (do not change with premium increases). Variable expenses include state or local premium taxes, and WYO commissions and expenses. Fixed expenses include NFIP salaries, floodplain mapping, mitigation grants, contractor costs, and the direct agent. In addition to premiums, NFIP collects a policy fee from each policyholder that covers a portion of the fixed expenses. After expenses, FEMA uses the remainder of premiums to pay for losses and debt repayment (see fig. 5). FEMA does not collect the flood risk information for most subsidized policies and therefore cannot accurately determine forgone premiums (the difference between subsidized premiums paid and the premiums that would be required to cover the full risk of losses) associated with subsidized policies. FEMA has not required all policyholders to submit flood risk information, specifically elevation certificates, which are needed to determine their full risk, because it does not use the information in rating subsidized policies. In implementing the Biggert-Waters Act, FEMA began requiring certain policyholders to submit elevation information upon renewal or when new policies were issued as required for full-risk rates. However, according to FEMA officials, FEMA will not continue to collect this information with the restoration of these subsidies under HFIAA. According to FEMA officials, obtaining elevation certificates can cost policyholders from about $500 to $2,000 or more. Therefore, the information needed to accurately measure forgone premiums associated with subsidized policies is not available. We previously recommended that FEMA collect flood risk information from all affected policyholders in SFHAs. In July 2013, we found that to phase out and eventually eliminate subsidies specified under the Biggert- Waters Act and revise rates over time, FEMA would need information on the relative risk of flooding and property elevations (elevation certificates), which generally had not been required for subsidized policies prior to the act. We recommended that FEMA develop and implement a plan to obtain the flood risk information needed to determine full-risk rates for properties with subsidized rates. FEMA agreed with the recommendation and as part of our current review said that it was evaluating different approaches for obtaining the information and using it more broadly. FEMA officials also stated that obtaining this information from other sources is very difficult because BFEs are not available on the maps for about 500,000 subsidized policies and some technologies for obtaining elevations lack precision. FEMA officials stated that they will continue to rely on policyholders to voluntarily obtain elevation certificates. Policyholders with structures at lower risk (higher elevations relative to BFE) have an incentive to obtain the certificates because they can qualify for lower rates. However, policyholders with structures at higher risk (lower elevations relative to BFE) have no incentive to obtain an elevation certificate. Thus, it is unlikely that FEMA will collect flood risk for all properties relying only on voluntary submissions. Although FEMA has taken some steps, we maintain the importance of fully implementing this recommendation and obtaining flood risk information to measure accurately forgone premiums associated with subsidies. Under HFIAA, FEMA must increase subsidized premium rates for all but certain properties by 5–15 percent annually, which eventually should phase out all pre-FIRM subsidized rates. FEMA will need the property-level information for these subsidized policies and the policies with subsidies that are being phased out through the annual 25 percent increases under the Biggert-Waters Act, to know when the relevant subsidized premium rate reaches the full-risk rate for any given policy. Obtaining information that would allow for measuring forgone premiums associated with subsidies also is important because although the size of subsidies will decrease under HFIAA, the number of subsidized policies could increase over time and continue to affect the financial stability of the program. Historically, the percentage change in subsidized policies generally followed the same trend as the percentage change in total policies (see fig. 6). FEMA has begun to collect elevation information for policyholder disclosure purposes as required by HFIAA, but according to FEMA officials they have not determined it to be of sufficient quality for use in determining full-risk rates, which would be required to measure forgone premiums. HFIAA requires FEMA to clearly communicate full flood risk determinations to individual property owners regardless of whether their premium rates are full actuarial rates or subsidized. Additionally, information about risk is important in that it can influence behavior, such as purchase decisions and decisions to mitigate risk. According to FEMA officials, in response to the HFIAA provision, FEMA has begun gathering relevant information from publicly available sources and considering formats for disclosing the information to policyholders. Additionally, they said that FEMA has an ongoing pilot program in North Carolina to use Light Detection and Ranging (LIDAR) technology and flood maps to determine flood risk at the property level. According to FEMA officials, the information from these two efforts could give an order of magnitude for the risk, but may not be of sufficient quality to use in rating policies. This information also may not be of sufficient quality to measure forgone premiums associated with subsidized policies. Although the information to measure actual forgone premiums for subsidized policies was not available, using available information we estimated forgone premiums for 2002–2013 to be roughly $16–25 billion and $11–17 billion net of expenses. We were unable to calculate the actual forgone premiums for subsidized policies because, as stated previously, FEMA does not have the information required to determine flood risk for most of these policies. Therefore, to estimate forgone premiums we used two statements about the subsidy’s impact on NFIP premiums that are included in FEMA’s actuarial rate reviews for 2002– 2013. Impact on aggregate premiums. If FEMA were to eliminate the subsidy for the approximately 20 percent of policies with subsidized rates, while leaving the unsubsidized policies unchanged, the aggregate premium for the entire NFIP would increase approximately 50–75 percent. Percentage of expected long-term losses covered by subsidized premiums. The subsidized pre-FIRM properties are estimated to pay 45–50 percent of the full-risk premium needed to fund the long-term expectation for losses. That is, subsidized policyholders pay 45–50 percent of what they would pay if they were charged full rates. FEMA first reported this percentage as 35–40 percent for 2002, but gradually increased the percentage after making adjustments to the subsidized rates. We note several limitations to using these statements to produce our estimates. First, FEMA officials said the statements should not be considered definitive or precise; therefore, our estimates also are not precise. The officials stated they based the statements on their analysis of a 1999 PricewaterhouseCoopers (PwC) report, which sampled pre- FIRM structures around the nation, determined their flood zones, elevations relative to BFE, and full-risk rates, and then projected a nationwide distribution of the policies. FEMA officials said they used this information to arrive at the 35–40 percent estimate for 2002. They used professional judgment to make adjustments to the statements over the years based on how rate increases for subsidized policies compared with inflation. Second, relying on these statements limited the scope of our analysis because FEMA did not include these statements in actuarial reviews for years before 2002. Therefore, we could not estimate the total historic forgone premiums of these subsidies and limited our scope to 2002–2013. In the past, FEMA subsidized a much larger percentage of policies (76 percent in 1978, compared with 21 percent in 2013), so current estimates should not be applied to previous years. Third, FEMA’s statements do not account for any changes in program participation that could result from increasing the premium rates of subsidized policies to full-risk rates. According to FEMA officials and insurance industry stakeholders, higher premiums could have resulted in reduced participation in NFIP over time as policyholders either decided to drop policies or were priced out of the market. The 1999 PwC study estimated a possible 50 percent decrease in participation by affected property owners if subsidies were immediately eliminated. This drop in participation could result both in lower premium revenues and lower losses, so the net effect on the program of eliminating subsidies would be unclear. FEMA officials stated that increased rates likely resulted in some property owners forgoing flood insurance when FEMA began charging full-risk rates for properties that previously would have qualified for subsidized rates (in the short time after the Biggert-Waters Act was implemented and before HFIAA was enacted). Had FEMA substantially increased subsidized rates in earlier years, it likely would not have collected the total amount of forgone premiums we estimate in this report. Considering these limitations, we relied on FEMA’s statements in producing our estimates because they provide the only information available about the relationship of subsidies and full-risk rates for the period we reviewed. We estimated the range of forgone premiums using three different calculations to illustrate the potential magnitude of forgone premiums associated with subsidized policies. Table 1 summarizes the estimated forgone premiums and forgone premiums net of expenses from each calculation using FEMA’s statements, as discussed above. For the first estimate, we used FEMA’s statement about the impact of eliminating subsidies on aggregate premiums. For the second estimate, we used the percentage of long-term expected losses covered by subsidized premiums. For the third, we used the percentage of long-term expected losses covered by subsidized premiums to estimate forgone premiums for only the policies that remained subsidized after HFIAA. We estimated forgone premiums at $16–25 billion during 2002–2013, using FEMA’s statement that eliminating subsidies would increase NFIP premiums 50–75 percent after expenses. As discussed previously, some program expenses increase as premiums increase. Therefore, FEMA also would have incurred additional expenses if the agency had been able to collect the forgone premiums. We estimated that FEMA might have had $11–17 billion in premiums net of expenses. This amount—as much as $1 billion a year—could have been available for losses or debt repayment. Figure 7 shows the estimated annual aggregate NFIP premiums had subsidies been eliminated. The low bar assumes a 50 percent increase in aggregate NFIP premiums and the high bar assumes a 75 percent increase. We estimated $18–23 billion in forgone premiums during 2002–2013, using FEMA’s second statement that subsidized premiums cover 45–50 percent of long-term expected losses. As FEMA also would have incurred additional expenses if it had been able to collect the forgone premiums, we estimated that FEMA might have had $13–16 billion in premiums net of expenses. This amount could have been available for losses or debt repayment. These ranges fall within those estimated in our first approach. In this approach, we estimated the difference between premiums for subsidized policies and their assumed full-risk premiums based on FEMA’s stated percentage ranges. Figure 8 shows the estimated full-risk premiums for subsidized policies. Each bar depicts the annual subsidized premiums actually collected and the estimated forgone premiums, assuming the low and high ends of FEMA’s statements about the percentage of losses covered by subsidized premiums. Finally, we estimated forgone premiums attributable to policies that would remain subsidized after HFIAA. We refer to remaining subsidized policies as those with subsidized premiums not subject to FEMA’s 25 percent annual increases. As discussed earlier, FEMA is phasing out subsidies— through 25 percent annual increases—including for nonprimary residences, severe repetitive loss properties, and business properties, as required by the Biggert-Waters Act. Under HFIAA, FEMA also generally must increase premium rates on other subsidized policies by 5–15 percent annually. See figure 9 for a comparison of estimated forgone premiums for subsidies subject to 25 percent annual increases and remaining subsidies. We estimated forgone premiums for the remaining subsidized policies would have been $11–14 billion during 2002–2013, again using FEMA’s statement that subsidized premiums cover 45–50 percent of long-term expected losses. As FEMA also would have incurred additional expenses if it had been able to collect the forgone premiums, we estimated that FEMA might have had $8–9 billion in premiums net of expenses. This portion could have been available for losses or debt repayment. This estimate is lower than our estimates from the second calculation because it includes only a subset of the subsidized policies—those that remained subsidized after the Biggert-Waters Act and HFIAA changes. FEMA did not proactively validate or monitor implementation of data system changes, which resulted in unreliable premium data that were unable to be used for a fourth estimation of forgone premiums. FEMA needed to modify its data system to implement the changes required in the Biggert-Waters Act, but did not have sufficient controls in place to validate that the changes made were complete and accurate. FEMA provided the contractor that maintains its policy data system instructions for changes in the system, including adding new data fields (such as the date of purchase), adding new risk-rating methods to calculate premiums for policies affected by the Biggert-Waters Act, and developing new edit checks. For example, because FEMA had to charge full-risk rates for policies that previously would have qualified for subsidized rates, changes had to be programmed into the system to identify and require elevation certificates for the affected policies (both new and renewing). Software vendors that WYOs and FEMA’s direct agent use to assist them with servicing flood insurance policies also received these instructions. FEMA also published a new Flood Insurance Manual that included updated rate tables and instructions on rating these policies. According to its usual process, FEMA released instructions for most of the changes 6 months before changes were to be effective. FEMA also issued three additional sets of changes at 5 months, 3 months, and 2 months before changes were to be effective. In total, FEMA released more than 350 pages of instructions to the contractor and vendors, the most changes released in the last several years. The changes became effective on October 1, 2013. In an attempt to illustrate forgone premiums, we analyzed over 260,000 pre-FIRM policies for primary residences sold between the date these changes were effective (October 2013) and the enactment of HFIAA (March 2014) and found discrepancies in premium data for some of these policies. To illustrate how forgone premiums could be measured accurately if flood risk information were available for subsidized policies, we planned to compare the reported full-risk premiums in the data system with hypothetical subsidized premiums we could calculate based on policy information in the data. However, our preliminary results revealed discrepancies in FEMA’s reported premiums for some of these policies. These discrepancies, as well as limited monitoring of the contractor’s progress toward completion of data system changes, called into question the reliability of the reported premium data in the system and prevented completion of our analysis. Specifically, Some policyholders who should have paid full-risk rates after the Biggert-Waters Act were inaccurately charged subsidized rates. According to our analysis, 49 percent of the new policies that should have paid full-risk rates from October 1, 2013, through February 28, 2014, were charged subsidized rates instead. We found that more than 20 WYOs inaccurately charged subsidized rates for policies rather than full-risk rates, but most of the policies were sold by a few WYOs and FEMA’s direct agent. FEMA also found these errors during its annual operational review of the direct agent about 6 months after the changes were effective. According to FEMA, no corrections were made to the affected policies because by that time HFIAA had been enacted which reinstated subsidies for this category of policies. FEMA officials stated that most of these errors were attributable to software provided by the company that is both the direct agent to FEMA and a software vendor for WYOs. FEMA officials stated that the vendor subsequently made the necessary corrections to its software. Although FEMA officials said that they did not suspect problems with additional vendors, we could not verify this because we did not have information on which vendor software was used by each WYO. FEMA’s standard controls for its data system did not detect or report erroneous premium rates submitted by WYOs and FEMA’s direct agent and policyholders were under- or overcharged. Typically, FEMA’s data system, which is administered by a contractor, automatically checks the premiums submitted by WYOs or its direct agent when rating a new or renewed policy. If a discrepancy is detected, an error code is generated and sent to the WYO or the direct agent for correction. However, for one class of policies in our analysis—new policies that were rated using one of the new Biggert- Waters Act-related risk-rating methods to calculate premiums—our preliminary results showed that about 28 percent of these policyholders paid at least 5 percent more in premiums than they should have, or paid at least 5 percent less in premiums than they should have based on the rates available in FEMA’s data. Additionally, for another class of policies—those rated tentatively or provisionally (about 4,400 policies—about 2 percent of policies in our analysis)—about 45 percent of policies analyzed had premiums that were off by more than 5 percent based on the rates available in FEMA’s data. Including both of these groups, more than 30,000 policies were affected. FEMA officials acknowledged these errors. Automatic edit checks were not performed on these policies, so the system did not detect or report these errors. After we discussed these discrepancies with FEMA officials, they conducted an inquiry with the contractor in August and September 2014. As a result, the contractor informed FEMA that it had not implemented all the required system changes before the effective date and that it had disabled some automatic edit checks. According to documentation from the contractor, the contractor did not sufficiently communicate either issue to FEMA. Because the edit checks were inoperative, FEMA did not receive complete error reports and its controls, such as monitoring data system error rates and reviewing error reports, did not identify any problems. In response, FEMA required the contractor to implement the changes within 10 days or be in violation of the contract. Changes included implementing automatic checks on premiums calculated using the new Biggert-Water Act rating methods and enabling error checks on new data fields (such as the date of purchase). According to contractor documentation, the contractor implemented most of the changes as of September 2014. As of October 2014, FEMA had not yet verified these changes. FEMA’s monitoring was not sufficient to identify problems with the contractor’s implementation of system changes before changes were effective. FEMA has processes in place to monitor contractor performance, but monitoring reports provided minimal information on the progress of the data system changes. For example, the contractor submits weekly performance reports and presents information from these reports in monthly reports that are reviewed by FEMA contracting office staff and the contracting officer’s representative. The reports also are available to management. The monthly reports track risks and issues associated with selected objectives, key milestones, and the progress toward completion of these objectives. We reviewed the reports from April 2013 through June 2014 and found that the weekly contractor performance reports included documentation of FEMA providing the contractor clarifications. However, the reports included minimal information on the progress of the implementation of the data system changes—stating, for example that programming changes were continuing—with many weeks passing without updates. Furthermore, the monthly reports that are available for management to review did not track the status of the data system changes. Following FEMA’s inquiry about the data discrepancies described previously, the contractor informed FEMA that 50 percent of the changes scheduled to be effective on October 1, 2013, had been implemented by the required date and 70 percent of the changes scheduled to be effective on June 1, 2014, had been implemented by the required date. Federal internal control standards and FEMA’s data system manual and contracting officer’s representative handbook provide guidelines for controls and monitoring. For example, the internal control standards and data system manual state that error checks should be implemented to help ensure the accuracy of data being entered and that changes should be verified. Specifically, according to federal internal control standards, data validation and edit checks should be performed at all interfaces with other systems to identify erroneous data. Erroneous data should be captured, reported, investigated, and promptly corrected, according to internal controls and FEMA’s data system manual. In addition, controls should be in place to determine whether changes to technology have been made properly. This may involve reviewing changes and testing results. Further, FEMA’s data system manual states that a system check (to verify the premium) is to be performed for all policies that have the data required to calculate the premium. Errors associated with this verification should be noted on the file. Regarding monitoring, FEMA’s handbook for contracting officer’s representatives states that these representatives are responsible for monitoring the contractor’s compliance with all requirements of the statement of work and reporting any potential or existing problems. Such monitoring enables the agency to ensure progress toward completion of the contractor’s specific requirements. One objective in the data contractor’s statement of work is implementing data system changes as required. FEMA provided the contractor, WYOs, and vendors with instructions for implementing changes, including adding edit checks for new data elements, but its controls were not sufficient to identify problems with the contractor’s and vendors’ implementation of the changes before the changes were effective. FEMA did not verify the contractor’s implementation of programming changes and edit checks before the rating changes became effective. FEMA officials told us they provided the contractor and vendors the requirements 6 months before they were to be effective—which is the typical process—and that regular reports from the contractor and other correspondence with the contractor to provide clarifications did not indicate any problems or delays with implementation of the changes. Further, FEMA did not take any additional steps to ensure that the contractor had implemented the data system changes until August after we identified a number of discrepancies. FEMA does not verify that changes in vendors’ software that assists agents in generating rates are correctly implemented before the changes are effective. FEMA officials said that the WYOs and FEMA’s direct agent are responsible for monitoring their software vendors and that FEMA does not have direct oversight. FEMA officials noted that they rely on processes such as data system monitoring and error report reviews to identify errors from the contractor or vendors, and that they did not identify these errors sooner because edit checks were inoperable. Documentation from the contractor in response to FEMA’s August and September 2014 inquiries states that it revised the edit check strategy without FEMA’s approval. In addition to insufficient controls, FEMA’s monitoring reports did not contain sufficient information to identify problems with the implementation of the changes before the changes were effective. FEMA maintained documentation of change requests and responses provided to the contractor’s questions and has regular reports from the contractor to monitor performance, but these documents did not capture critical information needed to oversee the contractor’s progress toward completion of the data system changes. For example, the template for monthly monitoring reports includes tracking of key milestones and status of the percentage complete, but FEMA did not direct the contractor to track the progress of implementing data system changes in these reports, even though the number of required data system changes was the most changes released in the last several years. As a result of not proactively monitoring or verifying the implementation of data system changes, premium data for the policies between the implementation of the Biggert-Waters Act and enactment of HFIAA were unreliable and some policyholders were charged inaccurate rates. We determined that the premium data for these policies did not meet GAO reliability standards for our planned analysis to illustrate forgone premiums. In addition, FEMA officials stated that they used the data from this time period to characterize policies that previously qualified for subsidies but were charged full-risk rates. Because of inaccuracies in these data, FEMA cannot rely on these data for business planning or other purposes. Furthermore, because WYOs and FEMA’s direct agent did not consistently apply rating changes between the implementation of the Biggert-Waters Act and enactment of HFIAA, our analysis shows that subsidized rates were incorrectly applied to at least 50,000 policies that should have been charged full-risk rates, and at least 30,000 other policyholders were over- or undercharged. The financial impact to NFIP of these inaccurate rates may have been negligible because HFIAA repealed many of the Biggert-Waters Act immediate subsidy removal provisions and required refunds to policyholders who again qualified for subsidized rates. However, the errors demonstrate that FEMA lacks sufficient controls over implementing changes to its data system. Without validating that the contractor and vendors have fully implemented changes and edit checks before processing refunds (scheduled for October through December 2014) and making additional changes associated with HFIAA (scheduled for April 2015), FEMA risks further inaccuracies in its data. In addition, without monitoring progress toward completion of data system changes, FEMA may not be aware of the full extent of problems its typical error reports may identify and would have inadequate information to oversee the performance of the contract. Our analysis shows that forgone premiums associated with subsidies could be as much as $1 billion dollars a year, but our estimates are imprecise because of the lack of information on policies’ flood risk. FEMA agreed with our previous recommendation (from July 2013) that it develop and implement a plan to obtain information on the relative risk of flooding and property elevations for subsidized policies. We acknowledge the difficulty and expense involved in obtaining precise flood risk information, but maintain the position that our recommendation is valid and should be fully implemented because the number of subsidized policies could grow under HFIAA. Flood risk information (such as from elevation certificates) is needed to correctly charge full-risk rates to an increasing number of policies as FEMA phases out subsidies, but FEMA continues to rely on policyholders to voluntarily submit it. In addition, such information could help FEMA provide policyholders information about their flood risk as required by HFIAA. FEMA did not proactively validate or monitor the implementation of large- scale changes to its data system before the rating changes became effective, and the reliability of premium data and other information submitted to its system was compromised. In addition, FEMA was unaware of the extent of delays and errors in its data system. Federal internal control standards call for agencies to have controls in place to help ensure the accuracy of all transactions and to determine if data system changes have been made properly. FEMA’s contracting officer’s representative handbook also states that a contractor’s performance should be monitored to ensure progress toward completion of specified requirements. However, FEMA lacked sufficient controls to oversee its contractor’s and software vendors’ implementation of data system changes before the changes were effective and therefore premium data and other information on policies subject to full-risk rates between October 1, 2013, and March 21, 2014 (the enactment of HFIAA) are unreliable. The consequences of the data unreliability are broad, affecting programmatic decision making (such as rate setting), accuracy of policyholders’ rates, and stakeholders that rely on the accuracy of FEMA’s data. Moreover, FEMA is planning further changes to its system in 2015. Monitoring progress toward completion and adding controls, such as data validation, as FEMA processes refunds and implements the additional changes can help ensure proactively that accurate data on policies are recorded, policyholders are charged appropriate rates, and inaccuracies are not further propagated in FEMA’s data system. To better ensure that future data system changes are fully and accurately implemented before they become effective, we recommend that the Secretary of the Department of Homeland Security (DHS) direct the FEMA Administrator to take the following three actions: Institute internal controls, such as testing a sample of policies, to validate that the data system contractor fully implemented changes and edit checks before program changes become effective. Obtain information verifying the status of software vendors’ implementation of program changes in their systems before program changes become effective. For example, this could include instructing WYOs and the direct agent to include controls or status updates in the terms of work or contracts with their software vendors. Require the data system contractor to include detailed information on the progress toward completion of major data system changes in regular monitoring reports, such as weekly status updates and monthly reports. We provided a draft of this report to FEMA within DHS for its review and comment. DHS provided written comments that are presented in appendix II. In its letter, DHS concurred with our three recommendations and has begun taking actions to address two. First, to respond to the recommendation for internal controls to validate system changes, FEMA has instituted a test plan that will be used to validate the October 2013 and June 2014 system changes as well as future changes. Second, to respond to the recommendation for enhanced reporting by the data system contractor, FEMA has been developing a standard operating procedure to monitor progress toward completion of major data system changes. In addition, DHS stated that FEMA will work with the WYOs to obtain information on the status of their vendors’ implementation of system changes beginning with changes scheduled for April 2015. FEMA also provided technical comments, which we have incorporated in the report, as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of Homeland Security. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-8678 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 III. The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) mandated that we conduct a number of studies about the National Flood Insurance Program (NFIP), including a study on the cost of forgone premiums of the properties that receive subsidized rates. This report discusses the estimated forgone premiums for subsidized policies during 2002–2013, and issues we identified surrounding modifications made to the Federal Emergency Management Agency’s (FEMA) data system to implement changes required under the Biggert-Waters Act. To estimate forgone premiums, we compiled information on premiums from the NFIP policy databases of FEMA, and information on expenses and published statements regarding the size of the subsidy from FEMA’s actuarial rate review documents. First, to obtain the number and premiums associated with all NFIP policies, all subsidized policies, and subsidized policies that would continue to receive subsidized premium rates (those not subject to 25 percent annual increases) after the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), we analyzed data from NFIP’s policy database. These data represent snapshots from the end of fiscal years 2002–2013. We applied the same algorithm that FEMA used to determine which policies were subsidized before the Biggert-Waters Act, and applied FEMA’s interpretation of the provisions in the Biggert-Waters Act that eliminated subsidies and the provisions in HFIAA that restored subsidies. We adjusted all premium amounts for each year into 2014 dollars by applying gross domestic product (GDP) price indexes provided by the Bureau of Economic Analysis. Second, to determine the percentage of NFIP premiums required for fixed and variable expenses for each year, we obtained historical information on NFIP expenses for 2002–2011, and projected expenses information for 2012–2013 from FEMA’s actuarial rate reviews. Third, to obtain FEMA-published information on the size of the subsidy, we compiled the percentage amounts for the following statements from FEMA’s actuarial rate reviews for 2002–2013: If subsidies were eliminated, aggregate NFIP premiums would increase by 50–75 percent after expenses. Subsidized premiums, on average, cover 45–50 percent of expected full-risk losses after expenses. With all information compiled, for each year, we selected the relevant premiums (premiums from all NFIP policies, all subsidized policies, and subsidized policies that would continue to receive subsidized premium rates after HFIAA), and applied the FEMA statements about the size of the subsidy to three calculations to estimate forgone premiums. First, we used aggregate NFIP premiums and FEMA’s statement that if subsidies were eliminated, overall NFIP premiums would increase by 50–75 percent after expenses. Second, we used all subsidized premiums and FEMA’s statement that subsidized premiums, on average, cover 45–50 percent of full-risk losses. Third, we used subsidized premiums for the portion of subsidized policies with characteristics that would have allowed them to receive subsidies after HFIAA and the same statement that subsidized premiums, on average, cover 45–50 percent of full-risk losses. Using the relevant premiums we performed the following: To estimate the high and low values of the range for forgone premiums net of expenses for each year for the first calculation, we subtracted expenses from the premiums collected and multiplied the result by the high and low values of the percentage range. To estimate the high and low values of the range for forgone premiums net of expenses for each year for the second and third calculations, we subtracted expenses from the premiums collected (premiums collected net of expenses) and divided the premiums collected net of expenses by the high and low values of the percentage range. We then subtracted premiums collected net of expenses from the result. To estimate the high and low values of the range for forgone premiums for each year for each calculation, we increased the high and low values of the range for forgone premiums net of expenses by the variable expense percentage. Finally, to estimate the high and low values of the range for forgone premiums and forgone premiums net of expenses for 2002–2013 for each calculation, for all years we added the low-range values together and the high-range values together. We assessed the reliability of FEMA’s policy and expense data by gathering and analyzing available information about how the data were created and maintained and performed electronic tests of required data elements of the policy data. We determined that these policy and expense data were sufficiently reliable to use for the three calculations described above. FEMA officials said that the statements about the size of the subsidy should not be considered precise or definitive. They stated they based their statements about the size of the subsidy for 2002 on their analysis of a 1999 PricewaterhouseCoopers (PwC) report that sampled structures around the nation that were built before flood insurance rate maps (FIRM) became available, determined their flood zones, elevations relative to base flood elevation (BFE), and full-risk rates, and then projected a nationwide distribution of the policies. FEMA officials stated that they used professional judgment to make adjustments to the statements about the size of the subsidy for 2003–2013 based on how rate increases for subsidized policies compared with inflation. FEMA officials stated that these statements were the only information available on the size of the subsidy. Therefore, we used them, but we added caveats to our estimate and noted the several limitations to using these statements to produce our estimates. First, as previously noted, FEMA officials said the statements should not be considered definitive or precise; therefore, our estimates also are not precise. Second, relying on these statements limited the scope of our analysis because FEMA did not include these statements before 2002. Therefore, we could not estimate the total historic forgone premiums of these subsidies and limited our scope to 2002–2013. In the past, FEMA had subsidized a much larger percentage of policies (about 76 percent in 1978, compared with 21 percent in 2013), so current estimates should not be applied to previous years. Third, FEMA’s statements do not account for any changes in program participation that could result from increasing the premium rates of subsidized policies to full-risk rates. Additionally, we attempted to calculate hypothetical subsidized premiums for primary residential policies that for a short, recent period paid full-risk rates but that would have qualified for subsidies before the Biggert- Waters Act. We planned to compare the hypothetical premiums with the full-risk premiums policyholders actually paid. FEMA began charging full- risk rates to new policies in this category on October 1, 2013, but HFIAA (enacted in March 2014) repealed the provision to charge full-risk rates to these policies. Therefore, for these calculations, we used FEMA’s policy rating methodology and obtained NFIP policy data as of February 28, 2014, and selected policy records with effective dates from October 1, 2013, through February 28, 2014. To select records that would have qualified for a subsidy before the Biggert-Waters Act, we applied a modified version of FEMA’s algorithm to determine which policies were pre-FIRM, primary residence policies in special flood hazard areas without consideration of elevation. We used two methodologies to determine which policies were new and therefore immediately subject to full-risk rates; however, changes affecting data fields we used in these methodologies were among those that had not been implemented by the contractor, thus impacting our ability to complete the analysis. First, we used FEMA’s rating method field that would indicate (according to FEMA documentation) that the policy was affected by the Biggert-Waters Act. Using this method, we found the policies that FEMA officials acknowledged had been erroneously charged subsidized rates. Second, at FEMA officials’ suggestion, we used a data field that would indicate a new policy and the new purchase date field. Similarly, we found that many policies had been charged subsidized rates and that the new purchase date field was unreliable because of either missing or invalid data for more than 95 percent of the policies. Therefore, without a valid methodology for selecting policies and without reliable premium data, we were not able to complete our analysis. To determine subsidized rates that each policy holder would have paid, we used FEMA’s premium rate tables and rating methodology for its flood insurance manual effective October 1, 2013, and variables in the data to select the proper basic and additional coverage rates for building and contents coverage for each policy. To calculate the subsidized premiums, we first added (1) the basic building rate multiplied by the amount of building coverage, up to the basic insurance limit; (2) the additional building rate multiplied by the amount of additional building coverage; (3) the basic contents rate multiplied by the amount of contents coverage up to the basic insurance limit; and (4) the additional contents coverage rate multiplied by the amount of additional contents. Second, we multiplied the result by the deductible factor and added the Increased Cost of Compliance (ICC) premium. Third, we subtracted the Community Rating System (CRS) discount, and added the probation surcharge and federal policy fee. To determine which policies were paying full-risk rates, for each record, we compared our determined building and contents basic rates to those assigned in the data. We considered those that matched to be subsidized and would have removed them from further analysis. However, we identified a number of discrepancies in the data and determined that the data were not sufficiently reliable to be used for this analysis. For example, using either methodology for selecting new policies resulted in more than 45 percent of policies receiving subsidized rather than full-risk rates. Additionally, some policies that had rate matches did not match on premium. We therefore calculated a premium based on FEMA’s rates and found additional problems with the premiums in the data. As policy selection and the reliability of the reported full-risk premiums were critical to our analysis, we determined the data to be unreliable for this analysis. We reported these and additional discrepancies to FEMA officials. FEMA conducted an inquiry with the data system contractor. As a result, the contractor informed FEMA that several requirements for changes that should have been in place by October 2013 had not been implemented, including system checks on new fields and checks on reported premiums for certain policies. Additionally, FEMA officials stated that they had found vendor issues in an operational review in April that showed that not all vendors had the October 2013 changes in place. We also analyzed recent NFIP legislation and examined FEMA’s implementation of legislative requirements authorizing subsidized rates for certain properties in high-risk locations. To calculate the number of annual rate increases required for subsidized premium rates to reach full-risk rates, we used FEMA’s building coverage rates for subsidized and full-risk rates effective March 21, 2014—FEMA’s most recent published rates for policies below BFE at the time of analysis. To adjust full-risk rates by inflation, we applied FEMA’s full-risk rate amounts for building coverage for properties in AE flood zones at BFE, at 2 feet below BFE, at 5 feet below BFE, and at 10 feet below BFE by the gross domestic product (GDP) price index for each of the next 30 years. To calculate the yearly subsidized rates after increases, we annually increased the subsidized rate amounts for building coverage by 5 percent, 15 percent, and 25 percent. To determine the number of years before the subsidized rate reached the full-risk rates at the same elevations, for each year we compared the increased subsidized rate with the inflation-adjusted full-risk rate, noting when the subsidized rate exceeded the full-risk rate at each elevation. In addition, to determine the extent that status information was required and present in contractor reports, we analyzed the statement of work for the contract and status documents prepared by the contractor and FEMA from April 2013 through June 2014. Finally, we interviewed FEMA actuaries, underwriters, and program management. We conducted this performance audit from May 2014 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Jill Naamane (Assistant Director); Karen Jarzynka-Hernandez (Analyst-in-Charge); Pamela Davidson; Catrin Jones; May Lee; Barbara Roesmann; Jessica Sandler; Jena Sinkfield; Frank Todisco; and Jack Wang made key contributions to this report. | As of September 30, 2013, FEMA, which administers NFIP, had more than 1.1 million subsidized flood insurance policies—about 21 percent of all of its policies. Because their premiums do not reflect the full risk of losses, subsidized policies have been a financial burden on the program. Due to NFIP's financial instability and operating and management challenges, GAO placed the program on its high-risk list in 2006. The Biggert-Waters Act mandated GAO to report on the forgone premiums from subsidies in NFIP. This report examines the forgone premiums associated with subsidies during 2002–2013 along with data reliability issues discovered in GAO's examination. Data for earlier periods were unavailable. GAO analyzed NFIP premium data, published statements about the size of the subsidies, and expenses associated with premiums. GAO also interviewed FEMA officials. The actual forgone premiums—the difference between subsidized and full-risk premiums—to the National Flood Insurance Program (NFIP) due to subsidies cannot be measured. The Federal Emergency Management Agency (FEMA) does not collect flood risk information for all subsidized policies, which is needed to calculate their full-risk premium rates. GAO recommended in July 2013 that FEMA develop and implement a plan to obtain this information. FEMA agreed with the recommendation, but has not yet fully implemented it. Although FEMA is phasing out subsidies through statutorily required rate increases, collecting this information remains important because the number of subsidized policies—and associated financial impacts—could grow over time with the restoration of certain subsidies under the Homeowner Flood Insurance Affordability Act of 2014 that previous legislation had eliminated. Working with available data and FEMA's published statements describing the size of the subsidies, GAO estimated forgone premiums in the range of $16–25 billion for 2002–2013 but estimates vary based on the calculation used. As FEMA would have incurred additional expenses if it had been able to collect the forgone premiums, GAO estimated that FEMA might have had $11–17 billion in premiums net of expenses, or as much as $1 billion a year, for losses or debt repayment. FEMA did not have sufficient controls or monitoring in place to validate system changes (made because of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act)) before they became effective, and some premium data were unreliable. Federal internal control standards suggest that agencies have controls, such as validating implementation of changes, to help ensure the accuracy of transactions. A FEMA contracting handbook also calls for monitoring a contractor's progress toward completion of specified requirements. However, FEMA did not validate that its contractor fully implemented changes and system checks, or verify the changes in vendors' software, before program changes became effective in October 2013. FEMA's monitoring reports also did not capture critical information to oversee the contractor's progress toward completion of the required changes. As a result, premium data on policies GAO analyzed are unreliable in the time period studied, some policyholders were charged inaccurate rates, and the full extent of delays and errors went undetected for nearly a year. Without better monitoring and controls over future changes, FEMA risks further inaccuracies in its data system. GAO recommends that FEMA institute controls to validate implementation of data system changes and track progress toward completion in its monitoring reports. GAO also maintains its position that a recommendation made in July 2013 ( GAO-13-607 ) that FEMA develop and implement a plan to obtain flood-risk information needed to determine full-risk rates for properties with subsidized rates is valid and should be fully implemented. FEMA agreed with the new recommendations and discussed its approach for addressing the July 2013 recommendation. |
GA is composed of a diverse fleet of aircraft, including airplanes, gliders, and helicopters, that are flown for a variety of purposes (see fig. 1). In 2013, FAA estimated there were about 340,000 licensed GA pilots, and approximately 200,000 aircraft were in the active GA fleet, with airplanes comprising the vast majority—almost 79 percent. According to FAA 2013 data, most GA airplanes are light, single-engine piston, fixed-wing aircraft. FAA also identifies a small, but growing portion of the GA fleet as “experimental” aircraft, which include amateur and home-built aircraft and aircraft used for racing and research (among other purposes), as well as exhibition aircraft, such as former military aircraft that are commonly referred to as “warbirds.” The majority of these GA aircraft (about 88 percent) are used for one of the following purposes: personal (e.g., a pilot taking a family on a sightseeing trip); business (e.g., an owner and pilot flying to a meeting); corporate (e.g., a professionally-piloted aircraft transporting corporate employees); and instructional (e.g., a student flying with a certified flight instructor). Domestic GA operations are conducted from more than 2,950 public-use GA airports (which primarily serve GA aircraft) as well as from thousands of other airports, including those that support commercial air service. GA flights operate under various federal aviation regulations. For the purposes of this report, our definition of GA includes flights operated under Part 91 of general operations and flight rules, namely, all civilian aviation flying except passenger air carriers and military aircraft. Although the number of GA accidents in the United States has been generally decreasing in recent years, there were over 1,200 accidents and over 400 resulting fatalities in 2014 (see table 1). In October 2012, we found that most GA accidents involved personal use and instructional flight operations. In 2014, personal use and instructional flight operations combined accounted for about 75 percent of GA accidents. Most accidents also occurred during the landing and take-off phases of a flight, and in 2014 most GA accidents occurred in California, Texas, and Florida, all states with large numbers of GA aircraft. Two federal agencies are primarily responsible for investigating GA accidents and ensuring aviation safety: FAA and NTSB. FAA is responsible for administering aircraft registration and pilot certification, conducting safety oversight of pilots’ training and GA operations, and taking enforcement actions against pilots and others who violate federal aviation regulations and safety standards. FAA also collects GA fleet and flight activity data through an annual survey that includes the number of hours flown and the uses of GA aircraft. The FAA’s statutory mandate does not, however, include requiring that GA aircraft are covered by liability insurance. NTSB is responsible for investigating all civil aviation accidents and major accidents and incidents in other transportation modes. Using the information gathered by its own investigators and in coordination with FAA, NTSB is responsible for determining an accident’s probable cause, issuing safety recommendations, and conducting safety studies. According to NTSB officials, if an NTSB official is not available at the scene of where the accident occurred, FAA gathers perishable data that are provided to the NTSB. However, NTSB is responsible for issuing a preliminary report and final accident report describing the history of the flight (e.g., date and time of accident, aircraft and accident type, purpose of flight, extent of pilot and passenger injuries, etc.) and findings of probable cause. NTSB also coordinates accident disaster-assistance activities, including providing information and assistance to accident victims (or their survivors), in the aftermath of an accident. The Office of the Secretary of Transportation (OST) within DOT is responsible for ensuring that commercial air carriers meet minimum liability insurance coverage amounts for liability, as required under federal law, and FAA has assumed this role pursuant to a memorandum of understanding with OST. The related regulatory requirement, which became effective in 1982, establishes minimum liability insurance requirements for air carriers. Commuter air carriers and air taxi operators are also required under federal regulations to have minimum liability insurance. While federal insurance requirements exist for commercial modes of transportation, the states generally regulate the business of insurance. No federal requirement exists for GA liability insurance, although as discussed later in this report, some states have liability insurance or similar requirements. Some countries require liability insurance for GA aircraft. Canada, for instance, requires commercial and GA aircraft owners operating aircraft with a maximum permissible take-off weight of more than 5,000 pounds to have liability insurance for death and bodily injury in the minimum amount of $300,000 (in U.S. dollars) multiplied by the number of passengers onboard the aircraft. Similarly, a European Union regulation requires liability insurance coverage for both commercial and GA aircraft when operating within, into, out of, or over the European Union member territories. When operating aircraft, owners and operators face financial risks, such as the risks associated with damage to the aircraft itself as well as those associated with death, injury, and property damage to third parties. Aircraft owners and operators, like many other individuals and organizations, may choose to purchase insurance in which the financial risks of an accident are transferred to an insurance company in exchange for a premium payment. Various aviation insurance products are available, such as hull insurance, which covers physical damages to the aircraft, including the engine, propeller, and all other systems and permanently attached equipment. Liability insurance covers death or bodily injury to passengers or persons on the ground as well as property damages caused by an aircraft accident. Aviation insurance policies for GA aircraft owners are generally sold to owners as a package, which include coverage for aircraft hull and liability. Additionally, GA pilots who do not own their own aircraft may also purchase their own liability insurance policy, commonly referred to as renters insurance. This type of insurance is designed to protect pilots against claims arising from bodily injury or property damages when they are deemed to have caused an accident. It is also designed to provide pilots with legal representation to defend themselves if they are sued, whether or not they are ultimately determined to be at fault for the accident. However, renter’s insurance is an excess insurance product that is secondary to the primary insurance policy of the aircraft owner, which is designed to pay for damages first. As such, renter’s insurance is not as comprehensive as aircraft owners insurance tied to the aircraft. For instance, in contrast to an aircraft owner’s policy, coverage for damages to third parties on a renter’s policy is typically not triggered unless the pilot was deemed to have been negligent in the operation of the aircraft, according to a principal insurance underwriter offering such policies. In addition to passengers on the aircraft or parties on the ground, insurance companies themselves may also sue pilots for damages, taking action to subrogate against the party responsible for losses paid. Apart from where liability insurance is required, whether GA aircraft owners or operators choose to purchase insurance depends, in part, on how much risk they are willing to assume versus the risk they need or desire to transfer (for a premium) to an insurance company. In particular, they may choose not to purchase coverage if they believe the coverage is too expensive for the amount of risk they bear. Based on our survey of state aviation officials and analysis of state statutes and regulations identified by such officials, as of April 2015, the majority of the states do not have liability insurance requirements applicable to GA aircraft owners and operators (see fig. 2). Five states have a liability insurance requirement that is applicable to at least some categories of GA aircraft owners and operators, and six states have some type of aircraft financial-responsibility requirements. Aviation officials we spoke with in these states generally commented that they did not know the history of why they have these requirements or how effective they have been in terms of ensuring liability insurance coverage because data are not collected to measure the effect of these requirements. Minnesota is the only state that has a liability insurance requirement applicable to nearly all GA aircraft owners. Every owner of aircraft in Minnesota, including GA aircraft owners, must show proof of insurance, with the minimum coverage requirements, when registering the aircraft with the state. While it is a misdemeanor under Minnesota law for an owner to operate an aircraft registered within Minnesota without the required liability insurance, according to state aviation officials, the state relies on self-reporting of liability insurance coverage during the aircraft registration process and does not systematically track violations. Four other states—Hawaii, Maryland, Oregon, and Rhode Island—have provisions applicable to GA aircraft owners and operators that require them to have liability insurance if they either hangar their aircraft at a state-owned airport or operate their GA aircraft for commercial purposes, such as leasing or renting out aircraft. For instance, according to a state aviation official, GA aircraft owners that base or hangar their aircraft at Rhode Island’s six state-owned airports for more than 90 days are required to register their aircraft with the state and have a minimum liability insurance coverage limit of $1 million per accident. In Hawaii, persons such as GA aircraft owners who rent a state hangar as well as air tour operators are required to maintain liability insurance. Six other states have some type of aircraft financial responsibility requirements. Under the aircraft financial responsibility requirements in California, Connecticut, Indiana, Massachusetts, and Virginia, GA aircraft owners and operators must demonstrate aircraft financial responsibility to the state by showing differing combinations of liability insurance, a bond, deposits of money or securities, or a letter of credit. Unlike the other five states, North Dakota does not specify how financial responsibility should be demonstrated. According to Virginia state aviation officials, most GA owners meet the Virginia requirement by purchasing liability insurance; however, aviation officials in California, Connecticut, Indiana, and Massachusetts told us that this requirement has not been enforced, due to lack of resources. See appendix II for more detailed description of states with minimum liability insurance requirements or aircraft financial requirements applicable for GA aircraft owners and operators. Seventeen of the 73 aviation stakeholders, including aviation insurers, GA association representatives, and aviation attorneys, we spoke with stated that other public and private entities require GA owners and operators with whom they do business to purchase liability insurance, but the extent of such requirements is unknown. According to six of the 73 aviation stakeholders, data are not systematically collected on which or how many public and private entities have liability insurance requirements. Some local government airport operators may require GA aircraft owners to have liability insurance as a condition of using the airport (e.g., to operate in or out of or to use as a hangar for their aircraft). For instance, a GA airport owned and operated by the city of Redding, California, requires GA aircraft owners to have a $1 million liability insurance policy with coverage for bodily injury and property damage in order to lease space at the airport. Fourteen of the 73 aviation stakeholders, including representatives from most of the GA associations and state aviation offices and aviation attorneys, we spoke with also told us that to their knowledge, all financial institutions or lenders require GA aircraft owners and operators to have aircraft hull insurance as a condition of financing an aircraft purchase. Although only hull insurance might be required as a condition for financing, four aviation insurance providers we spoke with told us that GA insurers generally offer a package of both hull and liability insurance to GA aircraft owners, and almost all GA aircraft owners opt to purchase the package. According to representatives from a flight school association, some flight schools either cover certified flight instructors under the schools’ liability insurance or require certified flight instructors and student pilots to have their own liability insurance. As such, certified flight instructors and student pilots have the option of purchasing a renter’s insurance policy. Flight school association representatives also told us that some independent certified flight instructors may require student pilots to have liability insurance. In addition, a few states require flight schools to disclose the extent of liability insurance coverage they carry, if any, which would cover a student pilot or a pilot renting one of their aircraft. For instance, according to a state aviation official, Nebraska requires flight schools to disclose to renters or student pilots whether they are covered by the school’s liability insurance before they fly. However, DOT does not require flight schools or flight instructors to carry liability insurance. According to the three nationwide insurance brokers we spoke with, the two most common types of liability insurance policies purchased by GA aircraft owners were those with coverages of: $1 million per occurrence (i.e., accident) with a $100,000 per passenger sublimit (commonly referred to as a “$1 million/$100 K policy”), meaning the insurance policy limits the coverage for each passenger in the aircraft to $100,000, although the limitation does not apply to victims on the ground, and $1 million per occurrence with no sublimit (commonly referred to as a “$1 million smooth policy”), meaning the policy can offer higher coverage to passengers up to the maximum total policy limit, depending on the accident scenario. Because of the higher potential payouts, premiums rates are higher for the smooth policies than for those with sublimits. Based on information provided by brokers and underwriters we contacted, we found that other policies with higher coverage amounts were not prevalent in the marketplace. These three brokers write policies with multiple underwriters in the GA area. premiums for aircraft with certain characteristics. Specifically, we sought premium information applicable to aircraft owners who: use their aircraft primarily for personal, non-commercial use; have light aircraft with six seats or less (single or multi-engine); and use turboprop or piston engine planes (excluding corporate jets and helicopters). Given those parameters, the insurance brokers estimated that for the $1 million/$100K policies most commonly sold to aircraft owners, premiums generally ranged from $125 to $1,500 annually. Comparatively, for the $1 million smooth policies, estimated premiums ranged from $450 to $3,500. They noted that these ranges are dependent on a number of factors that are highly unique and individualized to characteristics of the aircraft as well as the pilot. For example, for a Cessna 172 aircraft, owned and operated by a pilot who has achieved at least a private pilot’s certificate, the range of premiums was estimated from $200 to $550 annually for the $1 million/$100K policies and $500 to $1250 annually for the $1 million smooth policies, according to the three nationwide brokers we interviewed. Figure 3 below illustrates estimated ranges of premium costs tied to the two types of insurance policies commonly sold to GA aircraft owners. As discussed earlier, GA pilots who do not own aircraft may also obtain liability insurance or renter’s insurance. This type of insurance policy offers pilots coverage separate from that of an insurance policy of the aircraft owner. Such coverage is offered at many different coverage limits (with many policies covering less than $100K per passenger) and is less costly than insurance purchased by aircraft owners. For example, the published rates from one of the largest GA insurance organizations in the marketplace offered renter’s insurance for a $1 million/$100K sublimit policy for approximately $200 per year. Beyond the type of coverage, the aviation insurance brokers and underwriters we interviewed generally identified the following characteristics associated with the aircraft and the pilot as key factors that can have a significant influence on the price of liability insurance policy premiums: Aircraft characteristics: Relevant characteristics include the number of seats, the aircraft’s equipment and technology, and aircraft’s (e.g., make and model) accident history. For instance, an insurance broker noted that insurance rates are higher for a 6-seat aircraft than for a 2 or 4-seat aircraft because the risk level and liability will increase with additional passenger capacity. Additionally, some aircraft with higher performance characteristics (e.g., higher horsepower engines and retractable landing gear) can cost more to insure than less complex aircraft. Pilot characteristics: Relevant characteristics include the pilot’s experience, (e.g. flight hours and flying frequency), certifications, training, age, accident history, and violations, if any, of FAA rules or regulations. For example, insurance brokers and underwriters noted that a pilot who flies more frequently will likely be offered lower rates than pilots who fly occasionally. Further, as pilots increase the number of flight hours tied to the aircraft they are currently flying, such experience can help lower their insurance rates. Conversely, higher rates can be expected for pilots who have had FAA violations (e.g., an expired medical certification). Geographic location: Relevant considerations include the location where the aircraft is based and will be flown, including elevation, runway length at airports used, and terrain of the area. For instance, an insurance broker mentioned that premiums can increase for a plane based at an airport in mountainous terrain compared to an airport located in flat terrain. Use of the aircraft: This factor focuses on how the aircraft will be used, such as primarily for personal business and recreational use or for commercial business purposes. For instance, insurers will price insurance for personal and recreational uses of aircraft differently than aircraft used for commercial purposes, such as a charter operation. We asked 73 aviation stakeholders, including federal and state aviation officials, GA association representatives, aviation insurers, and aviation attorneys what factors should be considered in determining whether to adopt a federal GA liability insurance requirement. From these interviews, we identified the five most frequently cited factors, which include considering: 1) the costs borne by victims and the public in the absence of a liability insurance requirement; 2) the extent of the problem; 3) the cost impact on the GA community if a requirement were adopted; 4) implementation and administration issues of a potential requirement; and 5) the potential public safety benefits of a requirement. Forty-seven of the 73 aviation stakeholders who responded to us, particularly aviation attorneys representing victims of aviation accidents and state aviation officials, cited financial costs borne by some victims and the public in the absence of liability insurance as a factor that should be considered in assessing the appropriateness of liability insurance requirements for GA aircraft owners and operators. For example, 36 aviation stakeholders, including all 11 of the aviation attorneys we spoke with mentioned that a liability insurance requirement would help ensure that victims could receive compensation for at least some of the costs they incurred, including medical expenses and property damage. They also emphasized that a liability insurance requirement could help shift some of the costs currently being borne by society at large (e.g., medical expenses) as a result of an accident involving uninsured or underinsured GA aircraft owners and operators. Some of these stakeholders also commented that the very purpose and principal benefit of liability insurance is to cover damages that the insured party, who assumes the risk of engaging in a certain activity, causes to innocent bystanders or their property. Some stakeholders also believed that liability insurance requirements for GA aircraft owners and operators would serve the same purpose as automobile liability insurance, which is to protect the public at large from the costs associated with accidents. Forty-five of the 73 aviation stakeholders who responded to us—including state aviation officials, GA association representatives, and aviation insurers—mentioned the importance of understanding the extent of the problem—namely the number of GA aircraft owners and operators who do not have liability insurance and the extent to which the absence of liability insurance has precluded accident victims from receiving compensation—as a factor that should be considered in determining whether to adopt a liability insurance requirement. Based on our interviews with aviation stakeholders, including representatives of GA associations and insurance organizations, data are not readily available to help quantify the extent to which GA aircraft owners and operators do and do not have liability insurance, much less to identify policy limits for those with liability insurance. Representatives from insurance industry associations and many aviation stakeholders we contacted in our review confirmed that no central data existed or are systematically collected in a manner that would help provide this information. Although no central data exist, a number of stakeholders we interviewed offered differing opinions based on their experience about the extent to which GA aircraft owners and operators have liability insurance. Representatives from 5 of the 9 GA associations and 11 of the 39 state aviation officials estimated that the majority of GA aircraft owners and operators have liability insurance and, therefore, questioned whether the lack of liability insurance is widespread enough to justify the need for a federal requirement. Eight of these stakeholders offered estimates in the 80 to 90 percent range. In March 2014, a private pilot, flying an experimental amateur-built aircraft, and two passengers were killed. According to a preliminary NTSB report, the pilot lost control of the airplane, struck a few trees, and crashed. The aviation attorney we spoke with said the pilot did not have liability insurance and the estimated cost of the damages was $18 million, based on the DOT’s 2011 Guidance on Treatment of the Economic Value of a Statistical Life. In November 2009, an experimental aircraft crashed and killed the pilot and a 17-year-old passenger, shortly after takeoff. Prior to the crash, the aircraft had maintenance and repair work performed by FAA-licensed aircraft mechanics. Neither the pilot, nor the owner of the experimental aircraft had insurance. According to the aviation attorney, the estimated cost of the personal injury and property damages was more than $3 million. However, 10 aviation attorneys and representatives from a GA association and an accident victims association we contacted believed that a problem exists, but said they did not know the extent of the problem. As compared to the other aviation stakeholders who offered estimates of the percentage of GA owners and operators with liability insurance, three aviation attorneys offered a lower estimate—about 50 to 70 percent. A few aviation attorneys we spoke with said that they were aware of accidents where no liability insurance was available to compensate accident victims, but they did not know how many cases like this had occurred. In some instances, the attorneys we spoke with had represented victims or their survivors; three aviation attorneys also mentioned that they had declined to take such a case because there was little chance, given the absence of liability insurance, that the victim could obtain compensation from the GA aircraft owner or his or her estate. Some of these stakeholders pointed to the magnitude of injury that can occur—in the millions of dollars, in some cases—as another indicator of the problem. arm after de-boarding an aircraft that was used for a commercial purpose. The commercial operation owned the aircraft but did not have insurance on it. After the company sold the plane, hangar, and other assets, the case was settled for about $40,000, which did not cover the victim’s medical expenses, which were estimated to be more than $1 million, according to an aviation attorney. All 11 aviation attorneys we spoke with, however, also commented that, based on their experience, accidents involving underinsured owners or pilots are more prevalent than those where there is no liability insurance. That is, the aircraft owner or pilot involved in an accident had liability insurance; however, the liability insurance’s limit–often $100,000 per passenger—was, according to the aviation attorneys, frequently insufficient to compensate victims or their families in accidents involving death or serious injury. For example, according to an NTSB report, in February 2012, a GA aircraft owner-pilot and a passenger died after the pilot lost control of the plane and crashed. According to aviation attorneys we spoke with, the families of the deceased pilot and passengers each received the total individual liability insurance coverage limit of $100,000; however, aviation attorneys estimated the damages at about $3 million. Two aviation attorneys we spoke with noted that their firms often do not accept cases where the liability insurance coverage limit involved is $100,000 because they want the prospective client to receive the total $100,000 in compensation, rather than having their legal fees being paid from the insurance coverage limit. At the same time, aviation insurers we spoke with stated that such liability limits are commonly found in aviation liability insurance policies. Furthermore, we found no GA accident data describing the frequency of accidents with third-party damages or the magnitude of those damages. Such data would inform an analysis of policy limits that would be a component of a broader examination of issues related to a possible GA liability insurance requirement. Although more than half of the aviation stakeholders said that considering the extent of the problem is important, no process is currently in place to collect information on the portion of the GA community that does not carry liability insurance coverage. FAA is responsible for registering GA aircraft and pilots, but FAA does not collect information on insurance coverage at the time of registration or at a subsequent time and is not required to do so. NTSB and FAA collect certain data on GA accidents, including the type of aircraft involved in the accident, number of fatalities and injured parties, and geographic location of the accident. However, FAA and NTSB data on accident and incident investigation does not include information about insurance coverage or the amount, if any, of property damage. We identified four potential mechanisms to collect data based on our interviews with aviation stakeholders and our previous work on GA issues, and discussed these potential mechanisms with FAA and NTSB officials. Based on these discussions and our prior work, we determined that these mechanisms could be challenging or problematic to implement. Specifically, according to FAA, it may be possible to collect information on insurance coverage as part of the aircraft registration process, but FAA officials indicated this approach could be problematic since there is no federal requirement that GA owners and operators have insurance. FAA officials also commented that their lack of authority to require insurance coverage may cause some challenges in any effort to collect information on insurance coverage. FAA officials also stated that it would be possible to include a question on FAA’s annual survey of GA owners and operators, but we previously found that the overall response rate to the survey is low and the reliability of the information is questionable. Another potential method to collect insurance information would be to match registered aircraft numbers with policy information from insurance underwriters; however, this would require FAA, the National Association of Insurance Commissioners (NAIC), or another third party to devote a significant amount of resources to collect and analyze data from about 200,000 registered GA aircraft owners; the expense of this process is unknown. Finally, according to NTSB officials, information on insurance coverage could be collected as part of GA accident investigations, but the officials stated that an accident investigation is already time consuming and collecting liability insurance information is not relevant to their safety investigation or their broader safety mission. In addition, NTSB officials told us that the NTSB comes in contact with only a very small number of aircraft, and thus, the data would not be representative of the industry. Sixty of the 73 aviation stakeholders we spoke with—including state aviation officials, aviation attorneys, representatives of GA associations, and aviation insurance organizations—cited potential costs to and their effect on the GA community as a key factor in assessing the appropriateness of a liability insurance requirement. At the same time, these stakeholders held mixed views on the impact such a requirement would have on costs. For instance, 18 of the 60 aviation stakeholders, including state aviation officials, representatives from GA associations, and aviation attorneys stated that a requirement could likely impose higher costs on the GA community. Specifically, among the 18 stakeholders, two noted that higher operating costs would be imposed on those who currently do not purchase liability insurance. In addition, three aviation stakeholders noted that all GA aircraft owners could pay higher premiums if insurance companies are forced to include potentially higher risk owners in the coverage pool as a result of the requirement. Two representatives from insurance-related organizations we spoke with told us that some sort of a high-risk pool might have to be established in order to provide insurance for all aircraft owners. Conversely, four stakeholders, including an aviation insurance provider, stated that a larger pool would not significantly affect costs because they believe most GA aircraft owners and operators are already insured now or liability insurance requirements would further spread the risk of an accident among more insureds in the pool. Five stakeholders, including some from state aviation offices and GA associations, raised concerns that some GA aircraft may be uninsurable at a reasonable cost, including some vintage and experimental aircraft. Four insurance providers and a state aviation official we spoke with, however, told us that overall, insurance is generally available and that providers have the capacity to offer additional liability insurance coverage if liability insurance were required. Additionally, six stakeholders, including representatives from GA associations, believed that requiring liability insurance might discourage individuals who were thinking of pursuing a career in aviation because of the cost of insurance. In a February 2014 report, we found that according to pilot school representatives we interviewed, the cost of pilot training (about $9,500) coupled with low entry-level pay at regional airlines was deterring students from entering pilot school and pursuing an airline pilot career. As we noted above, renters insurance is available to student pilots for approximately $200 per year for a $1 million/$100k sublimit coverage policy—a fairly minimal cost when compared to the overall cost of pilot training. Seven stakeholders also believed that insurance requirements may cause some existing GA aircraft owners and pilots to leave aviation, particularly those who may be subject to higher premiums. On the other hand, other stakeholders pointed out that if most GA aircraft owners and pilots already have liability insurance, then the number who may choose to exit because of additional costs may be relatively low. Forty-five of the 73 aviation stakeholders that responded to us—including federal and state aviation officials, aviation attorneys, and representatives of GA associations—cited implementation and administration issues as another factor that should be considered in determining whether to adopt a federal liability insurance requirement for GA aircraft owners and operators, though their perspectives differed. For example, two state aviation officials and an aviation insurance provider stated that implementing and administering a liability insurance requirement for GA aircraft owners and operators at the federal level would be logical because of the existing federal role—that is, FAA oversees and monitors GA aircraft registration and pilot licenses. In addition, as previously noted, commercial air carriers are required under federal law to have liability insurance, and OST through FAA enforces this requirement by annually collecting and certifying insurance information and coverage from commercial air carriers’ insurers. However, if a GA liability insurance requirement were to be implemented at the federal level, FAA officials noted that a cost-benefit analysis would need to be conducted for the development of any related regulations. FAA officials also noted that additional resources would be needed for collecting insurance information from GA aircraft owners and operators due to the significantly larger number of GA aircraft and operators as compared to commercial air carriers. In contrast, 11 state aviation officials told us that if there is a need for a liability insurance requirement, it should continue to be addressed and implemented at the state level. As we mentioned above, the states generally regulate the business of insurance with state insurance regulators having the ability to regulate insurance companies and collect information for other insurance products. Some of these state aviation officials also considered the state the natural entity to require liability insurance, analogous to state requirements for auto insurance. Four state aviation officials also raised concerns that a federal requirement may impede a state’s ability to best tailor a requirement to meet their specific state’s needs and characteristics. For instance, one state aviation official noted that the risk level of third-party losses or property damages is lower in Montana than in Massachusetts because Montana has more remote areas (e.g., mountain ranges and flat farmlands) and less population per square mile while Massachusetts has fewer remote locations and a high population density in certain parts of the state. Such factors could influence states’ decisions to institute mandatory liability insurance requirements and any associated coverage minimums. On the other hand, 12 aviation stakeholders, including state aviation officials and aviation attorneys we spoke with, commented that the advantage of a potential federal requirement would be uniformity and standardization of any potential requirements. Thirteen of the 73 aviation stakeholders who responded to us—including aviation attorneys and representatives from an accident victims association and GA associations—cited potential public safety benefits as key considerations in determining whether to adopt a federal GA liability insurance requirement. For instance, five aviation attorneys told us that although requiring GA liability insurance will not eliminate accidents, it may positively impact safety because insurers offer policyholders reduced premium incentives for activities they consider could enhance safety. For instance, an insurance broker we spoke with told us that premiums can be lowered if a pilot participated in FAA’s voluntary pilot proficiency program called “WINGS,” which is a training program designed to reduce the number of GA accidents. Aviation attorneys noted that if GA aircraft owners and operators were required to have liability insurance, they may seek higher training certification or update their training more frequently in order to obtain lower premiums from insurance companies. NTSB officials questioned whether there was a direct link between liability insurance and safety, although NTSB has recently noted that ongoing pilot education, among other factors, could help reduce one of the major causes of GA accidents—that is, a pilot’s loss of control. FAA officials also told us that while liability insurance requirements may have an indirect impact on safety, enforcing such requirements would be outside of their aviation safety mission. We provided the DOT and NTSB with a draft copy of this report for review and comment. Neither agency had comments on the report. FAA and NTSB did provide technical clarifications, which we incorporated into the report as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Transportation, the Chairman of NTSB, and interested parties. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me on (202) 512-2834 or at dillinghamg@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 III. The objectives of this report were to describe (1) existing liability insurance requirements for general aviation (GA) aircraft owners and operators in the United States; (2) available data on the range of premiums charged by selected insurance providers for GA liability insurance and factors that influence those costs; and (3) factors that selected stakeholders stated should be considered in determining whether to adopt a federal liability insurance requirement for GA aircraft owners and operators. To identify existing liability insurance requirements, we conducted a survey of aviation officials in all 50 states and a legal analysis of state statutes and regulations identified by such officials to determine the number of states with existing liability insurance requirements for GA aircraft owners and operators. We developed two questions in the survey instrument, asking each state about any liability insurance or aircraft financial-responsibility requirements for GA aircraft owners and pilots, and we requested citations of their state statutes, regulations, or policies. We pre-tested the two-question survey instrument with state aviation officials from California and Virginia—two states we initially found to have provisions relating to liability insurance—and Alabama and Alaska—two states that did not have insurance requirements. These state aviation officials provided technical comments to our questions, which we incorporated as appropriate. We conducted the survey from February through April 2015 and received a 100 percent response rate. We also spoke with aviation officials in those states that indicated some type of liability insurance or aircraft financial-responsibility requirements to obtain more information about those requirements, including how they are administered. We also spoke with aviation stakeholders, as we mention later, to ascertain information on other entities that may require GA aircraft owners and operators to maintain liability insurance. To identify the range of premiums for GA liability insurance and factors that influence those costs, we obtained GA liability insurance premium information for common GA aircraft from insurance associations, brokers, and underwriters through interviews and responses to a questionnaire. We spoke with three nationwide insurance brokers who work with the major underwriters in the GA aviation insurance market, according to aviation insurance representatives. We collected liability insurance premium information, using the following parameters to be covered by an insurance policy: light, single-piston or multi-piston or turbo-prop engine GA aircraft type with 6-seats or less that is used primarily for personal and non-commercial flights. Although we did not independently validate the insurance premium information collected from these brokers, we corroborated the premium information received with premium data from aviation insurance underwriters to assess the reasonableness of the data provided. We determined that the information provided was sufficient to use as examples of GA liability insurance premiums, but that it is not generalizable to the entire spectrum of the GA insurance market, given the multiple and unique factors that can significantly influence premium prices. To obtain selected stakeholders’ perspectives on factors that should be considered in determining whether to adopt a federal liability insurance requirement, we obtained oral or written responses from 73 aviation stakeholders, including officials from the Department of Transportation, Federal Aviation Administration, the National Transportation Safety Board; 39 state aviation offices; representatives from 9 GA trade associations and 10 aviation insurance-related organizations; as well as an accident victims association and 11 aviation attorneys representing GA accident victims (see table 2). Through interviews or written responses, we collected the perspectives of aviation officials in 39 states on these factors after receiving their responses on our survey of state liability insurance or aircraft financial-responsibility requirements. Aviation officials from five states declined to talk with us, and aviation officials from six states did not respond to our numerous attempts to obtain their views on factors that should be considered on potentially adopting a federal GA liability insurance requirement. The selection of representatives from GA trade associations was based on prior GAO reports that identified the GA associations and recommendations from FAA, NTSB, and selected state aviation officials. We identified the accident victims association and selected aviation attorneys, specializing in personal injury and representing aviation accident victims, based on our initial literature reviews and recent news article that mentioned attorney firms prosecuting or defending GA accident cases, recommendations from state aviation officials, and an Internet search with the following terms: “aviation lawyers, aviation attorneys, and aviation litigation.” We analyzed the contents of our interviews with or written responses from all 73 aviation stakeholders to identify the key factors that were mentioned in consideration of potentially adopting a federal liability insurance requirement. The aviation stakeholder’s views are not generalizable to the entire GA community, but they provided us with valuable insights. We conducted this performance audit from October 2014 to September 2015, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Eleven states have either a minimum liability insurance requirement or an aircraft financial-responsibility requirement applicable to general aviation (GA) aircraft owners and operators. Five states—Hawaii, Maryland, Minnesota, Oregon, and Rhode Island—have a liability insurance requirement that is applicable to at least some categories of GA aircraft owners and operators. Six states—California, Connecticut, Indiana, Massachusetts, North Dakota, and Virginia—have some type of aircraft financial-responsibility requirements, which require GA aircraft owners to demonstrate financial ability to cover potential losses incurred in an accident. Details on the requirements are in table 3 below. In addition to the contact named above, the following individuals made important contributions to this report: Edward Laughlin, Assistant Director; Stephen Brown; Jim Geibel; Geoff Hamilton; Delwen Jones; Jennifer Kim; Elke Kolodinski; Barry Kirby; Emei Li; Amanda Miller; SaraAnn Moessbauer; Malika Rice; Sandra Sokol; Patrick Ward; and Frank Todisco. | A substantial proportion of all domestic aviation accidents and fatalities that occur each year involve GA, which includes all aviation except commercial and military. Under federal law, the Secretary of Transportation is responsible for ensuring that commercial air carriers carry liability insurance. However, no such federal requirements exist for GA aircraft owners. In some cases, accidents involving uninsured or underinsured GA aircraft owners have occurred where individuals (passengers or third parties) who incurred losses received little or no compensation. GAO was asked to look at the feasibility and costs associated with adopting federal liability insurance requirements for GA aircraft owners. This report examines (1) existing liability insurance requirements for GA aircraft owners, (2) premiums for GA liability insurance, and (3) factors that selected stakeholders cited which should be considered in determining whether to adopt a federal liability insurance requirement. GAO surveyed aviation officials in 50 states, analyzed state statutes identified in the surveys, collected insurance premium information from three nationwide aviation insurance brokers, and interviewed a diverse group of 73 aviation stakeholders—including FAA and NTSB officials, GA associations, and attorneys representing accident victims—selected based on GAO's prior work that identified the GA associations and recommendations from FAA, NTSB, and other aviation stakeholders. Based on GAO's 50-state survey of state aviation officials and analysis of state statutes and regulations identified by such officials, the vast majority of states do not have liability insurance requirements for general aviation (GA) aircraft owners and operators (i.e., pilots). As of April 2015, 11 states have some variation of a liability insurance requirement or aircraft financial-responsibility requirements, which require GA aircraft owners to demonstrate financial ability to cover potential losses incurred in an accident (see figure below). Minnesota is the only state that requires almost all GA aircraft owners to have a minimum liability insurance coverage: the required minimum coverage is $100,000 per passenger seat. Annual premiums for liability insurance vary depending on the type of aircraft insured and a pilot's experience. For example, three nationwide brokers GAO contacted noted that an annual premium for a common 4-seat GA aircraft, a Cessna 172, can range from $200 to $550 for a policy that provides $1 million in coverage per accident, with a limit of $100,000 for each accident victim. GAO interviewed 73 aviation stakeholders who most frequently cited five factors that they felt should be considered in determining whether to adopt a federal liability insurance requirement. Understanding the extent of the problem—both the number of GA aircraft owners who are uninsured and underinsured and the extent to which accident victims received little or no compensation from such owners—was one such factor. However, data on the extent of this problem are not available and, according to FAA and NTSB officials, could be challenging to collect. Four other factors cited include: (1) costs to victims and the public in the absence of liability insurance; (2) costs to the GA community if such a requirement were adopted; (3) issues related to the implementation and administration of such a requirement; and (4) the potential public-safety benefits. |
The SBIR program was initiated in 1982 and, as described on the SBIR website, has four main purposes: (1) use small businesses to meet federal R&D needs, (2) stimulate technological innovation, (3) increase commercialization of innovations derived from federal R&D efforts, and (4) encourage participation in technological innovation by small businesses owned by women and disadvantaged individuals. The STTR program was initiated about a decade later in 1992 and, as described on the SBIR website, has three main purposes: (1) to stimulate technological innovation, (2) foster technology transfer through cooperative R&D between small businesses and research institutions, and (3) increase private sector commercialization of innovations derived from federal R&D. Legislation enacted in 2011 reauthorized the programs from fiscal year 2012 through fiscal year 2017. The spending requirements for SBIR and STTR are to be calculated as a percentage of each agency’s extramural R&D obligations, provided their extramural obligations exceed the participation thresholds of $100 million for SBIR and $1 billion for STTR. Under the 2011 reauthorization, the SBIR extramural spending requirement was set at 2.8 percent for fiscal year 2014 and will increase incrementally to 3.2 percent of the extramural R&D obligations in fiscal year 2017. The STTR allocation was set at 0.40 percent in fiscal year 2014 and will increase to 0.45 percent in fiscal year 2016. The SBIR and STTR programs each include the following three phases: In phase I, agencies make awards to small businesses to determine the scientific and technical merit and feasibility of ideas that appear to have commercial potential. Phase I awards normally do not exceed $150,000. For SBIR, phase I awards generally last up to 6 months. For STTR, these awards generally last 1 year. In phase II, small businesses with phase I projects that demonstrate scientific and technical merit and feasibility, in addition to commercial potential, may compete for awards of up to $1 million to continue the R&D for an additional period, normally not to exceed 2 years. Phase III is for small businesses to pursue commercialization of technology developed in prior phases. Phase III work derives from, extends, or completes an effort made under prior phases, but it is funded by sources other than the SBIR or STTR programs. In this phase, small businesses are expected to raise additional funds from private investors, the capital markets, or funding sources within the agency that made the initial award other than its SBIR or STTR program. While SBIR or STTR funding cannot be used for phase III, agencies can participate in phase III by, for example, purchasing the technology developed in prior phases. SBA’s Office of Investment and Innovation is responsible for overseeing and coordinating the participating agencies’ efforts for the SBIR and STTR programs. As part of SBA’s oversight and coordination role, the agency issued SBIR and STTR policy directives to explain and outline requirements for agencies’ implementation of these programs. The policy directives include a list of the data that agencies must submit to SBA annually—such as their extramural R&D obligation amounts and the amount obligated for awards for the programs. Each participating agency must manage its SBIR and STTR programs in accordance with program laws and regulations and the policy directives issued by SBA. In general, the programs are similar across participating agencies. All of the participating agencies follow the same general process to obtain proposals from and make awards to small businesses for both the SBIR and STTR programs. However, each participating agency has considerable flexibility in designing and managing the specifics of these programs, such as determining research topics, selecting award recipients, and administering funding agreements. At least annually, each participating agency issues a solicitation requesting proposals for projects in topic areas determined by the agency. Each participating agency uses its own process to review proposals and determine which proposals should receive awards. For those agencies that have both SBIR and STTR programs, agencies usually use the same process for both programs. Also, each participating agency determines whether the funding for awards will be provided as grants or contracts. According to a SBIR/STTR program manager at one of the participating agencies, agencies such as the Department of Defense (DOD), the Department of Homeland Security (DHS), and the National Aeronautics and Space Administration (NASA) typically issue contracts that address topic areas and include a number of requirements that small business must comply with, while agencies like the Department of Energy (DOE) and the National Science Foundation (NSF) often issue grants for less specified topic areas that allow for more flexibility. Agency data indicate that most participating agencies complied with their SBIR and STTR spending requirements for fiscal year 2014. The accuracy of these data remains an issue, but more agencies submitted correct data to SBA in fiscal year 2014 than in past years, providing extramural R&D obligations instead of their proposed budgets. However, one agency’s total extramural R&D obligations reached the $1 billion threshold for an STTR program, but it did not establish an STTR program as required by law. Agency data indicate that 9 of the 11 agencies participating in the SBIR program met or exceeded their fiscal year 2014 spending requirements, while the remaining 2 agencies did not (see fig. 1). According to the agencies’ data, the 9 agencies that appeared to meet or exceed SBIR spending requirements spent from 2.8 percent to 5.1 percent of their extramural R&D obligations for the program, and the remaining 2 agencies spent from 1.8 to 2.3 percent—less than the required 2.8 percent. As we previously found, the number of agencies that have complied with SBIR spending requirements—according to their data—has varied since fiscal year 2011, with 9 of the 11 agencies meeting these requirements in fiscal year 2013, 8 of the 11 agencies meeting them in fiscal year 2012, and 10 of the 11 agencies meeting them in fiscal year 2011. None of the agencies participating in the SBIR program were out of compliance for all 4 fiscal years. Agency data indicate that 4 of the 5 agencies participating in the STTR program met or exceeded their fiscal year 2014 spending requirements, while 1 agency did not (see fig. 2). According to the agencies’ data, DOE, the Department of Health and Human Services (HHS), NASA, and NSF appeared to meet or exceed STTR spending requirements, spending from the required 0.40 percent to 0.45 percent of their extramural R&D obligations on their STTR programs, while DOD did not comply, spending 0.21 percent. As we previously found, the number of agencies that have complied with STTR spending requirements—according to their data— has increased since fiscal year 2011. For example, data that agencies submitted to SBA indicated that 4 of the 5 agencies complied with spending requirements in fiscal year 2013, as compared to 2 of 5 agencies that complied with spending requirements in fiscal years 2011 and 2012. HHS is the only agency to comply with STTR spending requirements in each of the past 4 fiscal years. Officials at those agencies that did not meet the spending requirement for the SBIR and STTR programs said that they were unable to do so because of multi-year funding and extenuating circumstances. Specifically, program managers at DOD told us that their agency did not comply with STTR spending requirements in fiscal year 2014 because their 2-year funding cycles enable them to spend funds across 2 years. This is consistent with the findings from our previous reports, when program managers said that their agency did not meet spending requirements in certain years because of multi-year funding, but they would spend the funding on the programs before it expires. As we have also found in previous reports, while some agencies receive multi-year appropriations, which may, generally, be carried forward from one year to the next, the Small Business Act nevertheless requires agencies to spend the required amount on the programs in each fiscal year. Officials at the Department of Commerce (Commerce) told us that they were unable to meet their SBIR spending requirement in fiscal year 2014 because they received more funding for their SBIR program than they had planned for, in addition to SBIR funding that they carried over from fiscal year 2013 from supplemental appropriations for Superstorm Sandy, and they did not include enough topics in their solicitation for applications to allow them to make enough awards to meet the spending requirement. This is consistent with what Commerce officials told us in fiscal year 2013. U.S. Department of Agriculture (USDA) officials said that they did not comply with SBIR spending requirements because their extramural R&D obligations—a key figure in calculating the spending requirement—nearly doubled from what they planned based on their proposed budget. In addition, the officials told us that they have multi-year funding, which enables them to spend funds in years other than when they were appropriated. Commerce and USDA officials said that they plan to spend all of their SBIR funds on the program before the funding expires. In fiscal year 2014, 8 of the 11 participating agencies correctly submitted data on their actual extramural R&D obligations as opposed to their proposed budgets. The Small Business Act requires agencies to calculate their spending requirements based on their actual obligations over the course of the year, and SBA has requested that agencies submit obligations rather than proposed budget data. As we found in fiscal year 2013, 2 agencies reported their extramural R&D obligations, and the other 9 agencies provided the amount that they proposed to spend on extramural R&D to SBA, rather than the amount they actually obligated. Officials at the 2 agencies that submitted extramural R&D obligations for the first time cited our previous reports as leading to the change in the data they submitted to SBA. Three agencies did not submit data on extramural R&D obligations to SBA for fiscal year 2014—DOD, NSF, and the Environmental Protection Agency (EPA). Instead, these agencies continued to submit their proposed extramural R&D budgets. Agency officials from NSF and EPA said the requirement to use extramural R&D obligations rather than proposed extramural R&D budgets is a challenge for agencies trying to comply with spending requirements because extramural R&D obligations are not known until the end of the fiscal year. Several program managers told us that they believe it is unfair or impractical to hold their agencies to a requirement that is not known until the end of the year, when it is not possible to obligate additional money. In addition, DOD officials told us that they do not have systems in place to easily calculate extramural R&D obligations. For example, DOD officials said they are unsure if all their comptrollers track extramural R&D obligations. In contrast, the 8 agencies that reported obligations in fiscal year 2014 told us that they faced no challenges in reporting obligations. SBA officials told us that they were continuing to work with agencies to obtain extramural R&D obligations data for fiscal year 2014. In fiscal year 2014, USDA reported extramural R&D obligations of $1.1 billion but did not establish an STTR program as required. The Small Business Act and the STTR policy directive state that each federal agency with extramural obligations for R&D in excess of $1 billion must participate in the STTR program. USDA officials told us that they did not establish an STTR program because they did not expect their extramural R&D obligations to exceed $1 billion in fiscal year 2014. Specifically, USDA’s proposed extramural R&D budget for fiscal year 2014 was $682 million and the department was unaware of its actual obligations until after the end of the fiscal year, when it was too late to retroactively begin an STTR program. The officials said that they believe the agency’s obligations in fiscal year 2014 were an anomaly, and they did not expect them to reach this level in subsequent years. They told us that some of their agency’s subunits that have multi-year funding obligated funds in fiscal year 2014 that were appropriated in prior years. Additionally, they said that the agency received $1.3 million in additional R&D funds in fiscal year 2014, as well as increased appropriations for the Agriculture and Food Research Initiative. Agency officials said that setting up an STTR program at this point would not make sense, as they expected that USDA would be under the $1 billion threshold in fiscal year 2015. The preliminary data that USDA submitted to SBA in April 2016 indicated that its extramural R&D obligations for fiscal year 2015 totaled $904 million, which is below the threshold for participating in the STTR program. Although the legislation is clear about the dollar threshold for starting an SBIR or STTR program, neither the law nor SBA’s guidance specifies when an agency should establish a program, such as whether the agency should begin its program at the beginning of the year, partway through the year, or at the end of the year. SBA’s policy directive provides guidance on when an agency may exit the programs, as required by the Small Business Act, but does not provide specific guidance on when it should set up a program beyond the requirement to do so when the agency’s extramural R&D obligations are above the thresholds for participating. Specifically, the policy directives state that an agency may be considered by SBA for a phased withdrawal from participation in the SBIR or STTR program over a period of time sufficient to minimize any adverse impact on small businesses, and any withdrawal will be accomplished in a standardized and orderly manner. This could potentially be a model for SBA to follow in updating guidance for starting up a program. One potential challenge identified by officials is that in setting up a new program, total extramural R&D obligations may be difficult to calculate until after the end of the fiscal year, as agencies can obligate extramural R&D funding through the end of the fiscal year. Therefore, according to USDA and SBA officials, USDA would not have been in a position to know that it needed to start an STTR program in fiscal year 2014, in accordance with the law and program policy directive. Moreover, SBA officials said they did not urge USDA to implement an STTR program because it was unclear if the department’s extramural R&D obligations in fiscal year 2014 would be maintained in future years. The officials told us that it takes approximately 2 years to establish and implement a robust STTR program. SBA officials agreed with USDA that it would not be worthwhile for the department to begin an STTR program one year and close it the following year, as it would negatively affect the small businesses involved with the program. The purpose of the policy directives is to provide guidance on how to conduct the programs, and agencies are required to comply with both the law and the additional details in the policy directives. If SBA provided more information on the timing of starting an SBIR or STTR program, agencies may have more certainty about when to establish a program. All of the agencies participating in the SBIR and STTR programs submitted methodology reports to SBA for fiscal year 2014, and some agencies provided more detail than they did in fiscal year 2013. However, many agencies did not provide all the required information and most were late in submitting their reports. Additionally, SBA has not issued its required report to Congress on the programs for fiscal year 2014. Each participating agency submitted a methodology report to SBA for fiscal year 2014, and some agencies submitted additional information about their exclusions in their methodology reports, as compared to fiscal year 2013. As discussed in the policy directive, agencies are required to submit reports to SBA each year that itemize the programs excluded from their extramural R&D calculations and the reasons for the exclusions. For fiscal year 2014, 10 of the 11 participating agencies submitted at least partially itemized exclusions from their calculations of extramural R&D, and 9 of the 11 agencies at least partially explained these exclusions (see table 2). In addition, 5 agencies provided additional information in fiscal year 2014 that they did not provide in fiscal year 2013. Most agencies did not provide dollar amounts for their exclusions in fiscal year 2014. Five agencies—USDA, HHS, NSF, DOD, and DHS— provided partial information on their exclusions but did not fully itemize or explain them. For example, USDA’s report listed exclusion information for four of its seven sub-units. In addition, 1 agency, NASA, did not list whether it had exclusions. Agencies are not explicitly required to state that they have no exclusions. However, without such information SBA cannot determine whether agencies are accurately reporting whether they have exclusions to their extramural R&D calculations. Officials at SBA told us that they are developing written guidance in their policy directive on how agencies should complete the methodology report. In fiscal year 2014, 5 of the 11 participating agencies—Commerce, DHS, the Department of Education (Education), EPA, and USDA—provided some or all of the dollar amounts associated with each of their exclusions. As we reported in June 2014, SBA officials told us that they would like agencies to include more information about exclusions in their methodology reports. SBA has requested dollar amounts of exclusions in the past, but it is not explicitly required by statute or in the policy directive. However, in fiscal year 2014, the guidance requesting agencies to provide dollar amounts for their exclusions was removed from the annual report template, leading some agencies to omit information that they provided in the past, according to officials at 2 of the participating agencies. Specifically, in fiscal year 2013, the Department of Transportation (DOT) provided an itemized description of its exclusions, including dollar amounts. However, in fiscal year 2014, DOT itemized exclusions but did not report the dollar amounts excluded. DOT officials told us that these amounts were not provided because SBA removed language requesting that agencies list the programs excluded from the extramural R&D obligations calculation from the guidance for their fiscal year 2014 methodology reports. In addition, USDA officials told us that they did not provide dollar amounts for all exclusions in fiscal year 2014 because SBA did not request this information in its guidance for submitting the annual report. The annual report template requested that agencies provide their accounting procedure used to determine their obligations, but did not explicitly require agencies to provide dollar amounts of exclusions. According to SBA officials, SBA and several of the participating agencies interpreted “accounting procedure” to include reporting the dollar amount associated with exclusions. SBA officials told us that they planned to contact the agencies that did not provide information on exclusions for fiscal year 2014 and planned to update the guidance to request dollar amounts for exclusions in future reports in the future. Inclusion of this instruction could have reminded agency officials to provide the information, which may have helped SBA fully evaluate and report to Congress on the accuracy of DOT or USDA’s methodologies. Federal standards for internal control state that management should communicate with, and obtain quality information from, external parties using established reporting lines so that external parties can help the entity achieve its objectives and address related risks. Additionally, 9 of the 11 agencies submitted their methodology reports for calculating extramural R&D to SBA later than the date required by the Small Business Act, as shown in table 2. According to the Small Business Act, agencies must submit their methodology reports to SBA within 4 months of enactment of their annual appropriations. Agency appropriations for fiscal year 2014 were enacted in January 2014, so the methodology reports were due by May 2014. For fiscal year 2014, 2 agencies—HHS and DOD—complied with the reporting requirement by submitting their methodology reports to SBA in May 2014. Several of the agencies provided their methodology reports to SBA as a part of their annual data submissions to SBA, which were generally submitted to SBA from January through April 2015. Most agency officials told us that they submitted their methodology reports late because SBA did not request the reports at an earlier date. Officials from 5 of the 9 agencies that submitted their reports late said that they could have provided the reports to SBA within 4 months of appropriations if SBA had requested them. SBA is not required to request the reports from agencies. In contrast, officials at 2 agencies told us that they submitted their methodology reports late because each of their agencies requires an approved spend plan before officials can calculate extramural R&D obligations and provide them in the methodology report, and those plans were not approved in enough time to submit the methodology reports on time. As we found in our September 2013 report, the late submission of the methodology reports makes it difficult for SBA to promptly analyze these methodologies and provide agencies with timely feedback to assist them in accurately calculating their spending requirements. Without such review and feedback, agencies may be calculating their extramural R&D obligations incorrectly, which could lead to agencies spending less than the required amounts on the programs. In that report, we recommended that SBA request that the agencies submit their methodology reports within 4 months of the enactment of appropriations, and SBA agreed with the recommendation. When we followed up on SBA’s response to the recommendation, we were told that SBA officials sent an e-mail to participating agencies in February 2016 requesting that they submit their fiscal year 2015 methodology reports to SBA in a time frame that meets the 4 month requirement. We will continue to monitor the extent to which agencies submitted their methodology reports within the required 4-month time frame in fiscal year 2015 as part of our next mandated review. The Small Business Act requires SBA to report to certain congressional committees on the SBIR and STTR programs—including an analysis of the agencies’ methodology reports—not less than annually, but the act does not specify a date that the report is due. SBA issued its required report to Congress on the SBIR and STTR programs for fiscal year 2013 in March 2016, but it has not issued its report for fiscal year 2014. In our September 2013 report, we concluded that without more rigorous oversight by SBA and more timely and detailed reporting on the part of both SBA and participating agencies, it would be difficult for SBA to ensure that intended benefits of the SBIR and STTR programs are being attained and that Congress was receiving critical information to oversee these programs. In that report, we recommended that SBA provide Congress with a timely annual report that includes a comprehensive analysis of the methodology each agency used for calculating the SBIR and STTR spending requirements. SBA agreed and stated that it planned to implement the recommendation. However, SBA has not yet done so, and as we found in this review, it continues to lag in its submissions to Congress. Specifically, each year agencies are required to report their data to SBA by March following the end of the fiscal year. SBA’s fiscal year 2012 report to Congress, issued in November 2014, was submitted 19 months after the agencies’ data were due to SBA. Similarly, SBA submitted its fiscal year 2013 report to Congress in March 2016, two years after the agencies’ data were due to SBA. At the time of our review, SBA officials said that they had not set a date for submitting the fiscal year 2014 report. SBA officials told us that they have undertaken steps to address developing the required reports to Congress, including reporting improvements to the SBIR website that they expected would expedite the verification of agencies’ data and lead to faster reporting. In addition, the officials said that fiscal years 2013 and 2014 were transitional periods for reporting due to changes in reporting requirements and the creation of new databases. Changing the methodology for determining SBIR and STTR spending requirements could increase agencies’ spending requirements and increase the number of agencies required to participate in the programs. Agency officials identified several benefits and drawbacks that changing the calculation methodology could have on their agencies’ SBIR and STTR programs. Changing the methodology for determining SBIR and STTR spending requirements to use an agency’s total R&D budget authority rather than its extramural R&D obligations could increase spending requirements. For example, if the spending requirements were calculated based on an agency’s total R&D budget authority rather than its extramural R&D obligations using the same percentages and participation thresholds defined in current law, we estimate that total spending requirements in fiscal year 2014 for the SBIR and STTR programs would have increased from $2.3 billion to $4.2 billion, an increase of roughly $1.9 billion, or 83 percent, based on our analysis of budget authority data and data submitted to SBA. This increase would have occurred for two reasons: (1) an agency’s total R&D budget authority is larger than its extramural R&D obligations therefore agencies that currently participate would have been required to spend more on the programs and (2) additional agencies would have been required to participate. Figure 3 shows the effects of changing spending requirements at each agency from current law, which is based on a percentage of extramural R&D obligations, to an alternative scenario that applies the same percentages to total R&D budget authority. These effects are consistent with our findings in previous reports. As shown in figure 3, some agencies’ spending requirements would have increased more than others under the alternative scenario. This variation is due primarily to differences in the relative proportions of the agencies’ extramural and intramural R&D obligations, but is also affected by how many programs are excluded by statute. Agencies that fund primarily extramural research would have seen smaller increases to their spending requirements for the SBIR and STTR programs under the alternative scenario, while agencies that fund more intramural research would have seen larger increases in their spending requirements, a finding consistent with those of our previous reports. Examples are as follows: NSF used 86.3 percent of its total R&D budget authority to fund extramural research in fiscal year 2014 and was required, based on data it submitted to SBA, to spend $131 million on its SBIR program that year. Under the alternative scenario, NSF’s SBIR spending requirement would have been $152 million, an increase of about 16 percent. Commerce, on the other hand, used 22.2 percent of its total R&D budget authority to fund extramural research in fiscal year 2014 and was required to spend about $8 million on its SBIR program in that year. Under the alternative scenario, Commerce’s spending requirement would have more than quadrupled to $38 million. Furthermore, assuming that the thresholds for participating in the program did not change, this scenario would have required Commerce to spend approximately $5 million on a new STTR program in fiscal year 2014. The alternative scenario would have required Commerce to spend an additional $34.6 million on the SBIR and STTR programs in fiscal year 2014, an increase of more than 400 percent. As noted above, changing the calculation methodology from basing the spending requirement on extramural R&D obligations to total R&D budget authority would also require additional agencies to participate in the SBIR and STTR programs, assuming that the dollar thresholds for participation remain the same. Two additional agencies—the Departments of Veterans Affairs (VA) and the Interior—would have been required to participate in SBIR during fiscal year 2014 under the alternative scenario. Adding these agencies to the SBIR program would have increased total federal SBIR spending requirements by $54 million, in addition to the $1.6 billion increase in spending requirements at the 11 agencies that currently participate in the SBIR program. Likewise, three additional agencies— USDA, Commerce, and VA—would have been required to participate in STTR under the alternative scenario. Adding these three agencies to the STTR program would have increased total federal STTR spending requirements by $18.8 million, in addition to the spending requirement increases of $214 million at the five agencies that currently participate in STTR. Alternatively, basing the SBIR and STTR spending requirements on an agency’s total R&D budget authority and applying a lower percentage than under current law could result in a total federal commitment to the programs that is similar to what would result under current law. However, our analysis shows that such a scenario would lower spending requirements at some agencies and raise them at others. As shown in figure 4, if the percentage applied to an agency’s total R&D budget authority had been 1.6 percent for the SBIR program and 0.2 percent for the STTR program in fiscal year 2014, and the thresholds for participating had remained the same, total required federal spending on the programs would be similar to required federal spending under current law. Using these lower percentages, spending requirements would have increased at agencies that primarily fund intramural research, such as EPA and Commerce. In contrast, spending requirements would decrease at agencies, such as HHS and NSF, which primarily fund extramural research. In this scenario, the spending requirement reductions, including $230.7 million at HHS and $53.9 million at NSF, were large enough to offset increases in spending requirements at other agencies. As we found in our previous review on these programs, agencies identified potential benefits and drawbacks to changing the calculation methodology for their SBIR and STTR spending requirements from extramural R&D obligations to total R&D budget authority. For example, officials at DOD told us in the past that changing the calculation method would simplify administration of their program. As we found in previous reports, officials said that it can take months for DOD’s program managers to receive funding for the SBIR and STTR programs from the comptrollers of all three military departments and approximately 21 other components that conduct R&D. However, in technical comments on a draft of this report, a DOD official told us that, based on additional analysis, the Office of Small Business Programs believes that changing the calculation methodology would complicate the administration of the programs because services and components would still need to calculate their extramural R&D budgets and DOD would need to apply different percentages to the services and components to compensate for the wide variation in extramural budgets within the department. In addition, program managers at one agency told us that basing the spending requirement on total R&D would result in more SBIR program awards, and officials at another agency said that the change would allow the agency to set up an STTR program. If spending requirements were based on total R&D budget authority, DOD officials told us that the percentages for the SBIR and STTR spending requirements should be lowered to offset using total R&D. Agency officials also identified potential drawbacks to changing the methodology, which is also consistent with our findings in previous reports. In particular, some program managers said that increasing the amount of money that goes to the SBIR and STTR programs could reduce the amount of resources available for other R&D conducted by the agency. Furthermore, program managers from one agency told us that basing the SBIR and STTR spending requirements on total R&D would not substantially reduce the time required to calculate their spending requirements. For example, officials at one agency said that they would still have to request data from all of their line offices during the year, as total R&D obligations can fluctuate. Some program managers also said that basing the spending requirement on total R&D would put an unsustainable strain on their programs and make it difficult to find high- quality awardees in the near term. Little is known about total administrative spending for fiscal year 2014 because the agencies that participate in the SBIR and STTR programs do not—and are not required to—fully track these costs. The seven agencies that participated in the administrative pilot program reported spending $19.1 million to address the six program goals in fiscal year 2014, but this amount does not represent total administrative spending. Furthermore, officials at some agencies identified constraints to participation in the administrative pilot program. Little is known about the total amount that the 11 participating agencies spent to administer their SBIR and STTR programs for fiscal year 2014 because the agencies do not—and are not required to—fully track these costs. For example, as we reported in the past, officials told us that it is challenging to accurately estimate total administrative costs because many staff and contractors help administer the program part time. Program managers also told us that many of their staff and contractors spend time on different programs, and they do not have systems in place to track their time specifically to the SBIR and STTR programs. In response to our requests for data on their fiscal year 2014 administrative costs, 9 of the 11 participating agencies provided information on some categories of administrative costs and partial estimates of costs. These estimates ranged from about $8,500 to $2,200,000. As with the cost data for fiscal years 2011, 2012, and 2013 provided for our previous reports, these data were incomplete and unverifiable. Seven agencies—DOD, DOE, HHS, NSF, USDA, Commerce, and DOT— participated in the administrative pilot program in fiscal year 2014, and these agencies reported spending $19.1 million on administrative and oversight activities as part of the program. The 2011 reauthorization of the SBIR and STTR programs directed SBA to allow agencies to spend up to 3 percent of SBIR funds on program administration and similar costs in fiscal years 2013 through 2015. In November 2015, the National Defense Authorization Act for Fiscal Year 2016 extended the program through September 30, 2017. According to the programs’ policy directives, funding for the pilot program cannot replace current agency administrative funding. SBA’s policy directives require each agency to submit a work plan to SBA that includes, among other information, a prioritized list of initiatives, the estimated amounts to be spent on each initiative, and the expected results to be achieved. The policy directives require SBA to evaluate the work plan and provide initial comments within 15 calendar days of receipt of the plan. If SBA does not provide initial comments within 30 calendar days of receipt of the plan, the work plan is deemed approved. In our April 2015 report, we found that SBA requested that agencies submit data on the total amount spent on the administrative pilot program, but did not request that agencies submit information on how they used the funds. In that report, we recommended that SBA request that agencies participating in the administrative pilot program provide data on the use of the funds, rather than a total cost for all the activities under the pilot. SBA generally agreed with our recommendation and, in fiscal year 2014, requested that agencies provide additional information on how they spent administrative pilot program funds. SBA is required to use the information from the agencies to report on the pilot program to Congress. Agencies participating in the administrative pilot program used funds towards six goals developed by SBA in consultation with agency officials, as shown in table 3. Under the administrative pilot program, some goals received more attention than others based on our review of the funds spent on each goal. In particular, all seven of the agencies that participated in the administrative pilot program spent funds to increase outreach to underserved communities. For example, officials at one agency told us that they spent approximately $1 million under the administrative pilot program to expand assistance, through budget support and proposal review, among other assistance, to women-owned small businesses, minority-owned small businesses, and small businesses from states that are underrepresented in the SBIR and STTR programs. According to agency officials, their efforts resulted in 43 applications from companies that received such assistance. Other agencies also took steps to improve outreach, including traveling to underserved states, launching websites, enhancing social media platforms, or attending trade shows. On the other hand, only two agencies used funds for congressional and inter-agency reporting. Officials at one agency told us that it is not clear from the law or SBA guidance if all six goals require equal attention. In fiscal year 2014, agencies proposed that they would spend $55.5 million on the administrative pilot program, but our analysis of the agencies’ work plans and data submitted to SBA shows that agencies obligated $19.1 million, or 34 percent of the proposed amount (see table 4). This compares with obligations of $12.3 million in fiscal year 2013, or 21 percent of the proposed amount. Of the seven agencies that participated in the administrative pilot program, DOE obligated most of what it estimated it would spend, and Commerce obligated the lowest percentage of what it planned to spend. Program managers at Commerce told us that they originally planned to spend money on a joint SBA database, but agencies faced difficulties in getting permission to use the money for the database and the project was completed with other funds. In addition, they said that the agency received appropriations late in fiscal year 2014, requiring them to reserve money they planned to spend for outreach efforts in fiscal year 2014. More agencies participated in the administrative pilot program in fiscal year 2014 than in the previous year, but some agencies identified potential constraints that limited their participation, including the temporary nature of the program and the requirement to expend funds only on new activities. First, officials at 2 agencies told us that the temporary nature of the administrative pilot program constrained them from using the funds to make new hires. For example, officials at one agency said that they could have used the funds to hire a new contract specialist but were concerned that they would not have funding to pay the employee after the end of the pilot program. Program officials at another agency, which did not participate in the administrative pilot program, told us that if they hired additional contractors, they could not continue to pay them after the administrative pilot ended. Program managers at 10 of the 11 agencies supported making the administrative pilot program permanent, including 3 of the 4 agencies that did not participate in the pilot program. For example, officials at one agency told us that the administrative pilot program gives them opportunities to experiment with different approaches to promote their programs. While NSF officials said that the agency already has substantial programs in place, administrative funds enabled them to start new ones, particularly around social media. SBA officials told us that administrative pilot program funding is necessary to increase staff levels. Officials at the 1 agency that did not support making the administrative pilot program permanent at this time said that it is too early to tell whether the pilot program is successful and that more information is needed to decide whether the administrative pilot program should be made permanent. Second, program officials at 2 agencies told us that the requirement to expend funds on only new activities constrained their ability to participate in the program. Officials at one of the agencies that did not participate in the administrative pilot program told us that the requirement to spend money on only new initiatives restricted them from using funds for existing administrative activities, whereas agencies that do not already have these types of activities are not constrained from using their funds for the same activities. The officials also told us that the requirement puts a heavy burden on offices with smaller budgets, as they must start up new activities as well as continue existing activities with limited budgets. As we discussed previously, SBA is required to provide Congress with an annual report each fiscal year. In addition to addressing issues in the annual report such as agencies’ methodologies to calculate extramural R&D obligations, SBA is also required to collect data and report on the funds used to achieve the objectives of the administrative pilot program. Such a report could include an evaluation of the constraints that have hindered agencies’ participation in the program. As outlined in GAO’s guide for designing evaluations, an evaluation gives an agency the opportunity to refine the design of a program and provides a useful tool for determining whether program operations have resulted in the desired benefits for participants. In its fiscal year 2013 report to Congress on the programs, SBA identified some potential constraints to the amounts that agencies spent on the program, including the amount of time available for making obligations after the necessary budget information was received. SBA officials told us that they plan to include information on the administrative pilot program in their annual report to Congress. However, as we previously noted, SBA submitted its fiscal year 2013 report 2 years after agencies’ data were due and has not submitted its fiscal year 2014 annual report to Congress in a timely manner. Until SBA submits its fiscal year 2014 report and includes information on the administrative pilot program, SBA and Congress will not have the information they need to know whether the administrative pilot program has met its goals or whether there are constraints to participating, such as those that we identified. Further, an assessment of the effect of potential constraints on agencies’ abilities to participate in the pilot program and the steps needed to address these constraints may help to eliminate inconsistencies in the activities that agencies can currently consider new and help address agencies’ views that they are limited in their ability to hire individuals for administrative purposes. Federal agencies have spent billions of dollars with small businesses under the SBIR and STTR programs to develop and commercialize innovative technologies. In our previous reports on these issues, we identified some areas where SBA could take actions to better ensure agencies’ compliance with spending and reporting requirements, as well as management of the administrative pilot program. SBA has taken actions to address some of these recommendations and SBA officials have told us of their plans to address others. As SBA takes steps to address issues we previously identified, we found three additional issues that could continue to affect compliance with spending and reporting requirements in the future. First, because SBA’s guidance does not address the timing for when an agency should start up programs, agencies may not know when to start a program. Such information may help ensure that agencies will establish programs when required and ensure that the required amount of money is available for small businesses participating in the programs. Second, because SBA removed language requesting agencies to list the dollar amounts of exclusions from the guidance for submitting data for fiscal year 2014, some agencies did not provide this information. Restoring this guidance could help SBA fully evaluate and report to Congress on the accuracy of agencies’ methodology reports. Third, because SBA has not submitted a report on the administrative pilot program to Congress for fiscal year 2014, it has not evaluated the effects of potential constraints on agencies’ ability to participate in the pilot program for that year and the steps needed to address these constraints. As a result, some agencies may not have implemented the administrative pilot program to the fullest extent. Performing such an analysis and notifying Congress of constraints may help to eliminate inconsistencies in the activities that agencies can currently consider new and help address agencies’ views that they are limited in their ability to hire individuals for administrative purposes. To ensure full compliance with SBIR and STTR spending and reporting requirements and improve participation in the administrative pilot program, we recommend that the SBA Administrator take the following three actions: Review SBA guidance regarding when an agency is required to start up an SBIR or STTR program, and if necessary, update the guidance to provide greater clarity to agencies with R&D obligations greater than the thresholds for participating. Restore guidance requesting that agencies provide dollar amounts for exclusions in agency methodology reports to SBA. Complete the required reporting on the administrative pilot program for fiscal year 2014, which could include an evaluation of the potential constraints that may hinder agencies’ participation and any steps to address these constraints. We provided a draft of this report to SBA and the 11 participating agencies for review and comment. In an e-mail response, SBA generally agreed with our recommendations. SBA also provided technical comments, as did DHS, DOD, DOE, HHS, and NASA, which we incorporated, as appropriate. As part of its technical comments, SBA provided additional information on steps it has taken to identify why its annual reports to Congress have taken so long to complete and corrective actions it has taken to address the delays. Based on this information, we deleted a proposed recommendation on this issue. Five of the agencies—Commerce, DOT, Education, EPA, and NSF—had no technical or written comments. The remaining agency, USDA, provided written comments, which we reproduced in appendix III. In written comments, the Chief Scientist for USDA raised three issues. First, USDA raised issues with how we determine compliance with spending requirements in the report. USDA explained that it uses a two- step process to determine its annual spending requirement—first, USDA determines a “set aside” based on appropriations, and second, USDA calculates end-of-year total obligations. USDA said that we focused only on the end of year obligations process in determining whether agencies met the spending requirements and omitted the calculations that show compliance at the front-end of the process. The Small Business Act defines extramural R&D budget in terms of obligations, however. As we found in our April 2015 report, nothing in the Act indicates that “obligations” should be construed as “planned obligations.” Because extramural R&D budget is defined as actual obligations over the course of the year, we therefore use end-of-year obligations to determine whether an agency has met its annual spending requirement. Further, in its comments, USDA states that the spending compliance calculation needs further review and it appears that neither we nor SBA have recommended a change to the calculation methodology. However, in our April 2015 report, we recommended that SBA notify Congress in its annual report if it cannot determine agency compliance with program spending requirements when agencies that participate in the SBIR and/or STTR programs do not report extramural R&D obligations data, or develop a proposal to Congress that would change the requirement. In response to this recommendation, SBA reported to Congress in its fiscal year 2013 report that it could not determine compliance with spending requirements and has worked with the agencies to collect obligations data. Second, in its written comments, USDA states that it was not possible to initiate an STTR program in fiscal year 2014 based on end of year obligations. We recognize in this report that one potential challenge for agencies setting up a new STTR program is that total extramural R&D obligations may be difficult to calculate until after the end of the fiscal year, as agencies can obligate extramural R&D funding through the end of the fiscal year. To address this potential challenge, we recommend in this report that SBA review guidance regarding when an agency is required to start up an SBIR or STTR program and, if necessary, update the guidance to provide greater clarity to agencies with R&D obligations greater than the thresholds for participating. Third, in its written comments, USDA stated that it can spend multi-year or no-year funds in years other than when they were appropriated, which can have a negative effect on the ability of the SBIR program to comply with spending requirements under the current calculation. USDA raised concerns that footnote 18 in the report, which restates the spending requirements, could lead to a misinterpretation of USDA’s authority. We agree with USDA that the Small Business Act does not supersede the authority USDA has to use multi-year or no-year funds in general. However, the Small Business Act imposes more specific yearly spending requirements for the SBIR and STTR programs. We clarified the cited footnote to make clear that the referenced spending requirements only pertain to the SBIR and STTR programs. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, and Transportation; the Administrators of the Small Business Administration, the Environmental Protection Agency, and the National Aeronautics and Space Administration; the Director of the National Science Foundation; 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 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 this report are listed in appendix IV. The data that the agencies submitted to the Small Business Administration (SBA) indicate that 9 of the 11 participating agencies spent amounts for the Small Business Innovation Research (SBIR) program that met or exceeded their fiscal year 2014 spending requirements, while spending for the remaining 2 agencies did not meet the requirements. For the purposes of this report, we defined compliance as spending at least 2.8 percent of an agency’s reported extramural research or research and development obligations on the SBIR program in fiscal year 2014, as required by the Small Business Act. This method is consistent with SBA’s approach for calculating spending requirements in its reports to Congress on the program (see table 5). The data that the agencies submitted to the Small Business Administration (SBA) indicate that four of the five participating agencies spent amounts for the Small Business Technology Transfer (STTR) program that met or exceeded their fiscal year 2014 spending requirements, while 1 agency did not. For the purposes of this report, we defined compliance as spending at least 0.4 percent of an agency’s reported extramural research or research and development obligations on the STTR program in fiscal year 2014, as required by the Small Business Act. This method is consistent with SBA’s approach for calculating spending requirements in its reports to Congress on the program. (See table 6.) In addition to the contact named above, Hilary Benedict (Assistant Director), Jeffrey Barron, Lisa Brown, Antoinette Capaccio, Cindy Gilbert, Jordan Kudrna, Alison O’Neill, and Sara Sullivan made key contributions to this report. | Federal agencies have awarded contracts and grants totaling more than $40 billion through the SBIR and STTR programs to small businesses to develop and commercialize innovative technologies. The Small Business Act requires agencies with extramural R&D obligations that meet certain thresholds—$100 million for SBIR and $1 billion for STTR—to spend a percentage of these funds on the programs. The agencies are to report on their activities to SBA, and in turn, SBA is to report to Congress. The 2011 reauthorization of the programs includes a provision for GAO to review compliance with spending and reporting requirements and other program aspects. This report examines, for fiscal year 2014, (1) the extent to which participating agencies complied with spending requirements, (2) the extent to which agencies and SBA complied with certain reporting requirements, (3) the potential effects of basing spending requirements on total R&D budget authority, and (4) what is known about the amounts spent to administer the programs. GAO reviewed agency spending data and reports and interviewed program officials from SBA and the 11 participating agencies. Agency data indicate that 9 of the 11 agencies participating in the Small Business Innovation Research (SBIR) program and 4 of the 5 agencies participating in the Small Business Technology Transfer (STTR) program complied with spending requirements in fiscal year 2014. One agency—the Department of Agriculture (USDA)—had extramural R&D obligations greater than $1 billion, but did not implement an STTR program, as required in the Small Business Act. This is, in part, because the Small Business Administration's (SBA) guidance does not address when an agency should establish a new STTR program. As a result, in fiscal year 2014, less money was available for awards to small businesses through this program. Most participating agencies did not fully comply with certain reporting requirements. For example, while all participating agencies submitted the required methodology reports for fiscal year 2014, 6 of the 11 did not fully itemize the specific programs they excluded from their extramural R&D, did not fully explain the reasons why they excluded the programs, or both. Additionally, 2 agencies did not submit complete information on the dollar amounts of exclusions in fiscal year 2014 because of a change in SBA's fiscal year 2014 guidance. Restoring this guidance could provide information to help SBA assess the accuracy of agency methodology reports. GAO's analysis shows that basing SBIR and STTR spending requirements on an agency's total R&D budget authority instead of its extramural R&D obligations could increase the amount each agency has to spend on the programs and increase the number of agencies required to participate in the programs. Some agency officials identified benefits of this potential change, such as more funding to make awards to small businesses, but some agencies identified drawbacks, such as limiting resources for other R&D programs. Total administrative spending on the SBIR and STTR programs in fiscal year 2014 is unknown, but agencies participating in the administrative pilot program spent about $19 million on new activities. Agencies do not and are not required to track total administrative costs, and therefore total spending could not be calculated for fiscal year 2014. Seven agencies participated in the administrative pilot program and tracked the amounts of program funds they spent on new administrative and oversight activities in fiscal year 2014. While these 7 agencies spent more on the program in fiscal year 2014 than in the previous year, some of these agencies identified constraints that limited their participation. For example, agency officials pointed to guidance that requires agencies to only spend money on new initiatives and the limited length of the pilot. Agency officials told GAO these constraints kept them from achieving program goals by preventing them from undertaking some initiatives and hiring individuals for administrative purposes. SBA plans to include its required evaluation of the pilot program in its annual report to Congress, which could include an evaluation of such constraints and the steps needed to address them, but it has not yet submitted its fiscal year 2014 report to Congress. Until SBA submits its evaluation of the pilot program, SBA and Congress will not have needed information about the pilot for fiscal year 2014 or potential constraints for participants. GAO recommends that SBA clarify guidance for when an agency is to start up an STTR program, restore guidance about dollar amounts of exclusions in the methodology report, and complete the required report to Congress for fiscal year 2014. SBA generally agreed with GAO's findings and recommendations. |
VA comprises three major components: the Veterans Benefits Administration (VBA), the Veterans Health Administration (VHA), and the National Cemetery Administration (NCA). VA’s mission is summed up in its mission statement, a quotation from Abraham Lincoln: “to care for him who shall have borne the battle and for his widow and his orphan.” VA carries out this mission by providing benefits and other services to veterans and dependents. The department’s vision is to be a more customer-focused organization, functioning as “One VA.” This vision stemmed from the recognition that veterans think of VA as a single entity, but often encountered a confusing, bureaucratic maze of uncoordinated programs that put them through repetitive and frustrating administrative procedures and delays. The “One VA” vision is to create versatile new ways for veterans to obtain services and information by streamlining interactions with customers and integrating IT resources to enable VA employees to help customers more quickly and effectively. This vision will require modifying or replacing separate information systems with integrated systems using common standards to share information across VA programs and with external partner organizations, such as the Department of Defense. Accordingly, effective management of its IT programs is vital to VA’s successful achievement of its vision and mission. Table 1 shows a breakdown of VA’s approximately $2.1 billion IT budget request for fiscal year 2006. Of the total, VHA accounted for approximately $1.8 billion, VBA approximately $150 million, and NCA approximately $11 million. The remaining $84 million was designated for the department level. The Congress has long recognized that IT has the potential to enable federal agencies to accomplish their missions more quickly, effectively, and economically. However, fully exploiting this potential presents challenges to agencies. Despite substantial IT investments, the federal government’s management of information resources has produced mixed results. One of the ways in which the Congress has addressed this issue was to establish the CIO position; an agency’s CIO is to serve as the focal point for information and technology management within an agency. In 1996, the Clinger-Cohen Act established the position of agency CIO and specified responsibilities for this position. Among these responsibilities, the act required that the CIOs in the 24 major departments and agencies have information resources management (IRM) as their “primary duty.” The Congress has mandated that CIOs should play a key leadership role in ensuring that agencies manage their information functions in a coordinated and integrated fashion in order to improve the efficiency and effectiveness of government programs and operations. CIOs have responsibilities that can contribute significantly to the successful implementation of information systems and processes. In July 2004, we reported on CIO roles, responsibilities, and challenges (among other things) at 27 major agencies. For this work, we identified major areas of CIO responsibilities that were either statutory requirements or critical to effective information and technology management. Altogether, we identified the 13 areas shown in table 2. According to our report, CIOs were generally responsible for the key information and technology management areas shown in the table, although not all CIOs were completely responsible for all areas. For example: ● All the CIOs were responsible for the first five areas in the table (capital planning and investment management, enterprise architecture, information security, IT/IRM strategic planning, and IT/IRM human capital). ● More than half had responsibility for six additional areas (major e- government initiatives, systems acquisition, information collection/paperwork reduction, records management, information dissemination, and privacy). ● Fewer than half were responsible for two areas (information disclosure and statistics). It was common for CIOs to share responsibility for certain functions, and in some cases responsibilities were assigned to other offices. For example, systems acquisition responsibility could be shared among the CIO and other officials, such as a procurement executive or program executive; disclosure could be assigned to general counsel and public affairs, while statistical policy could be assigned to offices that deal with the agency’s data analysis. Nevertheless, even for areas of responsibility that were not assigned to CIOs, agency CIOs generally reported that they contributed to the successful execution of the agency’s overall responsibilities in that area. In carrying out their responsibilities, CIOs generally reported to their agency heads. For 19 of the agencies in our review, the CIOs stated that they had this reporting relationship. In the other 8 agencies, the CIOs stated that they reported instead to another senior official, such as a deputy secretary, under secretary, or assistant secretary. In addition, 8 of the 19 CIOs who said they had a direct reporting relationship with the agency head noted that they also reported to another senior executive, usually the deputy secretary or under secretary for management, on an operational basis. According to members of our Executive Council on Information Management and Technology, what is most critical is for the CIO to report to a top level official. Federal CIOs often remained in their positions for less than the length of time that some experts consider necessary for them to be effective and implement changes. At the major departments and agencies included in our review, the median time in the position of permanent CIOs whose time in office had been completed was about 23 months. For career CIOs, the median was 32 months; the median for political appointees was 19 months. To the question of how long a CIO needed to stay in office to be effective, the most common response of the CIOs (and former agency IT executives whom we consulted) was 3 to 5 years. Between February 10, l996, and March 1, 2004, only about 35 percent of the permanent CIOs who had completed their time in office reportedly had stayed in office for a minimum of 3 years. The gap between actual time in office and the time needed to be effective is consistent with the view of many agency CIOs that the turnover rate was high, and that this rate was influenced by the political environment, the pay differentials between the public and private sectors, and the challenges that CIOs face. In contrast, the CIOs at the 27 agencies were generally helped in carrying out their responsibilities by the background and experience they brought to the job. The background of the CIOs varied in that they had previously worked in the government, the private sector, or academia, and they had a mix of technical and management experience. However, virtually all had work experience or educational backgrounds in IT or IT-related fields; 12 agency CIOs had previously served in a CIO or deputy CIO capacity. Moreover, most of the them had business knowledge related to their agencies because they had previously worked at the agency or had worked in an area related to the agency’s mission. To allow CIOs to serve effectively in the key leadership role envisioned by the Congress, federal agencies should use the full potential of CIOs as information and technology management leaders and active participants in the development of the agency’s strategic plans and policies. The CIOs, in turn, must meet the challenges of building credible organizations and developing and organizing information and technology management capabilities to meet mission needs. In February 2001, we issued guidance on the effective use of CIOs, which describes the following three factors as key contributors to CIO success: ● Supportive senior executives embrace the central role of technology in accomplishing mission objectives and include the CIO as a full participant in senior executive decision making. ● Effective CIOs have legitimate and influential roles in leading top managers to apply IT to business problems and needs. Placement of the position at an executive management level in the organization is important, but in addition, effective CIOs earn credibility and produce results by establishing effective working relationships with business unit heads. ● Successful CIOs structure their organizations in ways that reflect a clear understanding of business and mission needs. Along with knowledge of business processes, market trends, internal legacy structures, and available IT skills, this understanding is necessary to ensure that the CIO’s office is aligned to best serve agency needs. The CIO study that we reported on in July 2004 also provides information on the major challenges that federal CIOs face in fulfilling their duties. In particular, CIOs view IT governance processes, funding, and human capital as critical to their success, as indicated by two challenges that were cited by over 80 percent of the CIOs: implementing effective information technology management and obtaining sufficient and relevant resources. ● Effective IT management. Leading organizations execute their information technology management responsibilities reliably and efficiently. A little over 80 percent of the CIOs reported that they faced one or more challenges related to implementing effective IT management practices at their agencies. This is not surprising given that, as we have previously reported, the government has not always successfully executed the IT management areas that were most frequently cited as challenges by the CIOs—information security, enterprise architecture, investment management, and e-gov. ● Sufficient and relevant resources. One key element in ensuring an agency’s information and technology success is having adequate resources. Virtually all agency CIOs cited resources, both in dollars and staff, as major challenges. The funding issues cited generally concerned the development and implementation of agency IT budgets and whether certain IT projects, programs, or operations were being adequately funded. We have previously reported that the way agency initiatives are originated can create funding challenges that are not found in the private sector. For example, certain information systems may be mandated or legislated, so the agency does not have the flexibility to decide whether to pursue them. Additionally, there is a great deal of uncertainty about the funding levels that may be available from year to year. The government also faces long-standing and widely recognized challenges in maintaining a high-quality IT workforce. In 1994 and 2001, we reported on the importance that leading organizations placed on making sure they had the right mix of skills in their IT workforce. About 70 percent of the agency CIOs reported on a number of substantial IT human capital challenges, including, in some cases, the need for additional staff. Other challenges included recruiting, retention, training and development, and succession planning. In addition, two other commonly cited challenges were communicating and collaborating (both internally and externally) and managing change. ● Communicating and collaborating. Our prior work has shown the importance of communication and collaboration, both within an agency and with its external partners. For example, one of the critical success factors we identified in our guide focuses on the CIO’s ability to establish his or her organization as a central player in the enterprise. Ten agency CIOs reported that communication and collaboration were challenges. Examples of internal communication and collaboration challenges included (1) cultivating, nurturing, and maintaining partnerships and alliances while producing results in the best interest of the enterprise and (2) establishing supporting governance structures that ensure two- way communication with the agency head and effective communication with the business part of the organization and component entities. Other CIOs cited activities associated with communicating and collaborating with outside entities as challenges, including sharing information with partners and influencing the Congress and OMB. ● Managing change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming an organization’s natural resistance to change, marshaling the resources needed to improve management, and building and maintaining organizationwide commitment to new ways of doing business. Some CIOs reported challenges associated with implementing both changes originating from their own initiative and changes from outside forces. Implementing major IT changes can involve not only technical risks but also nontechnical risks, such as those associated with people and the organization’s culture. Six CIOs cited dealing with the government’s culture and bureaucracy as challenges to implementing change. Former agency IT executives also cited the need for cultural changes as a major challenge facing CIOs. Accordingly, in order to effectively implement change, it is important that CIOs build understanding, commitment, and support among those who will be affected by the change. Effectively tackling these reported challenges can improve the likelihood of a CIO’s success. Until these challenges are overcome, federal agencies are unlikely to optimize their use of information and technology, which can affect an organization’s ability to effectively and efficiently implement its programs and missions. In September 2005, we reported the results of our study of CIOs at leading private-sector organizations, in which we described the CIOs’ responsibilities and major challenges, as well as private-sector approaches to information and technology governance. The set of responsibilities assigned to CIOs in the private sector were similar to those in the federal sector. In most areas, there was little difference between the private and federal sectors in the percentage of CIOs who had or shared a particular responsibility. In 4 of the 12 areas—enterprise architecture, strategic planning, information collection, and information dissemination and disclosure—the difference between the private- and federal-sector CIOs was greater; in each case, fewer CIOs in the private sector had these responsibilities. In all, the six functions least likely to be the CIO’s responsibility in the federal sector were equivalent to the five functions least likely to be his or her responsibility in the private sector. Some of the federal CIOs’ functions, such as information collection and statistical policy, did not map directly to the management areas in several of the private-sector organizations we contacted. Figure 1 compares federal and private-sector CIO responsibilities for the 12 areas, showing the percentage of CIOs who had or shared responsibility for each area. Among the private-sector CIOs, it was common to share responsibility with either business units or corporate functional areas; these sharing relationships accounted for almost a third of all responses. Among federal CIOs, the sharing of responsibility was not described in as many areas. Approximately half of all the private-sector CIOs described four major challenges: ● Aligning IT with business goals was cited by 11 of the CIOs. This challenge requires the CIOs to develop IT plans to support their companies’ business objectives. In many cases this entails cross- organization coordination and collaboration. ● Implementing new enterprise technologies (e.g., radio frequency identification, enterprise resource planning systems, and customer relationship management systems) was cited by 8 of the CIOs. This challenge requires the broad coordination of business and corporate units. ● Controlling IT costs and increasing efficiencies was cited by 9 of the CIOs. Several CIOs explained that by controlling costs and providing the same or better service at lower cost, they are able to contribute to their companies’ bottom lines. A few CIOs also said that they generate resources for new investments out of the resources freed up by cost savings. ● Ensuring data security and integrity was cited by 9 of the CIOs. Closely associated with this challenge was ensuring the privacy of data, which was raised by 6 CIOs. Additional management challenges commonly raised by the private- sector CIOs included ● developing IT leadership and skills (7), ● managing vendors, including outsourcing (7), improving internal customer satisfaction (5). Additional technical challenges commonly raised by the private- sector CIOs included implementing customer service/customer relationship management (CRM) systems (7), identifying opportunities to leverage new technology (6), integrating and enhancing systems and processes (5), and ● rationalizing IT architecture (5). The challenges mentioned by the private-sector CIOs overlapped with those mentioned by federal CIOs in our previous study. Improving various IT management processes was mentioned by several private-sector CIOs (e.g., IT investment decision making) as well as by federal CIOs, as was developing IT leadership and skills. In technology-related areas, both private-sector and federal CIOs mentioned working with enterprise architectures and ensuring the security of systems as challenges. Although the challenges mentioned by private-sector CIOs resembled those mentioned by federal CIOs, there were a few differences. Private-sector CIOs mentioned challenges related to increasing IT’s contribution to the bottom line—such as controlling costs, increasing efficiencies, and using technology to improve business processes—while federal CIOs tended to mention overcoming organizational barriers and obtaining sufficient resources. When asked to describe how the governance of information management and technology is carried out in their companies, 16 of the 20 private-sector companies told us that they had an executive committee with the authority and responsibility for governing major IT investments. As part of the governance of IT assets in their companies, nine of the CIOs said that they shared responsibility for IT investment management and that their involvement ranged from providing strong leadership to reviewing plans to ensure that they complied with corporate standards. Many of the private-sector CIOs were actively working to increase coordination among business units to enhance their governance process. Seven of the CIOs described efforts under way to implement enterprisewide financial and supply chain systems, which will move the companies to common business processes. Six CIOs also described using cross-organizational teams (sometimes called centers of excellence), which drive these broad collaborative efforts and others, such as the establishment of standards and common practices. With regard to the governance of the development of new systems, many of the private-sector CIOs described a process in which they collaborated closely with business units and corporate functional units in planning and developing systems to meet specific needs. The extent of the CIOs’ involvement ranged from providing strong leadership and carrying out most activities to reviewing the other components’ plans to ensure that they complied with corporate standards. With regard to sharing authority for decisions on the management of IT assets, several CIOs spoke of balancing between centralization and decentralization of authority and described their efforts to move between the two extremes to find the right balance. The appropriate balance often depended on other events occurring in the companies, such as major strategic realignments or acquisitions. For example, one CIO described his current evolution from a relatively decentralized structure—an artifact of a major effort to enable growth in the corporation—to a more centralized structure in order to reduce costs and drive profits. Since enactment of the Clinger-Cohen Act in 1996, the roles and responsibilities of VA’s Chief Information Officer have evolved. From lacking a CIO entirely, the department has taken steps to address the challenges posed by its multiple widespread components and its decentralized information technology and services. In June 1998, VA assigned CIO responsibility to a top manager. However, we reported in July 1998 that the person holding the CIO position at VA had multiple additional major responsibilities, as this person also served as Assistant Secretary for Management, Chief Financial Officer, and Deputy Assistant Secretary for Budget. According to the act, the CIO’s primary responsibility should be information and technology management. Noting that VA’s structure was decentralized, its IT budget was large, and its CIO faced serious information and technology management issues, we recommended that the Secretary appoint a CIO with full-time responsibilities for IRM. Concurring with the recommendation, VA established the position of Assistant Secretary for Information and Technology to serve as its CIO. As of May 2000, however, the position of Assistant Secretary for Information and Technology was vacant, and as we reported at the time, it had been unfilled since its creation in 1998. The Secretary then created and filled the position of Principal Deputy Assistant Secretary for Information and Technology, designating that person as VA’s acting CIO until an Assistant Secretary could be appointed. The Secretary also realigned IRM functions within VA under this position, which reported directly to the Secretary. As we reported, the Principal Deputy Assistant Secretary was involved in IT planning issues across the department. In addition to advising the Secretary on IT issues, he served as chair of the department’s CIO Council and as a member of the department’s Capital Investment Board, and he worked with the CIOs in VBA and VHA (at the time, NCA had no CIO). According to this official, one of his priorities was to ensure that IT activities in VBA and VHA were in concert with VA’s departmentwide efforts. In August 2001, VA filled the CIO position. In March 2002, we testified that this hiring was one of the important strides that the Secretary of Veterans Affairs had made to improve the department’s IT leadership and management, along with making a commitment to reform the department’s use of IT. On June 29, 2003, the CIO retired after a tenure of almost 2 years (about the median length of tenure for federal CIOs, as discussed above); the current CIO was confirmed in January 2004. Figure 1 is a time line showing the history of the CIO position at VA since the passage of the Clinger-Cohen Act. Our prior work highlighted some of the challenges that the CIO faced as a result of the way the department was organized to carry out its IT mission. Among these challenges was that information systems and services were highly decentralized, and the VA administrations and staff offices controlled a majority of the department’s IT budget. For example, in VA’s information technology budget for fiscal year 2002 of approximately $1.25 billion, VHA controlled about $1.02 billion (over 80 percent), whereas the department level controlled about $60.2 million (less than 5 percent). In addition, we noted that there was neither direct nor indirect reporting to VA’s cyber security officer—the department’s senior security official—thus raising questions about this person’s ability to enforce compliance with security policies and procedures and ensure accountability for actions taken throughout the department. The more than 600 information security officers in VA’s three administrations and its many medical facilities throughout the country were responsible for ensuring the department’s information security, although they reported only to their facility’s director or to the chief information officer of their administration. Given the large annual funding base and decentralized management structure, we testified that it was crucial for the departmental CIO to ensure that well-established and integrated processes for leading, managing, and controlling investments are commonplace and followed throughout the department. This is consistent with the finding in our CIO review that implementation of IT management practices was a challenge; over half of federal CIOs identified IT investment management specifically. Recognizing weaknesses in accountability for the department’s IT resources and the need to reorganize IT management and financing, the Secretary announced a realignment of the department’s IT operations in a memorandum dated August 2002. According to the memorandum, the realignment would centralize IT functions, programs, workforce personnel, and funding into the office of the department-level CIO. In particular, several significant changes were described: ● The CIOs in each of the three administrations—VHA, VBA, and NCA—were to be designated deputy CIOs and were to report directly to the department-level CIO. Previously, these officials served as component-level CIOs who reported only to their respective administrations’ under secretaries. ● All administration-level cyber security functions were to be consolidated under the department’s cyber security office, and all monies earmarked by VA for these functions were to be placed under the authority of the cyber security officer. Information security officers previously assigned to VHA’s 21 veterans integrated service networks would report directly to the cyber security officer, thus extending the responsibilities of the cyber security office to the field. ● Beginning in fiscal year 2003, the department-level CIO would assume executive authority over VA’s IT funding. In September 2002, we testified that in pursuing these reforms, the Secretary demonstrated the significance of establishing an effective management structure for building credibility in the way IT is used, and took a significant step toward achieving a “One VA” vision. The Secretary’s initiative was also a bold and innovative step by the department—one that has been undertaken by few other federal agencies. For example, of 17 agencies contacted in 2002, 8 reported having component-level CIOs, none of which reported to the department-level CIO. Only one agency with component-level CIOs reported that its department-level CIO had authority over all IT funding. We also noted that the CIO’s success in managing IT operations under the realignment would hinge on effective collaboration with business counterparts to guide IT solutions that meet mission needs, and we pointed out the importance of the three key contributors to CIO success described in our 2001 guidance (discussed earlier). Although we have not reviewed the current status of this proposed realignment or VA’s current organizational structure, it remains our view that the proposed realignment held promise for building a more solid foundation for investing in and improving the department’s accountability over IT resources. Specifically, under the realignment the CIO would assume budget authority over all IT funding, including authority to veto proposals submitted from subdepartment levels. This could have a significant effect on VA’s accountability for how components are spending money. To sum up, the CIO plays a vital role in ensuring that VA’s funds are well spent and in managing information technology to serve our nation’s veterans. In our view, the realignment of VA’s IT organization proposed in 2002 held promise for improving accountability and enabling the department to accomplish its mission. The additional oversight afforded the CIO could have a significant impact on the department’s ability to more effectively account for and manage its proposed $2.1 billion in planned IT spending. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of this Committee may have at this time. For information about this testimony, please contact Linda D. Koontz, Director, Information Management Issues, at (202) 512-6240 or at koontzl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Barbara Collier, Lester Diamond, Barbara Oliver, and J. Michael Resser. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In carrying out its mission of serving the nation's veterans and their dependents, the Department of Veterans Affairs (VA) relies extensively on information technology (IT), for which it is requesting about $2.1 billion in fiscal year 2006. VA's vision is to integrate its IT resources and streamline interactions with customers, so that it can provide services and information to veterans more quickly and effectively. Fully exploiting the potential of IT to improve performance is a challenging goal for VA, as it is throughout government. The Clinger-Cohen Act of 1996 addressed this challenge by, among other things, establishing the position of chief information officer (CIO) to serve as the focal point for information and technology management within departments and agencies. As agreed with Congress, GAO will discuss the role of CIOs in the federal government and in the private sector, as well as provide a historical perspective on the roles and responsibilities of VA's CIO. In developing this testimony, GAO relied on its previous work at VA and on the CIO role, including a 2004 review of CIOs at major departments and agencies and a 2005 review of CIOs at leading private-sector organizations. In the federal government and in the private sector, the responsibilities and challenges of CIOs are largely similar. In most management areas, the federal and private-sector organizations reviewed showed little difference in the percentage of CIOs who had or shared a particular responsibility. The challenges cited by private-sector CIOs were also similar to those of federal CIOs: both groups cited improving IT management processes, developing IT leadership and skills, working with enterprise architectures, and ensuring the security of systems. Over time, VA has increased its attention to the CIO position and to information and technology management. After several years with CIOs whose primary duty was not information and technology management or who were serving in an acting capacity, the department appointed a full-time permanent CIO in August 2001. VA also recognized that its decentralized computing environment presented challenges, with a large proportion of the department's IT budget controlled by its administrations and staff offices. As a result, in 2002, the department proposed a realignment to strengthen the department-level CIO position and centralize IT management under this official. GAO has not reviewed the current status of this proposed realignment or VA's current organizational structure, but its view is that the realignment held promise for improving accountability and helping to accomplish VA's mission by increasing the CIO's oversight over IT management and spending. |
NAGPRA covers five types of Native American cultural items, which we refer to collectively, in this report, as NAGPRA items (see table 1). Since the early 1800s, federal agencies have amassed archeological collections with items numbering in the millions. Some, such as NPS, acquired their collections through archeological excavations intended to advance scientific knowledge and preserve cultural resources. Others, such as the Corps and TVA, have made discoveries during the massive construction projects that are part of their missions. Forest Service officials estimated that an overwhelming majority of the agency’s collections resulted from non-Forest Service initiated activities, such as research by museums and universities or as a result of the construction of highways, reservoirs, and pipelines; or mining claims. Interior—with its land-management agencies—has the largest collection outside of the Smithsonian Institution, with an estimated 146 million objects and documents that cover archeology as well as disciplines such as art and zoology. Federal agency archeological collections are currently stored at a variety of repositories, both federal and nonfederal, located throughout the country. For example, BLM’s collections are stored at three BLM facilities and 121 other repositories. According to TVA officials, TVA’s collections are stored at universities in Alabama, Kentucky, Michigan, Mississippi, North Carolina, and Tennessee. These federal collections include tens of thousands of Native American human remains and hundreds of thousands of funerary objects, sacred objects, and objects of cultural patrimony subject to NAGPRA. NAGPRA defines a federal agency as any department, agency, or instrumentality of the United States, except the Smithsonian Institution, and defines a museum as any institution or state or local government agency, including any institution of higher learning, that receives federal funds and has possession of, or control over, Native American cultural items, except the Smithsonian Institution. The eight federal agencies with significant historical collections that we reviewed—BIA, BLM, BOR, FWS, NPS, the Corps, the Forest Service, and TVA—manage various amounts of federal land in conjunction with their missions and differ in organizational structure (see table 2). They also have long histories over which they came into possession or control of NAGPRA items. In addition, the missions of the agencies vary widely. For example, NPS’s mission is to preserve unimpaired the natural and cultural resources and values of the national park system for the enjoyment, education, and inspiration of this and future generations. In contrast, the mission of TVA is to serve the Tennessee Valley through energy, environment, and economic development. Because of their varying missions, the scope and treatment of their archeological programs have also differed. Since 1906, federal agencies have been issuing permits to individuals, universities, and corporations to perform archeological excavation and research on the federal land they manage. Although the permitting system has changed over time, these permits generally allowed the entities conducting the excavation and research to preserve the excavated materials in public museums. Thus, in theory, archeological materials legally excavated from federal lands since 1906 are recorded in agency reports and records, or in permitting records located in agency files, the Smithsonian Institution’s National Anthropological Archives, or the National Archives. However, due to the age of some of the permits, the large number of permits, and administrative processes that have changed over time, it can be difficult for some agencies to know where all of their collections are currently located. For example, a recent Interior Inspector General report stated that Interior agencies’ collections are held in 625 Interior facilities and at least 1,020 non-Interior facilities, but that four of its agencies were not aware of the location of their collections held in the non-Interior facilities. NAGPRA’s requirements for federal agencies, museums, and the Secretary of the Interior, particularly the ones most relevant to their historical collections, which are the focus of this report, include the following: Compile an inventory and establish cultural affiliation. Section 5 of NAGPRA required that each federal agency and museum compile an inventory of any holdings or collections of Native American human remains and associated funerary objects that are in its possession or control. The act required that the inventories be completed no later than 5 years after its enactment—by November 16, 1995—and in consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. In the inventory, agencies and museums are required to establish geographic and cultural affiliation to the extent possible based on information in their possession. Cultural affiliation denotes a relationship of shared group identity which can be reasonably traced historically or prehistorically between a present day Indian tribe or Native Hawaiian organization and an identifiable earlier group. Affiliating NAGPRA items with a present day Indian tribe or Native Hawaiian organization is the key to deciding to whom the human remains and objects should be repatriated. If a cultural affiliation can be made, the act required that the agency or museum notify the affected Indian tribes or Native Hawaiian organizations no later than 6 months after the completion of the inventory. The agency or museum was also required to provide a copy of each notice—known as a notice of inventory completion—to the Secretary of the Interior for publication in the Federal Register. The items for which no cultural affiliation can be made are referred to as culturally unidentifiable. Compile a summary of other NAGPRA items. Section 6 of NAGPRA required that each federal agency and museum prepare a written summary of any holdings or collections of Native American unassociated funerary objects, sacred objects, or objects of cultural patrimony in its possession or control, based on the available information in their possession. The act required that the summaries be completed no later than 3 years after its enactment—by November 16, 1993. Preparation of the summary was to be followed by federal agency consultation with tribal government officials, Native Hawaiian organization officials, and traditional religious leaders. The summary was to describe the scope of the collection, kinds of objects included, reference to geographical location, means and period of acquisition and cultural affiliation, where readily ascertainable. After a valid claim is received by an agency or museum, and if the other terms and conditions in the act are met, a notice of intent to repatriate must be published in the Federal Register before any item identified in a summary can be repatriated. In contrast to a notice of inventory completion for NAGPRA items listed in inventories, notices of intent to repatriate for NAGPRA items listed in summaries are not published until after an Indian tribe or Native Hawaiian organization has submitted a claim for an item. Repatriate culturally affiliated human remains and objects. Section 7 of NAGPRA and its implementing regulations generally require that, upon the request of an Indian tribe or Native Hawaiian organization, all culturally affiliated NAGPRA items be returned to the applicable Indian tribe or Native Hawaiian organization expeditiously—but no sooner than 30 days after the applicable notice is published in the Federal Register—if the terms and conditions prescribed in the act are met. Furthermore, the regulations require federal agencies and museums to adopt internal procedures adequate to permanently document the content and recipients of all repatriations. Section 8 of NAGPRA required the Secretary of the Interior to establish a Review Committee to monitor and review the implementation of the inventory and identification process and repatriation activities under the act. The Review Committee is composed of seven members appointed by the Secretary. Three members are to be appointed from nominations submitted by Indian tribes, Native Hawaiian organizations, and traditional Native American religious leaders. At least two of these members must be traditional Indian religious leaders. Three members are to be appointed from nominations submitted by national museum organizations and scientific organizations. The seventh member is to be appointed from a list of persons developed and consented to by all of the other members. Among other functions, the Review Committee is responsible for (1) upon request, reviewing and making findings related to the identity or cultural affiliation of cultural items or the return of such items; (2) facilitating the resolution of any disputes among Indian tribes, Native Hawaiian organizations, and federal agencies or museums relating to the return of such items; and (3) compiling an inventory of culturally unidentifiable human remains and recommending specific actions for developing a process for disposition of such remains. The Review Committee is a federal advisory committee subject to the requirements of the Federal Advisory Committee Act and its implementing regulations. The Federal Advisory Committee Act establishes requirements for advisory committees subject to the act, including broad requirements for balance, independence, and transparency. Specifically, the Federal Advisory Committee Act requires that the membership of committees be “fairly balanced in terms of points of view represented and the functions to be performed by the advisory committee.” Members of advisory committees subject to the Federal Advisory Committee Act are generally appointed as special government employees or representatives. Special government employees are appointed to provide advice on behalf of the government on the basis of their best judgment and must meet certain federal requirements pertaining to freedom from conflicts of interest. Representatives, in contrast, provide stakeholder advice—that is, advice reflecting the views of the entity or interest group they are representing, such as industry, labor, or consumers—and are not subject to the same conflict of interest requirements. NAGPRA Review Committee members are appointed as special government employees. The Federal Advisory Committee Act also requires the Secretary of the Interior to appoint a Designated Federal Officer for the NAGPRA Review Committee. Among other things, the officer must approve or call the meetings of the committee, approve the agendas, and attend the meetings. The NAGPRA Review Committee differs from most advisory bodies subject to the Federal Advisory Committee Act in two important ways. First, while most agencies have broad discretion in balancing their committees, NAGPRA limits this discretion because of its requirements both for the types of members that can serve (i.e., the requirement that at least two members be traditional Indian religious leaders) and the entities that can nominate them. Second, according to Interior officials, most federal advisory committees are not tasked with the dispute resolution function performed by the Review Committee. NAGPRA also assigned duties to the Secretary of the Interior that are carried out by the National NAGPRA Program Office (National NAGPRA) within Interior’s NPS Cultural Resources program. National NAGPRA has a staff of 5.75 full-time equivalent employees and one contractor. Its annual operating budget, which includes the operating expenses for the Review Committee, is about $1 million. One of the duties assigned to National NAGPRA is to help fill vacancies on the Review Committee. National NAGPRA is also responsible for developing NAGPRA’s implementing regulations and it provides administrative support to the Review Committee. The main body of the regulations was proposed in 1993 and became effective in 1996. NAGPRA required the Secretary of the Interior to perform a number of functions, which the Secretary initially delegated to the Departmental Consulting Archeologist, a position within NPS that provides coordination, leadership, technical assistance, and guidance to all federal agencies with responsibility for archeological resources. According to agency officials, this position was housed within the Archeological Assistance Division under the Associate Director for Cultural Resources. Officials further stated that, from 1990 to the mid-1990s, the Departmental Consulting Archeologist and other support staff within the Archeological Assistance Division were responsible for facilitating NAGPRA compliance governmentwide (such as reviewing inventories and summaries and publishing notices) and the Anthropology Division, also within the Cultural Resources Program, was responsible for conducting NPS’s compliance activities to meet NAGPRA requirements (such as completing inventories and summaries and drafting notices). Both offices reported to the Associate Director of Cultural Resources. Officials said that in the mid- 1990s, the Archeological Assistance Division and Anthropology Division were merged into a new unit—the Archeology and Ethnography Program—under the Departmental Consulting Archeologist, who then conducted both activities until 2000. In 2000, due to concerns voiced by NAGPRA practitioners over a conflict of interest between NPS’s facilitation of governmentwide NAGPRA implementation and its own NAGPRA compliance, the Director of NPS split these functions by creating a National NAGPRA office to handle the facilitation of NAGPRA governmentwide and a Park NAGPRA office to handle NPS compliance with the act. However, the two offices still reported to the Associate Director for Cultural Resources. New staff were brought in for National NAGPRA; the Departmental Consulting Archeologist continued to lead Park NAGPRA efforts and both NAGPRA programs reported to the manager of the Center for Cultural Resources, under the Associate Director for Cultural Resources. Additional changes were made in 2004 due to continued concerns about the two offices reporting to the same manager under the Associate Director for Cultural Resources. The Secretary removed Park NAGPRA from the Cultural Resources Program and placed it within the Office of Indian Affairs and American Culture in NPS’s Intermountain Region; this office then reported to the Regional Director. In addition to being organizationally moved, Park NAGPRA was physically moved from Washington, D.C., to the Intermountain Region located in Denver, Colorado. National NAGPRA was removed from the Center for Cultural Resources and placed directly under the Associate Director for Cultural Resources, but it remained in Washington, D.C. As a result of these changes, the Departmental Consulting Archeologist and the Archeology Program, as it is currently known, no longer has any NAGPRA responsibilities. National NAGPRA operates a grants program established by section 10 of NAGPRA that amounts to about $2 million per year. The grants are for two purposes—consultation and repatriation. Consultation grants are competitively awarded to Indian tribes, Native Hawaiian organizations, and museums to consult and document human remains and objects. They are not awarded for activities related to excavations or inadvertent discoveries under section 3 of NAGPRA, cultural items in the control of a foreign institution, or activities associated with the Smithsonian Institution, among other things. For fiscal year 2010, consultation grant awards can range from $5,000 to $90,000. National NAGPRA issues an annual call for consultation grants that provides a deadline for applications. In contrast, repatriation grants are non-competitive and are awarded to defray the expenses associated with repatriating human remains and objects, such as the packaging, transportation, and documenting the condition and treatment history of cultural items to mitigate potential health risks. Applications for repatriation grants are accepted on a rolling basis year round. Once received, National NAGPRA staff review the applications for consultation and repatriation grants to ensure they meet the eligibility requirements. For consultation grants, a panel, selected by National NAGPRA and consisting of federal government employees familiar with repatriation issues, reviews and scores grant applications and provides recommendations on which grants to award. The Assistant Secretary of Fish, Wildlife, and Parks ultimately makes the award decisions. According to the National NAGPRA Program Manager, consultation and repatriation grants are neither available to federal agencies nor to Indian tribes or Native Hawaiian organizations seeking to consult with and repatriate items from federal agencies. In accordance with NAGPRA’s implementing regulations, National NAGPRA has developed a list of Indian tribes and Native Hawaiian organizations for the purposes of carrying out the act. The list is comprised of federally recognized tribes, Native Hawaiian organizations, and, at various points in the last 20 years, corporations established pursuant to the Alaska Native Claims Settlement Act (ANCSA). The term “recognize” means the federal government acknowledges that a particular Native American group is a tribe by conferring specific legal status on that group, establishing a government-to-government relationship between the United States and the tribe, imposing on the government a fiduciary trust relationship to the tribe and its members and imposing specific obligations on the federal government to provide benefits and services to the tribe and its members. National NAGPRA’s list has evolved over time as additional tribes have either been granted federal recognition or had their federal recognition restored. Since NAGPRA was enacted, 28 Indian tribes have been newly recognized or restored (see app. II). In addition, hundreds of Indian groups that are currently not federally recognized have expressed an interest to BIA in seeking federal recognition. Since the enactment of two recognition laws in 1994, BIA has regularly published a comprehensive list of recognized tribes—commonly referred to as the list of federally recognized tribes—that federal agencies are supposed to use to identify federally recognized tribes. As of August 11, 2009, there were 564 federally recognized tribal entities—339 in the continental United States and 225 in Alaska—recognized and eligible for funding and services from BIA by virtue of their status as Indian tribes. Indian groups not included in the list are commonly referred to as “non-federally recognized tribes.” The recognition of Alaska Native entities eligible for the special programs and services provided by the United States to Indians because of their status as Indians has been controversial. Since a 1993 legal opinion by the Solicitor of the Department of the Interior, BIA’s list of federally recognized tribes has not included any ANCSA group, regional, urban, and village corporations. These corporations, chartered under state law, were the vehicle for distributing land and monetary benefits to Alaska Natives to provide a fair and just settlement of aboriginal land claims in Alaska. ANCSA defined Alaska Native villages by referring to the lists of villages contained in sections 11 and 16 of ANCSA. ANCSA required the Secretary of the Interior to review the section 11 list and add or delete villages that did not meet specified requirements. The Secretary’s review produced a so-called modified list, which included Alaska Native villages defined in or established under section 11 of ANCSA and the villages listed in section 16. Interior’s Solicitor has noted that a number of post-ANCSA statutes have included Alaska Native villages within their definition of Indian tribe by reference to the ANCSA definition of Native village and that these references are to this modified ANCSA list. While the eight key federal agencies we reviewed generally prepared their summaries and inventories by the statutory deadlines, the amount of work put into identifying their NAGPRA items and the quality of the documents prepared varied widely. For some of the human remains and associated funerary objects that these eight key federal agencies, along with other federal agencies, have culturally affiliated, they have published notices of inventory completion, although some notices have encountered delays. In addition, not all of the culturally affiliated human remains and associated funerary objects have been published in a Federal Register notice as required. Officials for the eight agencies also identified challenges that they faced complying with NAGPRA, which included lack of funding and staff only working on NAGPRA compliance for historical collections as a collateral duty. While federal agencies compiled hundreds of summaries and inventories, generally by the statutory deadlines, the amount of work conducted and the quality of the documents prepared varied widely and in some cases did not provide reasonable assurance of compliance with the act. When NAGPRA was enacted, the task facing each federal agency varied depending on several factors, including the size of their historical collections, the extent of centralized records in existence for their collections and institutional knowledge of repositories in possession of their collections, how dispersed their collections were both geographically and among different repositories, and each agency’s structure, staffing, and resources available for cultural resources management. For most agencies, the task of identifying their NAGPRA items within the larger universe of their historical collections was complicated by long- standing challenges with the curation and management of their archeological collections. For example, in 1981, we reported that Interior’s efforts to guide and coordinate many federal archeological activities were characterized by “disorder, confusion, and controversy.” More recently, a December 2009 report by Interior’s Office of Inspector General described similar deficiencies with the management of Interior’s museum collections (including NAGPRA items) and stated that Interior is failing to fulfill its stewardship responsibilities over museum collections, which are second in size only to the Smithsonian Institution. The Inspector General report noted that for fiscal year 2007, 53 percent of Interior’s museum collections, or 78 million objects, were not catalogued, and that Interior “had little idea” what collections non-Interior repositories held. Officials at several of the eight agencies that we focused on during our review said NAGPRA compliance involved a large amount of work and because they had different levels of resources to expend, they took varied approaches to meet the act’s requirements for their historical collections. Of these eight agencies, the Corps, the Forest Service, and NPS did the most extensive work to identify their NAGPRA items, and therefore they have the highest confidence level that they have identified all of them and included them in summaries and inventories (see table 3). In contrast, relative to the top three agencies, BLM, BOR, and FWS were moderately successful in identifying their items and including them in summaries and inventories, and BIA and TVA have done the least amount of work. As a result, these five agencies have less confidence that they have identified all of their NAGPRA items and included them in summaries and inventories. While some agencies have done more than others to comply with the requirements of the act, it does not appear that any of the eight agencies we reviewed are in full compliance. The act and its implementing regulations did not provide a specific list of activities or actions that federal agencies and museums had to take in order to identify their NAGPRA items. However, the act clearly stated that the summaries and inventories had to contain the NAGPRA items each agency or museum was in possession or control of. We believe that without conducting a level of activities that would provide a federal agency with a reasonable assurance that the summaries and inventories were complete, federal agencies cannot be confident that they have complied with NAGPRA’s inventory and summary requirements. Even those agencies that have done the most work acknowledge that they still have some individual units that have more work to do. For example, the Corps reports that as of the end of fiscal year 2009 the Louisville, Nashville, Mobile, and Tulsa Districts have not yet produced their inventories. Additionally, some agencies said they do not know exactly how much work is left in order to be confident that they have identified all of their NAGPRA items. In addition to the completeness of agency summaries and inventories, we found that two other important requirements affecting the quality of these documents—consultations with Indian tribes and Native Hawaiian organizations and the establishment of cultural affiliations—were also lacking in some instances. We found that the confusion over when consultations should occur and when cultural affiliations should be established appeared to be rooted in the confusion among some NAGPRA practitioners about the differences between summaries and inventories. Specifically, summaries described collections, and consultation was to occur after the summary document was prepared; and cultural affiliations were to be included in summaries where readily ascertainable. In contrast, inventories were item-by-item descriptions, consultation was to occur before the inventory document was completed, and cultural affiliations were to be made to the extent possible. However, we found examples where agency officials treated inventories like summaries in that the consultation occurred and cultural affiliation determinations were made after the preparation of the inventory. Also, several tribal officials stated that the frequency and thoroughness of consultations throughout the NAGPRA process for historical collections varied widely depending on the agency and agency personnel involved. However, agency officials also reported challenges in consulting with tribes, such as certain tribes not wanting to attach any cultural affiliations to NAGPRA items because of deeply-held spiritual beliefs. If agencies did not perform these initial critical steps to fully identify and disclose the NAGPRA items that they have in their historical collections, the repatriation process cannot move forward. According to information from National NAGPRA’s database, as of September 30, 2009, 16,302 Native American human remains, or 55 percent of all the Native American human remains inventoried by agencies, had been published in notices of inventory completion and 13,519 had been listed in inventories for federal collections as culturally unidentifiable (see table 4). Of the associated funerary objects inventoried by federal agencies, 193,324 objects, or 74 percent, had been published in a notice of inventory completion and 66,918 had been listed as culturally unidentifiable. However, we found that in some cases the publication of these notices encountered significant delays. When agencies made cultural affiliation determinations for Native American human remains and associated funerary objects listed in their inventories, they were required to notify the affiliated Indian tribe(s) or Native Hawaiian organization(s) within 6 months and at the same time submit a copy of the notice to National NAGPRA for publication in the Federal Register. NAGPRA and its implementing regulations do not contain a deadline for when the notice actually had to be published. If a notice of inventory completion is published and later is found to be inaccurate or new information emerges, agencies are to work with National NAGPRA to publish a correction notice. Through fiscal year 2009, federal agencies had published 309 notices of inventory completion and 28 corrections (see fig. 1). According to agency officials and National NAGPRA, several reasons contributed to the delays in publishing notices of inventory completion. First, during its review process National NAGPRA determined that some inventories had not been properly prepared and, as a result, agencies had prepared improper draft notices. For example, one improperly prepared draft notice included unassociated funerary objects, which are to be included in summaries and notices of intent to repatriate. This may have been partly because the regulation for the inventory process was not finalized until December 4, 1995, after the deadline for preparing inventories had passed. National NAGPRA officials said they returned improperly prepared draft notices to the agencies. A second reason for delays in publishing notices, according to some agency officials, was the highly complex nature of their consultations with the tribes, which resulted in the agencies needing additional time to finalize their cultural affiliations before publishing their notices. Third, some agencies treated inventories like summaries and waited for a culturally affiliated entity to request repatriation before submitting a notice for publication. Fourth, some agencies relied on non-federal repositories (such as universities and museums) that held their historical collections to compile the summary and inventory documents and submit them directly to National NAGPRA. According to one former National NAGPRA official, in one case the P.A. Hearst Museum at the University of California, Berkeley was granted an extension to the 5-year deadline for compiling inventories for their own collections, and some agencies believed that this extension also applied to their federal collections held by the museum. Additionally, we found that a number of federal agencies have not fully complied with NAGPRA’s requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register, thereby complicating efforts of Indian tribes or Native Hawaiian organizations to make repatriation requests for those items (see table 5). Agency officials provided several reasons for their lack of compliance with this requirement. For example, TVA staff stated that, because of personnel turnover and poor communication—with a repository and with National NAGPRA in the 1990s—320 human remains preliminarily culturally affiliated to the Creek and Cherokee tribes have not yet been published in notices. In addition, an official at BOR’s Great Plains Regional Office stated that, even though the office had listed culturally affiliated human remains in its inventory, National NAGPRA rejected the inventory in the 1990s because it was not properly formatted. The BOR official stated that resources have not been available to revise the inventory and publish the required notices. National NAGPRA and the Makah Indian tribe, with the National Association of Tribal Historic Preservation Officers, have conducted studies to identify culturally affiliated human remains and associated funerary objects listed in agency NAGPRA inventories but for which no notices of inventory completion have been published. However, our analysis has shown that none of these studies has been comprehensive and complete. National NAGPRA is currently in the process of reconciling all the inventories submitted with its electronic database in order to determine which culturally affiliated human remains and associated funerary objects have not been included in a notice of inventory completion. Program officials expect this effort to be completed by October 2010. Until federal agencies have published notices of inventory completion in the Federal Register for culturally affiliated human remains and associated funerary objects that they have listed in inventories, items cannot be repatriated according to the provisions of NAGPRA. Although National NAGPRA will have more information on the level of compliance by federal agencies from the reconciliation of data, this may not lead to improved compliance because NAGPRA and its implementing regulations do not provide National NAGPRA or any other federal office with authority to ensure federal agency compliance with the act. See appendix III for a discussion of NAGPRA enforcement. Officials with the eight agencies that we reviewed identified a number of challenges that their agencies have faced in complying with NAGPRA. First and foremost, officials at all of the eight key federal agencies that we spoke with and a December 2009 Interior Inspector General report all noted that the lack of funding is one of the most significant challenges to complying with NAGPRA. Officials noted that without funding, their cultural resources management programs have not been adequately staffed to comply with NAGPRA. For example, BIA has one curator for the estimated 5.7 million items in its collections across the entire agency, and FWS’s Service Archaeologist estimated that it would cost $35 million and take 28 years to properly review all of FWS’s historical collections for NAGPRA items. Second, NAGPRA compliance for historical collections is generally a collateral duty among all the other tasks that agency cultural resource staff must perform, including section 3 NAGPRA responsibilities for new intentional excavations and inadvertent discoveries. Officials at almost all of the eight agencies we reviewed confirmed that compliance with sections 5 and 6 of NAGPRA for historical collections is a collateral duty for most federal agency staff that work in this area. For example, BLM staff stated that their state archaeologists prioritize compliance with section 3 of NAGPRA, section 106 of the National Historic Preservation Act, and the National Environmental Policy Act. Even the national-level NAGPRA coordination staff at many agencies, such as BLM, BOR, FWS, and BIA, told us that they do not spend the majority of their time on NAGPRA compliance. Third, as discussed earlier, poor curation practices by agencies and repositories, in general, along with poor historical records and documentation, have also made NAGPRA compliance a challenge. To fulfill its responsibilities under NAGPRA, the Review Committee has monitored federal agency and museum compliance, made recommendations to improve implementation, and assisted the Secretary in the development of regulations. While the Review Committee’s recommendations to facilitate the resolution of disposition requests involving culturally unidentifiable human remains have generally been implemented, recommendations to facilitate the resolution of disputes over the disposition of NAGPRA items have generally not been fully implemented. Moreover, some actions recommended by the Committee have exceeded NAGPRA’s scope and, until recently, letters from the Designated Federal Officer informing parties of the Committee’s recommendations did not clearly indicate whether the Secretary of the Interior had concurred with the Committee’s recommendations after an independent assessment of the disposition request. In addition, the Review Committee has faced a number of challenges, in trying to effectively fulfill its role under the act. As part of its role in implementing NAGPRA, the Review Committee has (1) undertaken various activities, such as monitoring compliance with the act; (2) made recommendations on the disposition of culturally unidentifiable human remains; and (3) made recommendations on disputes. The Review Committee has undertaken various activities and provided information and advice to the Secretary and Congress on a wide range of NAGPRA issues: Monitoring compliance. Since its first meeting in 1992, the Review Committee has monitored agency and museum efforts to comply with NAGPRA using data provided by National NAGPRA and from status reports presented by agency, museum, and tribal representatives at Review Committee meetings. National NAGPRA has provided periodic information to the Review Committee on the quantity of agency and museum submissions of summaries, inventories, and publications in the Federal Register. Also in two meetings in the late 1990s, the Review Committee heard reports from representatives of more than 13 federal departments and agencies about their efforts to comply with NAGPRA’s requirements, consult with Indian tribes, and determine the cultural affiliation of human remains and objects. Officials from some agencies and museums, including NPS and the Forest Service have also regularly attended Review Committee meetings and provided updates on their efforts. The Review Committee has used this information in its annual reports to Congress and has noted that federal agency efforts to comply with NAGPRA have been uneven, complex to measure, and lacking in transparency. Making recommendations to Congress. In its annual reports to Congress, the Review Committee has recommended several amendments to NAGPRA but none have been enacted to date. For example, first, in its annual reports covering 2002 through 2008, the Review Committee recommended that Congress amend the definition of the term “Native American” to add the words “or was” so that the definition would read: “Native American means of, or relating to, a tribe, people or culture that is, or was, indigenous to the United States.” The members wanted this change made in response to a court case. While legislation has been introduced that would make this change, it has not yet been enacted. Similarly, in its annual reports to Congress covering 1995 through 2001, the Review Committee recommended that Congress amend NAGPRA to include language that would protect Native graves on state or private lands from grave robbing and destructive activities. An amendment adding this language to NAGPRA has not yet been enacted. Finally, to help eliminate some of the barriers to NAGPRA implementation, the Review Committee has made recommendations to Congress about appropriating funding for federal agencies, Indian tribes, Native Hawaiian organizations, and museums to implement the act’s requirements. Assisting in the development of regulations. The Review Committee has assisted in developing regulations to implement NAGPRA. In its early years, the Review Committee, in conjunction with Interior’s Office of the Solicitor spent substantial amounts of time developing the main rule. After assisting with the main rule, in 1997, the Review Committee turned its attention to providing input into the rule addressing the disposition of culturally unidentifiable human remains (see app. IV for a discussion of this rule), and in 2002 to the rules addressing civil penalties for noncompliant museums, and the future applicability rule for newly recognized tribes and other situations. Through fiscal year 2009, the Review Committee has made recommendations to the Secretary on 61 disposition requests for culturally unidentifiable human remains. We found that 52, or about 85 percent, of the Committee’s disposition recommendations had been fully implemented by the parties after the Secretary concurred with the Committee’s recommendation. Of the remaining 9 disposition recommendations, 3 have been partially implemented, 3 have been not implemented, and the status of 3 is unknown (see table 6). Twenty-two of the 61 requests involved federal agencies, and 19 of the 22, were fully implemented. Parties generally agreed in advance to their preferred manner of disposition and, in accordance with the regulations, came to the Review Committee to complete the process and obtain a final recommendation from the Secretary. The two most common recommendations made by the Review Committee were (1) disposition to a federally recognized tribe or group of tribes and (2) the need for additional consultation or documentation. In reviewing the recommendations made by the Review Committee, we noted that some of the actions recommended by the Review Committee were outside the scope of NAGPRA (see table 7). These recommendations were made prior to the new regulation on the disposition of culturally unidentifiable human remains. We found that the Review Committee recommended actions that fell outside the scope of NAGPRA for four primary reasons: Committee members were acting in accordance with the Review Committee’s principles of agreement, which outline the criteria that members are to use when considering requests for disposition of culturally unidentifiable human remains. According to former Review Committee members we spoke with, the principles of agreement stated that appropriate repatriation solutions included the return of human remains that were culturally unidentifiable for which there was a shared group identity with a non-federally recognized Indian group. The Review Committee had concluded that NAGPRA intended and did not prohibit funerary objects associated with culturally unidentifiable human remains from being repatriated. In instances where human remains were deemed culturally unidentifiable because they were culturally affiliated to non-federally recognized Indian groups, Review Committee members believed that it would be scientifically dishonest to recommend disposition to Native Americans not culturally affiliated with the human remains, thus they recommended dispositions to non-recognized Indian groups. Review Committee members recommended disposition of objects accompanying culturally unidentifiable human remains because they had heard from tribal representatives that it was culturally unacceptable to separate human remains from the objects buried with them. Some members lacked strong knowledge of the complexities of the law. Although attorneys with Interior’s Office of the Solicitor attend Review Committee meetings and provide legal advice, one attorney stated that the Solicitor’s Office allowed Review Committee members wide leeway with regard to their recommendations because the Committee’s recommendations are not binding. Nevertheless, we found that the Review Committee has not recommended dispositions to a non-federally recognized Indian group since 2001, and the Review Committee, National NAGPRA, and Interior officials have generally addressed the issue of the Review Committee recommending actions that are outside the scope of NAGPRA. First, for the culturally unidentifiable associated funerary objects, since 2008, letters from the Designated Federal Officer to the affected parties informing them of the Review Committee’s recommendations have included the stipulation that NAGPRA does not authorize disposition of these objects. The letters state that a federal agency or museum may choose to repatriate such objects under other authorities they may have. Under the recently issued rule on the disposition of culturally unidentifiable human remains, agencies may repatriate these objects if state or federal law does not preclude it. Further, an attorney with Interior’s Office of the Solicitor reported advising the Review Committee of this in the late 1990s. Second, according to National NAGPRA officials, since the fall of 2008, the Designated Federal Officer has requested that all parties seeking Review Committee consideration describe the issue that they wish to present. The officer reports using this information to help determine what type of issue is being presented and whether the issue is outside the scope of NAGPRA and therefore ineligible for consideration. In addition, with regard to tribal coalitions, attorneys with Interior’s Office of the Solicitor told us that they believe NAGPRA authorizes repatriations to coalitions of tribes as long as agency or museum records indicate that actual repatriation was made to a federally recognized tribe. We also found that, through January 2007, letters from the Review Committee’s Designated Federal Officer to the parties receiving a recommendation did not clearly indicate whether the Secretary of the Interior’s recommendation was the result of an independent assessment of the facts, NAGPRA, and the Review Committee’s recommendations. The importance of whether the Secretary’s recommendation is the result of Interior’s independent assessment of the request is two-fold. First, the Review Committee is advisory and its recommendations cannot bind the Department or the parties. Second, NAGPRA regulations require that agencies and museums retain possession of culturally unidentifiable human remains pending promulgation of an applicable regulation, unless legally required to do otherwise, or recommended to do otherwise by the Secretary. An attorney with Interior’s Office of the Solicitor confirmed to us that the Secretary’s recommendation reflects Interior’s independent assessment of the disposition requests for culturally unidentifiable human remains, and the Review Committee’s recommendations. However, we found that letters sent between 1994 and January 2007 did not clearly state that the Secretary had considered the facts or whether the Secretary had independently assessed the requests in concurring with the Review Committee recommendation. Letters sent since January 2007 have clarified the Secretary’s independent assessment of and concurrence with the Review Committee’s recommendations and in two cases stated that Interior disagreed in part with the Review Committee’s recommendation and did not recommend disposition. In contrast to the amicable nature of disposition requests, disputes are generally contentious and the Review Committee’s recommendations have had a low implementation rate. Through the end of fiscal year 2009, the Review Committee had considered 12 disputes brought by Indian tribes and Native Hawaiian organizations—three against federal agencies and nine against museums. We found agencies and museums usually did not implement some elements of the recommendations in disputes. In particular, the Review Committee recommended four times that agencies and museums revise the cultural affiliation of human remains or the classification of objects, but these recommendations were never implemented. Of the 12 disputes that we reviewed, the Review Committee’s recommendations were fully implemented for 1 dispute, partially implemented in 3 others, not implemented for 5, and the status of 3 cases is unknown. Furthermore, three of these cases have resulted in lawsuits, which further illustrates the Review Committee’s difficulties in fulfilling its statutory responsibility to facilitate the resolution of disputes. See appendix V for more information on the status of the Review Committee’s recommendations on the 12 disputes. According to officials of museums and scientific organizations, the Review Committee and its annual reports, the Committee has faced a number of challenges in fulfilling its NAGPRA responsibilities. These challenges fall into the following four categories: Perception that the Review Committee favors tribal interests. Officials from museums and scientific organizations and some Committee members themselves that we spoke with said that the Review Committee favors tribal interests over the interests of the museum and scientific community. This has led some to question the Committee’s objectivity. One official representing a museum that had previously been a party to a dispute considered by the Review Committee stated that she considered engaging with the Committee as one of the least preferred methods to achieve resolution on NAGPRA issues because of the perceived lack of balance. At the same time, some Committee members told us that the Review Committee acknowledges there may be some bias and regarded it as understandable because they believe the intent of NAGPRA was to serve Native American interests and overcome years of bias against tribal interests by museums and scientific organizations. Regardless, the issue of the Review Committee’s actual and perceived objectivity is a concern because it could impact the Review Committee’s ability to carry out its responsibilities. We have previously reported that to be effective, federal advisory committees must be—and, just as importantly, be perceived as— independent and balanced as a whole. If federal agencies and museums perceive the Review Committee as lacking objectivity and heavily favoring tribal interests, they may disengage from the process. Lack of data on federal agency compliance. In its annual reports to Congress from 2006 through 2009, the Review Committee has cited the lack of data on federal agency compliance as a significant challenge. From 2006 through 2009, the Review Committee regularly reported that the lack of data prevented it from assessing whether required consultations between Indian tribes and federal agencies were taking place. Further, in its annual report covering 2008, the Review Committee requested that Congress hold open hearings for agencies, as well as museums and tribes to provide the Review Committee and other stakeholders with more information on the challenges that NAGPRA practitioners have encountered. National NAGPRA officials noted that in addition to the biennial reports provided to the Review Committee on the status of NAGPRA compliance, National NAGPRA also produced a 2006 report on the status of Native American human remains in the control of federal agencies. Limited resources. According to annual reports prepared by the Review Committee and Committee members that we spoke with, the Committee lacks the resources it needs to effectively fulfill its responsibilities under NAGPRA. According to these sources, the Committee’s travel budget only allows it to hold two face-to-face meetings per year; therefore, it is unable to devote the attention needed to adequately cover all the agenda items. Two Review Committee members also told us that given their busy schedules, they have limited time to review particularly voluminous documents for disposition requests and disputes. Lack of administrative support provided by National NAGPRA. Several current and former Review Committee members expressed dissatisfaction with the level of administrative support provided by National NAGPRA to the Committee. For example, some stated that National NAGPRA did not provide Review Committee members briefing packets in a timely manner. These materials are essential for the proper preparation of meeting activities, particularly for complex disputes and disposition requests. National NAGPRA officials stated that they make efforts to provide the materials at least 15 days prior to the meeting. To accomplish this, they request that parties provide documents to National NAGPRA 30 days in advance, but, in some cases, presenters have come to the meetings with additional information that must then be provided to Committee members. In addition, two Committee members stated that in the past, National NAGPRA has been slow to reimburse the cost of travel to meetings, which has placed a financial burden on members. National NAGPRA has taken several actions to help the Secretary carry out responsibilities under NAGPRA. Overall, while most of the actions performed by National NAGPRA were consistent with the act, we did identify concerns with a few actions. Specifically, National NAGPRA has promulgated a number of regulations to implement NAGPRA, but failed to meet the statutory deadline for promulgation. In addition, National NAGPRA has developed a list of Indian tribes for the purposes of carrying out NAGPRA, but at various point in the last 20 years the list has not been consistent with BIA’s policy or a Solicitor legal opinion analyzing the status of Alaska Native villages as Indian tribes. Also, National NAGPRA has not always properly screened nominations for the Review Committee and, in 2004, 2005, and 2006, inappropriately recruited nominees for the Review Committee and, in one case, recommended the nominee to the Secretary for appointment. National NAGPRA has taken a number of actions that are consistent with the act. For example, National NAGPRA has published federal agency and museum notices in the Federal Register; increasing this number in recent years while reducing a backlog of notices awaiting publication. Furthermore, it has administered a NAGPRA grants program that from fiscal years 1994 through 2009 has resulted in 628 grants awarded to Indian tribes, Native Hawaiian organizations, and museums totaling $33 million. Other actions include the development of publicly available databases and providing training and educations materials to NAGPRA practitioners. See appendix VI for more details on these activities. National NAGPRA, primarily through the Review Committee’s Designated Federal Officer, has also assisted the Review Committee in several areas such as developing meeting agendas in concert with the Review Committee Chair and maintaining a list of culturally unidentifiable human remains. To assist parties that wish to bring issues before the Review Committee, National NAGPRA staff have produced templates for needed documents that, according to agency officials, help the parties organize materials for the review, focus presentations before the Review Committee, and simplify committee actions. Other activities have included publishing Federal Register notices of upcoming Review Committee meetings, issuing letters conveying Review Committee recommendations to affected parties, and providing logistical support to Review Committee members, such as reimbursing their travel expenses to attend Review Committee meetings. National NAGPRA has also administered the nomination process for Review Committee members. We have concerns with (1) the time frames in which the regulations have been promulgated and the inclusion of ANCSA corporations as Indian tribes in National NAGPRA’s list of Indian tribes for the purposes of carrying out NAGPRA at various points in the last 20 years, and (2) the screening of Review Committee nominations and questionable recruiting practices. As shown in table 8, National NAGPRA has promulgated regulations to implement NAGPRA in four main sections. While section 13 of NAGPRA required the Secretary to promulgate regulations within 12 months of the law’s enactment, the main body of the regulations was not published in final form until December 4, 1995; several years after the statutory deadline. Also, the regulations were not effective until January 3, 1996, which was after the 1993 and 1995 deadlines for the completion of summaries and inventories, respectively. In addition, National NAGPRA must still promulgate regulations for two remaining sections—disposition of unclaimed human remains, funerary objects, sacred objects, or objects of cultural patrimony (section 10.7) and failure to claim where no repatriation or disposition has occurred (section 10.15(b)). Furthermore, according to agency officials, National NAGPRA plans to revisit the NAGPRA regulations in their entirety, opening them up for public comment. However, the officials could not provide us with specific dates for when these additional rulemaking activities would occur. In accordance with the regulations, National NAGPRA developed a list of Indian tribes for the purposes of carrying out NAGPRA that includes federally recognized tribes and, at various point in the last 20 years, ANCSA corporations. National NAGPRA’s inclusion of ANCSA corporations in its list of Indian tribes does not appear to be consistent with Interior’s legal and policy positions regarding the status of Alaska Native villages and ANCSA corporations. Specifically, the inconsistency stems from the inclusion of village, regional, group, and urban corporations established pursuant to ANCSA that are not on BIA’s list of federally recognized Indian tribes or the modified ANCSA list of Alaska Native villages. NAGPRA’s enactment and National NAGPRA’s original development of the list of Indian tribes for the purpose of carrying out NAGPRA coincided with an ongoing debate within Interior about the status of ANCSA corporations. Although BIA currently does not recognize any of the ANCSA corporations as eligible for the special programs and services provided by the United States to Indians because of their status as Indians, at various times they have been included in BIA’s list of federally recognized tribes. For example, in 1982—the first time Alaska Native entities were included in the BIA list—the ANCSA corporations were excluded because they are not governments. However, the 1988 BIA list included ANCSA corporations, raising a number of questions with respect to the effects of the list, as BIA later recognized. After a 1993 legal opinion by the Solicitor that concluded that ANCSA corporations do not qualify as Indian tribes for the purposes of federal law, BIA published a revised list in 1993 that did not include any ANCSA corporations. Subsequent lists also have not included ANCSA corporations. Accordingly, BIA has not recognized and does not treat ANCSA corporations as federally recognized tribes. Moreover, none of the ANCSA corporations are included in the modified ANCSA list of Alaska Native villages. The Solicitor has noted that a number of post-ANCSA statutes, such as NAGPRA, have included Alaska Native villages within their definition of Indian tribe by reference to the ANCSA definition of Native village and that these references are to this modified ANCSA list. Therefore, the inclusion of ANCSA corporations in National NAGPRA’s list is at odds with the Solicitor’s legal position that the Alaska Native villages on the modified ANCSA list are Indian tribes for purposes of federal law. Under this interpretation, the inclusion of Alaska Native villages in NAGPRA’s definition of Indian tribe refers to the villages on the modified ANCSA list that were subsequently included in BIA’s list of federally recognized tribes and not the ANCSA corporations. However, because National NAGPRA’s list of Indian tribes for purposes of carrying out NAGPRA has included ANCSA corporations, at various times over the past 20 years, the office as well as other federal agencies and museums, have considered them eligible to make nominations for Review Committee positions, receive NAGPRA grants, and request repatriation of NAGPRA items. We found that in its administration of the Review Committee nomination process, National NAGPRA has not always properly screened nominees to ensure that they were nominated by one of the required entities specified in NAGPRA. During the first several rounds of nominations, we found numerous instances of this. For example, in 1991, National NAGPRA forwarded to the Secretary the names of a number of nominees that were submitted by ineligible entities, such as individual university staff members, tribal consortia, a non-profit organization, and a federal agency official. We identified similar, albeit fewer, problems in the 1996 and 2000 nominating rounds. As a result of this improper screening, the Secretary has appointed members who were nominated by ineligible entities several times since 1991. National NAGPRA has taken steps to improve the screening process. For example, in its April 2002 Federal Register notice soliciting nominations, National NAGPRA included the requirements for both nominators and nominees and required submission of additional information with nominations. Specifically, the notice required (1) nominations submitted by Indian tribes or Native Hawaiian organizations to be signed by the leader of the tribe or organization and (2) that traditional religious leaders making nominations identify themselves as such. It also clearly stated that nominations from other individual tribal members could not be considered. Also, beginning in 2002, National NAGPRA began to confirm the status of Native American traditional religious leaders, both as nominators and nominees, by contacting both sources to verify this information. The June 2003 nomination notice further required that nominations from Indian tribes or museum and scientific organizations include a statement indicating that the official is authorized to make the nomination. Moreover, it required that nominations from traditional Native American religious leaders include a statement by the nominator that the nominee is a traditional Native American religious leader. The August 2006 nomination notice further required that the nominator explain how he or she meets the definition of traditional religious leader. Despite National NAGPRA’s efforts to improve the screening process, some issues still remain. For example, two nominees forwarded to the Secretary recently were nominated by ineligible individuals or entities. In the first case, an individual was nominated by a tribe’s director of cultural resources and the nomination letter did not include a statement that the director was authorized by the tribe to make the nomination. This individual was appointed by the Secretary and currently serves on the Review Committee. After we brought this issue to their attention, National NAGPRA officials contacted the tribe and obtained an official letter from the chairman of the tribe supporting the individual’s nomination. In the other case, a nomination was made by a non-federally recognized tribe. Interior officials confirmed that nominations must be submitted by a federally recognized tribe. Again, we alerted National NAGPRA to this issue, and officials responded that although the individual’s name was on the list sent to the Secretary, he was not actually considered because he was not eligible. In addition to its lack of adequate screening of nominating entities, National NAGPRA has also bypassed the nomination process by essentially making its own nominations. In one case in 2004, National NAGPRA actively recruited a nominee and the nominee accepted the offer 6 months after the deadline for submitting nominations had passed. National NAGPRA then sought and received permission from a nominating entity to use a 7-year-old nomination for the current nominating round even though the entity had already nominated a different individual in response to the solicitation. The Secretary appointed the individual recruited and recommended by National NAGPRA. According to an Interior official involved in this recruitment effort, National NAGPRA became involved in recruiting efforts because the Federal Register solicitations had garnered an inadequate pool of nominees, and some National NAGPRA officials believed that the Review Committee had become too weighted toward the interests of the museum and scientific communities and was seeking an individual more favorable to tribal interests. In addition to this case, we identified two other instances in 2005 and 2006 where National NAGPRA recruited nominees. Both were appointed to the Review Committee. The National NAGPRA Program Manager pointed out that in these latter two instances, the nominees initiated the contact and pursued the position. The lack of adequate screening and recruitment issues surrounding the nomination process has damaged the credibility of both National NAGPRA and the Review Committee and has contributed to the perception of a lack of objectivity cited by some museum officials and Review Committee members that we interviewed. For example, several Review Committee members said that the appointment process is not transparent and fair and some, referred to it as a “black box” because they are not aware of what happens to nominations once they are submitted to National NAGPRA. The National NAGPRA Program Manager clarified that current policy is to collect and forward all of the nomination submissions, to the NPS Policy Office and subsequently to the Secretary of the Interior for further review. According to agency data and our survey results, a total of 55 percent of human remains and 68 percent of associated funerary objects have been repatriated as of September 30, 2009. While agencies are required to permanently document their repatriations, they are not required to compile and report that information to anyone. Of the federal agencies that have published notices of inventory completion, only three have tracked and compiled agencywide data on their repatriations. These three agencies, however, along with other federal agencies that have published notices of inventory completion, do not regularly report comprehensive data on their repatriations to National NAGPRA, the Review Committee, or Congress. Agency officials identified several reasons why some human remains and associated funerary objects have not been repatriated, including a lack of a repatriation request from a culturally affiliated entity, repatriation requests from disputing parties, a lack of reburial sites, and a lack of financial resources to complete the repatriation. Federal agencies have also published 78 notices of intent to repatriate covering 34,234 unassociated funerary objects, sacred objects, or objects of cultural patrimony. Federal agencies reported repatriating 141,027 of the 209,626 NAGPRA items published in their notices of inventory completion, or 67 percent, as of the end of fiscal year 2009. The repatriation rates by agency ranged from 0 percent to 100 percent and they represent 55 percent of the human remains and 68 percent of the associated funerary objects in federal agencies’ notices of inventory completion, according to agency reported data and our survey results (see table 9). Of the eight key agencies we reviewed, the Forest Service and FWS had the lowest repatriation rates for human remains among the key agencies with published notices of inventory completion. In addition, through fiscal year 2009, TVA has not published any notices of inventory completion and as a result, it has not repatriated any Native American human remains or associated funerary objects. One of NAGPRA’s purposes was to set up a process by which federal agencies and museums receiving federal funds would inventory their holdings and work with culturally affiliated Indian tribes and Native Hawaiian organizations to repatriate certain Native American human remains and objects in their historical collections. However, as noted in the data above only three of the eight key agencies with significant historical collections presently consolidate agencywide data on the extent of their repatriations. In addition, as they are not required to do so, these agencies and others generally do not regularly report comprehensive repatriation data by notice to National NAGPRA, the Review Committee, or Congress. Therefore, policymakers do not have an overall sense of how federal agency repatriation of NAGPRA items is progressing. Similarly, Indian tribes and Native Hawaiian organizations do not have readily available information on which human remains and objects have been culturally affiliated with them but have not been repatriated. Regulations implementing NAGPRA require that federal agencies and museums must permanently document the content and recipients of all repatriations, but do not require museums and agencies to compile these data and make them available to the public or to National NAGPRA. Because neither National NAGPRA nor the Review Committee receive this information, they cannot include it in their annual reports. Without repatriation data, we believe that National NAGPRA, the Review Committee, and Congress are lacking valuable information on the progress of NAGPRA implementation toward the overall goal of returning control of human remains and objects to affiliated groups. The 2008 report on NAGPRA implementation by the Makah Indian tribe and the National Association of Tribal Historic Preservation Officers found that Congress has no means of periodically assessing the effectiveness of NAGPRA implementation. The report recommended that federal agencies and National NAGPRA compile information on all completed repatriations reported by agencies and that National NAGPRA develop a database to hold this information. National NAGPRA has started a “Culturally Affiliated Native American Inventories Database,” which is to provide a snapshot on the current status of human remains and associated funerary objects that have been culturally affiliated as a result of consultation with Indian tribes and Native Hawaiian organizations. National NAGPRA reports that all the human remains and objects that are eventually listed in this database should be represented in a notice of inventory completion. National NAGPRA reported that the database was 75 percent complete as of April 1, 2010, and expected it to be fully populated by summer 2010. Completion of the database would provide reports on the minimum number of individuals culturally affiliated but not yet in notices. Because data on completed repatriations of culturally affiliated remains and objects are already being documented by federal agencies, and National NAGPRA already tracks the number of human remains and objects listed in each notice, National NAGPRA staff told us that they could include the repatriation status of the items appearing in each inventory and notice in their database. National NAGPRA staff could collect voluntary repatriation data from all agencies to provide a consolidated report, but there were no specific plans or time frames for this. A total of 7,401 human remains and 61,198 associated funerary objects published in a notice of inventory completion had not been repatriated as of September 30, 2009. Repatriations did not occur for a variety of reasons. The most common reason that repatriations did not occur is that the culturally affiliated Indian tribe(s) or Native Hawaiian organization(s) did not make a request for the return of the human remains and associated funerary objects, according to agency NAGPRA program officials and our survey results. For example, Forest Service NAGPRA staff told us that the most significant challenge to repatriations has been the lack of requests from culturally affiliated entities. They noted that tribes are often not prepared to deal with repatriation for a variety of reasons. In some cases, Forest Service, NPS, and tribal officials told us that tribes lack cultural protocols to deal with NAGPRA, and specific cultural protocols and new ceremonies need to be developed before a request or transfer of human remains and objects can be made. Responses to our survey of 12 agencies to obtain the repatriation status of human remains and associated funerary objects included in 147 notices of inventory completion show that the lack of a request from culturally-affiliated Indian tribes and Native Hawaiian organizations has prevented repatriations of human remains in 25 percent of the cases. Another reason repatriations did not occur is because, in some cases, multiple competing repatriation requests were received, and the federal agency could not clearly determine which requesting party is the most appropriate. Section 7(e) of NAGPRA provides that in these situations the federal agency may retain the item until the requesting parties reach agreement on its disposition or the dispute is resolved under NAGPRA’s provisions or in court. For example, in a case involving human remains that represent approximately 1,400 individuals removed from the Tonto National Forest in Arizona, there is a disagreement among some of the culturally affiliated tribes over the place and manner of the final disposition of the human remains. According to the Forest Service, because this involves differing cultural views among culturally affiliated tribes, it is leaving the matter to the tribes to resolve. As a result, the repatriation cannot proceed until the disagreement is resolved. The availability of an acceptable burial site is also an important reason why some repatriations were not completed promptly. This has been challenging, in part, due to the federal agencies’ reburial policies on their lands, which have varied over time. Most of the key federal agencies that manage land where NAGPRA items were found currently have policies that allow the reburial of the remains and objects on the land they manage (see table 10). BOR does not allow reburial on land that it manages. Tribes have cited the lack of reburial sites as a challenge to repatriation. The lack of financial resources may also prevent or delay repatriations. Repatriations may involve a variety of expenses, including preparing a reburial site, transporting the items from their present location to the reburial site, access roads, grave markers and security measures, preparation of remains, and travel expenses of tribal officials involved with the reburial. For example, officials from the Confederated Tribes of the Umatilla Reservation said that funding for repatriation work is their largest challenge. They said that one of the few sources of relief is National NAGPRA grants, but that these grants are difficult to get. The Caddo Nation historic preservation staff also told us that their office relies on federal grants to carry out NAGPRA repatriation work and said more funding is needed. In their 2008 report on NAGPRA implementation, the Makah Indian tribe and the National Association of Tribal Historic Preservation Officers recommended Congress provide more funding at the federal and tribal levels. They found that many Indian tribes or Native Hawaiian organizations do not have resources for training or repatriation activities. As previously mentioned, the Review Committee has also recommended additional funding for the grant program. The National NAGPRA program has awarded an average of $53,893 annually in repatriation grants to Indian tribes and Native Hawaiian organizations. On average about six tribes per year receive these grants to help with expenses associated with repatriating NAGPRA items from museums. Repatriation grants are not available to tribes for repatriations from federal agencies, according to National NAGPRA staff. The key federal agencies that we reviewed had different policies on the extent to which they would fund repatriation expenses and reburial of items from their historical collections (see table 11). For example, the Corps’ policy includes a specific list of allowed expenditures, while BIA and FWS have no formal policy but will fund some expenses on a case-by-case basis. BOR will fund only tribal activities, such as consultation, that occur prior to repatriation. As of the end of fiscal year 2009, federal agencies had published 78 notices of intent to repatriate in the Federal Register covering 34,234 objects— unassociated funerary objects, sacred objects, or objects of cultural patrimony (see table 12). An agency official said that almost all of these repatriations will proceed because, in accordance with NAGPRA, the notices are based on the summaries, the agency already had consulted and culturally affiliated the items, and that an Indian tribe or Native Hawaiian organization had made a repatriation claim prior to the publication of the notice of intent to repatriate. In some cases, where multiple groups are affiliated with the items, the groups must reach consensus on who will receive the items before the repatriation can proceed. After passage of the act, many federal agencies faced a monumental task in trying to identify all of their NAGPRA items and culturally affiliating them, to the extent possible, within the statutory deadlines. The difficulty of the task was compounded at some agencies by overall poor management and oversight of their museum collections over the years. NAGPRA compliance was generally assigned to cultural resources staff as a collateral duty, and trying to resolve the status of an item that the agency may have had for over 100 years was frequently a low priority when weighed against more immediate deadlines. While the act authorizes the Secretary of the Interior to assess civil penalties against museums for noncompliance, no enforcement mechanism exists to ensure federal agency compliance except through litigation by private parties. Despite the fact that key federal agencies have now had almost 20 years to comply with the act, they still have not fully complied. Furthermore, it is difficult for policymakers to determine how much work the federal agencies have left to achieve full compliance because the agencies generally do not have an estimate of the remaining work nor their needs for staff and resources to complete their NAGPRA activities for their historical collections. In the cases where the federal agencies have completed inventories with culturally affiliated human remains and associated funerary items, much of the compliance work has already been accomplished. However, for a variety of reasons, over the years, the publication of notices of inventory completion for some of these items in the Federal Register did not occur. Until agencies publish notices of inventory completion for the remaining culturally affiliated human remains and associated funerary objects in the Federal Register, they cannot be repatriated. NAGPRA’s enactment and National NAGPRA’s original development of the list of Indian tribes for the purpose of carrying out NAGPRA coincided with an ongoing debate within Interior about the status of ANCSA corporations. However, Interior’s Solicitor has since clarified the status of the ANCSA corporations, and they are no longer on BIA’s list of federally recognized tribes. Accordingly, the rationale for National NAGPRA continuing to include them as Indian tribes for the purpose of carrying out NAGPRA is unclear. Because repatriation involves addressing both the interests of Native Americans who want the remains of their ancestors and their cultural and sacred objects returned to them and the scientific and research interests of museums, it is important that all sides continue to be fully engaged in the process and it is important that the Review Committee and National NAGPRA be viewed as objective, balanced, and fair. In setting up the Review Committee with three members nominated from each side, the act tried to balance the interests of Native Americans and museums. However, actions by National NAGPRA have fueled concerns about not only its but also the Review Committee’s objectivity and transparency, especially through the inappropriate interference in the nomination process and failing to ensure that all the nominations considered for appointment meet the act’s requirements. In addition, data on repatriations are not centrally tracked and reported or readily available to affected Indian tribes and Native Hawaiian organizations. As a result, neither National NAGPRA nor the Review Committee can report this information in their annual reports to Congress. Without this information, policymakers cannot assess the overall effectiveness of the act. Furthermore, not making this information readily accessible to Indian tribes and Native Hawaiian organizations is an impediment to repatriation because a list of published items not yet repatriated would allow tribes to easily identify items that have been affiliated to them and allow them to request more information and, in turn, perhaps request repatriation. We are making the following five recommendations to improve NAGPRA implementation: To enhance federal agency NAGPRA compliance, we recommend that the Secretaries of Agriculture, Defense, and the Interior, and the Chief Executive Officer of the Tennessee Valley Authority direct their cultural resource management programs to develop and provide to Congress a needs assessment listing specific actions, resources, and time needed to complete the inventories and summaries required by NAGPRA sections 5 and 6 for their historical collections; and a timetable for the expeditious publication in the Federal Register of notices of inventory completion for all remaining Native American human remains and associated funerary objects that have been culturally affiliated in inventories. To clarify which entities are eligible under NAGPRA, we recommend that National NAGPRA, in conjunction with Interior’s Office of the Solicitor, reassess whether ANCSA corporations should be considered as eligible entities for the purposes of carrying out NAGPRA given the Solicitor’s opinion and BIA policy concerning the status of ANCSA corporations. To improve the confidence in the Review Committee and its support among NAGPRA practitioners, we recommend the Secretary of the Interior direct National NAGPRA to strictly adhere to the nomination process prescribed in the act and, working with Interior’s Office of the Solicitor as appropriate, ensure that all Review Committee nominations are properly screened to confirm that the nominees and nominating entities meet statutory requirements. To provide policymakers with information to assess the overall effectiveness of the act and to provide Indian tribes and Native Hawaiian organizations readily accessible information on items that are available for repatriation, we recommend that the Secretaries of Agriculture, Defense, the Interior, and the Chief Executive Officer of the Tennessee Valley Authority direct their cultural resource management programs to report their repatriation data to National NAGPRA on a regular basis, but no less than annually, for each notice of inventory completion they have or will publish. Furthermore, National NAGPRA should make this information readily available to Indian tribes and Native Hawaiian organizations and the Review Committee should publish the information in its annual report to Congress. We provided a draft of this report for review and comment to the Departments of Agriculture, Defense, and the Interior as well as TVA. In their written comments, officials from Agriculture’s U.S. Forest Service, Interior, and TVA agreed with the report’s conclusions and recommendations. Their written comments are reprinted in appendixes VII, VIII, and IX, respectively. Interior and TVA also provided technical comments, which we incorporated into the report as appropriate. The Department of Defense did not provide comments. Interior’s comments also included specific responses to each of the five recommendations in the report, and identified actions that it either has underway or will undertake in the future to implement four of the recommendations. However, regarding the recommendation involving ANCSA corporations specifically; Interior’s response did not reflect the long-standing nature of our concern. The definition of “Indian tribe” in the NAGPRA regulations published in 1995 included ANCSA corporations, even though Interior’s Solicitor and BIA had previously determined that the ANCSA corporations are not federally recognized tribes. Moreover, at various points in the past 20 years, ANCSA corporations have been included in National NAGPRA’s list of Indian tribes for the purposes of carrying out NAGPRA and have been treated as eligible to make nominations for the Review Committee, receive NAGPRA grants, and make repatriation requests and claims. For example, on October 27, 1997, National NAGPRA updated its list and ANCSA corporations were included in it. In addition, prior to that list’s publication, ANCSA corporations had made nominations for the Review Committee, received NAGPRA grants, and been the recipients of at least four separate repatriations. Following publication of the 1997 list, ANCSA corporations continued to make nominations for the Review Committee, receive NAGPRA grants, and have items repatriated to them. As of March 30, 2010, the list maintained by National NAGPRA did not contain ANCSA corporations but they were added in April 2010. After we discussed the issue with National NAGPRA and the Interior’s Office of the Solicitor, National NAGPRA removed the ANCSA corporations from the list in May 2010. However, a notice of inventory completion published on May 4, 2010, stated that repatriation of human remains to an ANCSA corporation would proceed unless other claimants came forward. To the extent that federal agencies and museums continue to treat ANCSA corporations as eligible “Indian tribes” for NAGPRA purposes, we believe that our recommendation remains valid. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Defense, and the Interior; the Chief Executive Officer of the Tennessee Valley Authority; and other interested parties. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix X. This appendix details the methods we used to examine the implementation of the Native American Graves Protection and Repatriation Act (NAGPRA). We were asked to determine: (1) the extent to which federal agencies have complied with NAGPRA’s requirements for their historical collections; (2) the activities taken by the Review Committee to fulfill its role under NAGPRA and what challenges, if any, it faces; (3) the actions taken by National NAGPRA to fulfill its responsibilities under NAGPRA; and (4) the extent to which federal agencies reported repatriating Native American human remains and objects. We examined NAGPRA implementation in detail for eight federal agencies with significant historical collections: the Department of the Interior’s Bureau of Indian Affairs (BIA), Bureau of Land Management (BLM), Bureau of Reclamation (BOR), U.S. Fish and Wildlife Service (FWS), and the National Park Service (NPS); the U.S. Army Corps of Engineers (Corps); the Department of Agriculture’s U.S. Forest Service; and the Tennessee Valley Authority (TVA). We reviewed NAGPRA and its implementing regulations in 43 C.F.R. Part 10 and the final rule on the disposition of culturally unidentified human remains published recently in the Federal Register. For each agency we reviewed records on NAGPRA compliance, such as inventories, summaries, Federal Register notices, consultations, and agreements with Indian tribes or Native Hawaiian organizations, collection records and repatriation forms or letters, other correspondence, agency databases, if any, and the National NAGPRA database and paper files. To check the reliability of the data on published notices in the National NAGPRA database (officially called “NAGPRA 20”), we compiled this data into one table and compared it to actual notices of inventory completion and notices of intent to repatriate published in the Federal Register. Of the 419 notices contained in the table we created using NAGPRA 20 data, we found a small number of data entry errors that we corrected. This data provides the basis for overall statistics on the program and the universe of notices for which we needed to seek repatriation data because not all of the agencies involved tracked and reported it. Considering that NAGPRA implementation happens at field locations around the country as well as at headquarters, we planned visits to some of these locations. We compiled a list of agency field locations with significant NAGPRA collections and activities. Based on these lists, we selected a judgmental sample of six areas for site visits that would allow us to visit as many of the key agencies as possible. Table 13 identifies the geographic areas and the levels of agency officials we met with in each location as well as tribal and museum officials. In total we met with the national-level NAGPRA coordination staffs for each of the eight key agencies in our review, as well as staff with NAGPRA responsibilities at either regional, state, district, local, or field levels for the key agencies, as applicable. Because we selected a judgmental sample of locations to visit, the information we obtained during these visits may not be generalized to all federal agencies and jurisdictions across the country. However, because we selected a variety of locations, the information we obtained at these locations provided us with a good perspective on the actual NAGPRA implementation efforts by federal agencies. During our review we interviewed officials from Indian tribes, tribal organizations, museums, and scientific organizations as well as current and former Review Committee members. During our interviews with these officials we asked questions regarding one or more of our objectives. During our review we maintained an open door policy and we accommodated any Indian tribe, museum, organization, or Review Committee member that wanted to meet with us or provide information in writing. As a result, our methodology was supplemented by meetings with additional Indian tribes, museums, and Review Committee members that approached us on an ad hoc basis. While we had specific discussion topics for each of these interviews related to one or more of our four objectives, we did not impose a limit on the topics that could be discussed. The interviews and visits for this review included: We interviewed officials from Indian tribes and tribal organizations either in conjunction with on our site visits, in Washington, D.C., or by telephone, including, the Caddo Nation of Oklahoma, the Four Southern Tribes (Gila River Indian Community of the Gila River Indian Reservation, Arizona; Salt River Pima-Maricopa Indian Community of the Salt River Reservation, Arizona; Ak-Chin Indian Community of the Maricopa (Ak Chin) Indian Reservation, Arizona; and Tohono O’odham Nation of Arizona), the Navajo Nation of Arizona, New Mexico and Utah; the Santa Clara Pueblo of New Mexico; Big Pine Band of Owens Valley Paiute Shoshone Indians of the Big Pine Reservation, California; Pyramid Lake Paiute Tribe of the Pyramid Lake Reservation, Nevada; Seneca Nation of New York; Confederated Tribes of the Umatilla Reservation, Oregon; and the Western Apache NAGPRA Working Group (San Carlos Apache Tribe of the San Carlos Reservation, Arizona; Tonto Apache Tribe of Arizona, White Mountain Apache Tribe of the Fort Apache Reservation, Arizona; and the Yavapai- Apache Nation of the Camp Verde Indian Reservation, Arizona); the Affiliated Tribes of Northwest Indians; the Inter Tribal Council of Arizona, Inc.; the Morning Star Institute; the Native Association of Tribal Historic Preservation Officers; and the Native American Rights Fund. We visited nonfederal entities (museums) serving as repositories for federal archeological collections in Illinois (Illinois State Museum), Tennessee (Frank H. McClung Museum at the University of Tennessee), and Arizona (Arizona State Museum at the University of Arizona in Tucson, Arizona). In addition, we interviewed other officials from museums and scientific organizations either in conjunction with our site visits, in Washington, D.C., or by telephone, including the American Museum of Natural History in New York, New York; the Field Museum in Chicago, Illinois; the Phoebe A. Hearst Museum of Anthropology at the University of California in Berkeley, California; the Peabody Museum of Archaeology and Ethnology at Harvard University in Cambridge, Massachusetts; the Heard Museum in Phoenix, Arizona; the American Association of Physical Anthropologists; and the Society for American Archeology. Since the focus of our report was on federal agencies’ implementation of NAGPRA, these interviews provided background information and we did not attempt to interview a representative sample of museum officials. We selected nine current and past members of the Review Committee for interviews through a network analysis based on four factors: (1) the entity that nominated them, (2) the length of their tenure on the Committee, (3) the period during which they served, and (4) whether they chaired the Committee. One of the selected members declined to be interviewed. We interviewed two additional members during the course of our review. Also related to all four of our objectives, we reviewed our prior reports on agency archeological resource preservation, relevant Interior Inspector General reports, academic sources, and the 2008 report by the Makah Indian tribe and the National Association of Tribal Historic Preservation Officers on NAGPRA implementation. We also attended the Arizona State University conference “Repatriation at Twenty” in January 2010. For our first objective, to determine the extent to which federal agencies have complied with their NAGPRA requirements for their historical collections, we obtained data from the NAGPRA 20 database on the federal agencies’ notices of inventories and summaries as published in the Federal Register notices through the end of fiscal year 2009. The database contained the dates that National NAGPRA received inventories and summaries from federal agencies and museums. To assess whether summaries and inventories were generally prepared on time by agencies we did the following. We determined that because the NAGPRA database did not contain the date that the documents were prepared, it was only partially useful for determining compliance with the statutory deadlines. Therefore, if the summaries and inventories were received by National NAGPRA before and near the statutory deadline, we determined that the documents had been completed in compliance with the act. We also reviewed agency files and interviewed agency officials in the eight key agencies involved in our review for information on timeliness. We used all of these sources to assess whether summaries and inventories were generally prepared on time by agencies. We analyzed the NAGPRA 20 database for reliability and verified all of the database information on notices of inventory completion, notices of intent to repatriate, and corrections of this information contained in the database. In addition, we assessed the reliability of relevant fields in the tables for summaries and inventories in the database by electronically testing for obvious errors in accuracy and completeness, reviewing information about the data and the system that produced them, and interviewing National NAGPRA officials knowledgeable about the data. When we found logical inconsistencies in the data, we clarified these with National NAGPRA officials before conducting our analyses. We determined that the data were sufficiently reliable for the purposes of using several fields related to when agencies submitted inventories and summaries. However, we found the database to be unreliable for purposes of tracking culturally unidentifiable human remains and objects because the items entered into the culturally unidentifiable portion of the NAGPRA 20 database are not deleted when they are affiliated. Rather, in some cases, a notation is made in the notes field. We analyzed text recorded in the notes fields of the inventory data to assess whether human remains and objects listed as culturally unidentifiable had been culturally affiliated. In addition to Inspector General, and other reports, we considered relevant reports identified in literature searches or recommended by NAGPRA experts, including a study by a National NAGPRA intern, the Corps’ Mandatory Center for Expertise for the Curation and Management of Archeological Collections, several academic journal articles and other materials concerning the curation of archeological collections, NAGPRA implementation, and cultural resource management. To track agency compliance with NAGPRA, we reviewed each agency’s records at headquarters and the field, such as inventories, summaries, Federal Register notices, and other documents. On our site visits, we interviewed national, regional, state, and local agency staff about their implementation of NAGPRA, in particular about the procedures they followed to identify their historical NAGPRA collections, to determine their level of confidence with their identification of NAGPRA items in their archeological collections. Our analysis is based both on the testimonial evidence and documents from agencies supplemented by Inspector General reports. In addition, we interviewed selected tribal and museum officials for their views on these efforts. In order to identify cases in which human remains and associated funerary objects that were culturally affiliated in agency inventories, but not yet published in Federal Register notices, we examined information from three sources: (1) the June 2008 report by the Makah Indian tribe and the National Association of Tribal Historic Preservation Officers, (2) a report on the topic by a National NAGPRA intern, and (3) inventory data from NPS’s “NAGPRA 20” database. We could not rely on National NAGPRA data alone because it was incomplete. We created a list of federal agency units mentioned in two or three of these reports, and then examined records at National NAGPRA offices, including the original inventories and published notices of inventory completion, to determine which units had in fact not published the relevant notices. In order to reduce the risk of undercounting, we examined the full agency-submitted inventories for each of the agency units listed in our examples. Through our analysis, we discovered that some agency units were listed erroneously in previous reports because of typing errors, or because the affiliated human remains had actually been correctly published in notices of intended disposition. To address our second objective to determine the actions taken by the Review Committee to fulfill its role under NAGPRA and the challenges it faces, we analyzed the Committee’s annual reports to Congress, meeting minutes, and reports by National NAGPRA. We reviewed documentation outlining Review Committee policies and procedures including Review Committee charters. We reviewed the Federal Advisory Committee Act and regulations, and our prior reports on the topic to understand the Review Committee’s role as a federal advisory committee. We interviewed current and former Review Committee members and Nationa NAGPRA officials to learn more about the Review Committee’s activitiesand the extent and quality of the support provided by National NA GPRA. We attended two Review Committee meetings (Seattle, Washington, in May 2009, and Sarasota, Florida, in October 2009) and observed an online training course on the role of the Review Committee in February 2010. To understand primary functions of the Review Committee— recommendations in cases of (1) requests for dispositions of culturally unidentifiable human remains and in (2) disputes—we reviewed files maintained by National NAGPRA on behalf of the Review Committee. We reviewed Federal Register notices describing the Review Committee’s findings of fact and recommendations with regard to these disputes and requests for disposition of culturally unidentifiable human remains. We interviewed officials with Interior’s Office of the Solicitor and National NAGPRA about the role of the Review Committee on behalf of the Department of the Interior. With respect to dispositions, we examined letters from the designated federal officer informing interested parties of the Committee’s recommendations to determine the extent of the department’s independent review of and concurrence with the recommendations. Based on the sources above, we determined that for dispositions, the Review Committee issued distinct recommendations regarding particular culturally unidentifiable human remains in 61 cases. National NAGPRA reports that the Committee considered 66 requests related to culturally unidentifiable human remains as of September 30, 2009. National NAGPRA listed some of these requests with additional subparts because the Committee considered the facts of the request at more than one meeting. In one case, the Committee issued distinct recommendations for each of two subparts, so we counted that request as two cases. We reviewed all the requests and subparts and determined that the Committee issued distinct recommendations 67 times. To focus our analysis on requests related to the disposition of particular culturally unidentifiable human remains we excluded 6 requests from our analysis. In 2 of these, the Committee recommended approval of a protocol, and no particular culturally unidentifiable human remains were involved. In 3 of these, the Committee deferred issuing a recommendation, and 1 request involved only objects (no human remains). Thus, we analyzed 61 cases where the Review Committee made distinct recommendations regarding the disposition of particular culturally unidentifiable human remains. We determined the status of Review Committee recommendations in disposition cases, and disputes by contacting officials with the involved museums and federal agencies, and reviewing documents they provided. We identified challenges that the Review Committee faces and the perceptions of the Review Committee through interviews of current and former Review Committee members, officials from museum and scientific organizations, Indian tribes, and tribal organizations. To address our third objective to determine the actions National NAGPRA has taken to facilitate federal agency implementation of NAGPRA, we reviewed the act and its implementing regulations for the duties assigned to National NAGPRA, as delegated to it by the Secretary of the Interior. We interviewed National NAGPRA staff, including the Program Manager and staff responsible for publishing notices, administering the Review Committee, running the grants program, and developing and maintaining National NAGPRA’s databases. To learn more about Interior’s decision to include Alaska Native corporations in the definition of Indian tribe, as provided for in the regulations, we interviewed staff from Interior’s Office of the Solicitor, reviewed Review Committee meeting minutes and transcripts, and analyzed National NAGPRA’s “List of Indian tribes for the purposes of carrying out NAGPRA and Native Hawaiian organizations that have appeared in notices.” With regard to National NAGPRA’s actions regarding the nomination process we reviewed files on the 14 times nominations were solicited for Review Committee openings since NAGPRA was enacted. We reviewed NPS budget justifications for the NAGPRA program as well as National NAGPRA annual reports. We reviewed a table developed by National NAGPRA that provided information on 79 draft notices withdrawn by museums (55) and federal agencies (24). We used this information, along with supporting documents, to determine the status of the 24 draft notices withdrawn by federal agencies. We obtained and reviewed data on the grants program and interviewed three grants panelists to understand the grants process. We determined that the grants data was sufficiently reliable to provide a table with key grants data over time by Indian tribe and museum, including numbers of applications submitted and awarded and the funding requested and awarded. We attended two online training courses (i.e., webinars) presented by National NAGPRA—one on notices provided in January 2010 and one on the Review Committee provided in February 2010—and discussed students’ training evaluations with National NAGPRA staff to learn more about the training program. In addition, we attended the NAGPRA Basics day-long training sessions before the Review Committee’s meeting in Seattle, Washington, (May 2009) and Sarasota, Florida, (October 2009). We reviewed information contained on the National NAGPRA Web site, including the various databases provided. For our fourth objective to determine the extent to which federal agencies have reported repatriating Native American human remains and objects for notices of inventory completion published in the Federal Register, we obtained data from the three agencies that track their repatriations—the Corps, the Forest Service, and NPS. For the other five key federal agencies and others publishing NAGPRA notices of inventory completion, we determined that there were no readily available sources of data on their repatriations. We have examined the reliability of the data from the three agencies that reported on repatriations and the data from National NAGPRA database. We interviewed agency staff that compiled the data on their methods and checks for accuracy to assess reliability of the data. We deployed a survey asking contacts in four key agencies and eight other agencies with published notices that did not collect data about whether the number of human remains or associated funerary objects included in each notice of inventory completion had actually been repatriated through fiscal year 2009, and if not, why not. We did not survey TVA because they had not published any notices of inventory completion through fiscal year 2009. We sent initial notification emails to test e-mail addresses. We also notified agency contacts by e-mail on how to access the survey and asked for responses within 2 weeks. After the survey had been available for 2 weeks, we reminded respondents by e-mail to complete surveys, and followed the e-mail with personal phone calls beginning a few days later. Through these efforts we obtained a 99 percent response rate. Respondents filled in surveys on 145 of 147 published notices of inventory completion. Because this survey was not based on a sample, there were no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as non-sampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data were entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize these non-sampling errors. For instance, a survey specialist designed the questionnaire in collaboration with GAO staff that have subject-matter expertise. Further, the draft questionnaire was pretested with a number of agency officials to ensure that the questions were relevant, clearly stated, and easy to comprehend. When the data were analyzed, a second, independent analyst checked all computer programs. We also sought information on the challenges to repatriation of human remains or objects through interviews and documents from agency officials, and from representatives of Indian tribes and Native Hawaiian organizations. In addition, we asked agency officials for their policies on reburial of human remains and objects on their lands and the extent to which the agency would assist tribes with the expenses of repatriation—as both were identified as factors affecting the ability of native groups to accept repatriations and rebury remains and objects. We sought data on the extent of National NAGPRA grants to tribes for the purposes of repatriation. We conducted this performance audit from July 2009 to July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The regulation on future applicability, which became effective on April 20, 2007, in part, established deadlines for federal agencies and museums to prepare summaries and inventories for new tribes added to BIA’s official list of federally recognized tribes. Specifically, agencies and museums have 6 months to prepare a summary and 2 years to prepare an inventory after the new tribe’s placement on the BIA list, or after the effective date of the future applicability rule, whichever is later. In November 2001, we reported on BIA’s process for recognizing new tribes. At that time, we identified 47 newly recognized tribes and 37 restored tribes, for a total of 84 newly recognized or restored tribes since 1960. While our November 2001 report contained detailed information on the 47 newly recognized tribes in a table on pages 25 to 26, it did not contain similar information on the 37 restored tribes. We provided detailed information on the 37 restored tribes in a table on pages 13 to 14 of an October 2006 report. In the October 2006 report, we also updated the cumulative number of newly recognized and restored tribes. While no additional tribes were restored between our November 2001 report and our October 2006 report, the Delaware Tribe of Indians of Oklahoma—a newly recognized tribe—was removed from BIA’s official list of federally recognized tribes during that time period and the Cowlitz Indian Tribe in the state of Washington was added as a newly recognized tribe. By deleting one tribe and adding another, in our October 2006 report, the total number of newly recognized or restored tribes remained at 84— 47 newly recognized tribes and 37 restored tribes. Since our October 2006 report, the Delaware Tribe of Indians of Oklahoma has been added back on the list, the Mashpee Wampanoag Tribe in the state of Massachusetts has been newly recognized, and the Wilton Rancheria in California has been restored. These actions bring the total of new or restored tribes since 1960 to 87—49 newly recognized tribes and 38 restored tribes—as of BIA’s last official list of federally recognized tribes published on August 11, 2009. Twenty-eight of the 87 new or restored tribes have been recognized or restored since NAGPRA was enacted on November 16, 1990 (see table 14). Federal agencies and museums were required to prepare summaries and inventories for the 25 tribes that were recognized or restored after NAGPRA’s enactment and before the effective date of the future applicability rule by October 20, 2007, and April 20, 2009, respectively. For the three most recent newly recognized or restored tribes—the Mashpee Wampanoag Tribe, the Delaware Tribe of Indians, and the Wilton Rancheria—the deadline for summaries was 6 months after the tribe was included in BIA’s list of federally recognized tribes and for inventories is 2 years after the tribe’s inclusion in the BIA list. The Mashpee Wampanog Tribe was first included in the BIA list published on April 4, 2008; the Delaware Tribe and the Wilton Rancheria were first included in the August 11, 2009, list. National NAGPRA is charged with assisting federal agencies and others with the NAGPRA process. NAGPRA and its implementing regulations do not provide National NAGPRA or any other federal entity with tools to encourage or ensure that federal agencies within or outside of the Department of the Interior comply with the act. The civil penalties established in section 9 of NAGPRA do not apply to federal agencies; only to museums. Absent such tools, there are limited options for holding agencies that are not in compliance with the act accountable. In addition, the mechanism that NAGPRA specifically provides to ensure federal agency compliance—lawsuits by nonfederal parties, such as Indian tribes, against federal agencies—is rarely used. In contrast to its role vis-à-vis federal agency compliance, National NAGPRA does have authority to encourage and ensure museum compliance. Through fiscal year 2009, 248 counts of alleged failure to comply with NAGPRA had been made against 43 museums. The number of allegations has increased substantially in recent years. In fiscal years 2008 and 2009 alone, 141 counts were alleged. National NAGPRA, in coordination with the NPS Law Enforcement Program, has investigated 126 of the 248 counts and has found over three-quarters of those investigated—108—to be unsubstantiated. At the end of fiscal year 2009, there was a significant backlog of 122 counts to be investigated. These investigations have resulted in penalties totaling $38,490 levied against six museums through fiscal year 2009. The first notice of failure to comply was served on a museum in 2006 and, according to National NAGPRA officials, has resulted in museums taking compliance more seriously and also in the increase in allegations. There has been some discussion over where to house National NAGPRA or whether to create a new compliance oversight office all together. As discussed in the background section of this report, amid conflict of interest concerns, the Secretary separated the functions of National NAGPRA into Park NAGPRA, to handle NPS compliance, and National NAGPRA, to facilitate NAGPRA implementation governmentwide. After this separation, National and Park NAGPRA were housed in different places within NPS and reported up a separate chain of command. Some believe there is still a conflict of interest in having National NAGPRA housed within NPS, as it is also an agency that must comply with the act. They have suggested it be removed from NPS, eliminating any conflict issues, and elevated in stature by, for example, placing it within the Office of the Secretary of the Interior. The June 2008 report by the Makah Indian tribe and the National Association of Tribal Historic Preservation Officers suggested an even greater elevation, recommending the establishment of an Inter-Agency NAGPRA Implementation Council within the executive branch—possibly within the Office of Management and Budget—that would assure federal agency compliance, among other things. This continues to be an issue of some debate. Section 8(c)(5) of NAGPRA made the Review Committee responsible for recommending specific actions for developing a process for the disposition of culturally unidentifiable human remains in the possession or control of museums and federal agencies. The Review Committee published its first draft of recommendations regarding the disposition of culturally unidentifiable human remains and associated funerary objects for public comment in June 1995. In response to comments, the Committee published a revised draft for public comment in August 1996. Subsequently, the Committee published draft principles of agreement regarding the disposition of culturally unidentifiable human remains in 1999. The Committee published its final recommendations in June 2000. (See table 8 in the body of the report for the citations for these actions.) In addition, the Review Committee submitted comments to the Secretary in 2000, 2003, and 2008. In October 2007, Interior published a proposed rule for public comment regarding the disposition of culturally unidentifiable human remains. The proposed rule generated over 100 comments from various interested parties, such as Indian tribes, museums, and museum or scientific organizations. Many have noted that the proposed rule departed from the Review Committee’s final 2000 recommendations. While some commenters—both tribes and museums—were generally supportive of the proposed rule and welcomed its publication, some commenters also raised concerns with the proposed rule that resulted in Interior making extensive revisions to the rule before issuing a final rule on March 15, 2010. For example, several commenters were concerned by the proposed rule’s requirement for museums and federal agencies to consult with and offer to transfer control of culturally unidentifiable human remains under certain circumstances to the Indian tribe or Native Hawaiian organization with a cultural relationship to the region from which the human remains were removed. The final rule does not contain this requirement. Given the rulemaking’s long history and the volume of comments Interior received on the proposed rule, this appendix describes certain provisions of the final rule, presents certain comments Interior received on the proposed rule that are available on www.regulations.gov, and provides Interior’s response to the comments. This appendix does not and is not intended to serve as a summary of all the comments Interior received on the proposed rule; the preamble to the final rule discusses all of the comments. Several museums and scientific organizations’ comments argued that Interior lacked authority to promulgate this rule for two reasons. First, they argued that section (8)(c)(5) is a clear instruction for the Review Committee to make recommendations to Congress for possible future legislative action, but does not authorize Interior to take any regulatory action itself. They note that the committee report accompanying the version of the bill debated on the House floor stated that the House Committee on Interior and Insular Affairs looks forward to the Review Committee’s recommendations on the process for disposition of culturally unidentifiable human remains. Second, museums and scientific organizations argued that NAGPRA clearly limited repatriation to human remains that could be culturally affiliated because the act balanced the interests of Indian tribes and Native Hawaiians with those of museums and scientists. In their view, the rule impermissibly expands the scope of the act. Indian tribes either did not comment on Interior’s statutory authority or stated that they believed the rule was authorized. One tribe noted that 25 U.S.C. § 9 authorizes the President to prescribe such regulations as he may think fit for carrying into effect the various provisions of any act relating to Indian affairs and that Congress has routinely delegated broad authority to the Executive Branch to manage Indian affairs. Based on these other laws and NAGPRA’s language and structure, this tribe argued that the culturally unidentifiable rule is authorized as long as the rule was consistent with and not precluded by the plain language of the act. Furthermore, the tribe stated that the culturally unidentifiable rule was plainly designed to carry out the act, reasonably related to the act’s purposes, and not precluded by the act. Interior contends that section 13 of NAGPRA, which authorizes Interior to promulgate regulations implementing the act, provides the statutory authority for the rule. The preamble to the final rule explains that section (8)(c)(5) of the act made the Review Committee responsible for recommending specific actions for developing a process for disposition of culturally unidentifiable human remains because Congress anticipated that not all items could be geographically or culturally affiliated with an Indian tribe or Native Hawaiian organization. Therefore, Interior interpreted the intent of Congress as authorizing the Secretary of the Interior to promulgate regulations governing the disposition of culturally unidentifiable human remains after considering the Review Committee’s recommendations. Interior has noted that an earlier version of the bill that became NAGPRA directed the Review Committee to provide its recommendations regarding the disposition of culturally unidentifiable human remains to the Secretary and Congress. However, the language regarding the Secretary and Congress was subsequently stricken from the bill. Interior has interpreted this sequence of changes and the act’s requirement that the Secretary consult with the Review Committee in the development of regulations as authorizing Interior to promulgate regulations governing the disposition of culturally unidentifiable human remains after considering the Review Committee’s recommendations on the matter. Moreover, Interior has stated that even if Congress did not expressly delegate authority or responsibility to implement a particular provision or fill a particular gap in the act, it can still be apparent from an agency’s generally conferred authority and other statutory directives that Congress would expect the agency to be able to speak with the force of law when the agency addresses ambiguities in the statute or fills a gap in the enacted law. In addition, Interior notes that 25 U.S.C. § 9 authorizes the Secretary to make such regulations as he may think fit for carrying into effect the various provisions of any act relating to Indian Affairs. Interior argues that “because NAGPRA is Indian law, the Secretary may promulgate any regulations needed to implement it under the broad authority to supervise and manage Indian affairs given by Congress.” The final rule, among other things, requires museums and federal agencies to consult with (1) an Indian tribe(s) or Native Hawaiian organization(s) that makes a disposition request for culturally unidentifiable human remains and (2) with federally recognized Indian tribes and Native Hawaiian organizations from whose tribal or aboriginal lands the remains were removed before offering to transfer control of the culturally unidentifiable human remains. Some museums questioned the imposition of this extra burden of consultation because National NAGPRA’s online database of culturally unidentifiable human remains contains sufficient information for Indian tribes and Native Hawaiian organizations to submit requests. Interior has said that this provision restates the consultation required under section 5 of the act and 43 C.F.R. § 10.9, which requires museums and federal agencies to consult with Indian tribes from whose tribal lands the human remains and associated funerary objects originated, that are or are likely to be culturally affiliated to the remains and objects, and from whose aboriginal lands the humans and objects originated while preparing their inventories. Therefore, Interior has said that museums and federal agencies that consulted with Indian tribes and Native Hawaiian organizations about the culturally unidentifiable human remains while compiling their inventories are not required by this new rule to consult again unless a disposition request is made. If the museum or federal agency cannot prove that it has a right of possession, the final rule also requires them to offer to transfer control of the culturally unidentifiable human remains in accordance with the priority order listed in the regulation. NAGPRA defines right of possession as “possession obtained with the voluntary consent of an individual or group that had authority of alienation.” Museums and fede agencies have right of possession for Native American human remains th were originally acquired, excavated, exhumed, or otherwise obtained with full knowledge and consent of the next of kin or the official governing body of the appropriate culturally affiliated Indian tribe or Native Hawaiian organization. Museums and scientific organizations generally commented that right of possession could never be established for culturally unidentifiable human remains because neither the next of kin or an appropriate culturally affiliated Indian tribe or Native Hawaiian organization could have consented to the original acquisition. Museums argued that NAGPRA’s definition of right of possession ignores state property laws that give museums legal title to human remains and items removed from private property with the consent of landowners. Because museums have legal title to these human remains and items, these groups argue that the return of culturally unidentifiable human remains would violate the Takings Clause of the Constitution. Museums and scientific organizations also note that this rule would deprive the world of scientific information on the biological and cultural development of humans and would impact many museums’ ability to educate the public about these issues. Interior has noted that NAGPRA’s definition of right of possession created an ownership presumption and that as a federal law it would preempt any state property law on the same subject matter under the Supremacy Clause of the Constitution. Interior also observed that the regulatory requirement to offer to transfer control of culturally unidentifiable human remains did not apply in circumstances where a court of competent jurisdiction has determined that the repatriation of the human remains in the possession or control of a museum would result in a taking of property without just compensation within the meaning of the Fifth Amendment. In addition to the right of possession issue, some museums and scientific organizations also assert that the final rule requires museums and federal agencies to offer to transfer control of culturally unidentifiable human remains absent any request or claim from an Indian tribe or Native Hawaiian organization. These museums and scientific organizations state that this requirement is inconsistent with NAGPRA and greatly exceeds the statute’s scope because the act’s requirement to repatriate culturally affiliated human remains and objects is triggered only upon a request being made. According to Interior, the requirement to offer to transfer control is not triggered until an Indian tribe or Native Hawaiian organization listed in the priority order makes a disposition request. Absent such a request, Interior said that museums and federal agencies are not required to offer to transfer control of culturally unidentifiable human remains, however, Interior noted that 43 C.F.R. § 10.11(b)(ii) allows museums and federal agencies to initiate the repatriation process without a request, especially if they identify the tribes that occupied the land from which the remains originated. If none of the Indian tribes or Native Hawaiian organizations in the priority order agrees to accept control, the final rule allows museums and federal agencies to transfer control of the culturally unidentifiable human remains to other Indian tribes or Native Hawaiian organizations or to non-federally recognized Indian tribes, if the Secretary of the Interior recommends the transfer. In their comments, some tribes objected to this provision because it makes the transfer of control voluntary and at the discretion of the museum or federal agency. These tribes wanted the rule to require museums and federal agencies to transfer control to non-federally recognized tribes from whose tribal or aboriginal lands the remains were removed. At least one Indian tribe, however, only wanted the rule to permit repatriation of culturally unidentifiable human remains to federally recognized Indian tribes. Museum and scientific organizations echoed this comment by questioning Interior’s authority in requiring museums to obtain the Secretary’s prior recommendation when the Secretary lacked authority over non-federally recognized Indian tribes or noting the difficulty museums and federal agencies would have in identifying which non-federally recognized tribes had a legitimate claim. Interior responded by noting that it followed the lead of Congress in expanding the possible recipients of culturally unidentifiable human remains to include non-federally recognized tribes both in assuring that the remains went to the Indian group that had the closest cultural connection to the remains, even if that group is not federally recognized, and in maintaining the priority position of the government-to-government relationship, by not making disposition to non-federally recognized tribes mandatory. In addition, Interior acknowledged that mandating the return of culturally unidentifiable human remains to non-federally recognized Indian tribes would be contrary to the terms of NAGPRA and the government-to-government relationship between the United States and federally recognized tribes, but that nothing in the act prohibited the voluntary transfer of human remains to non-federally recognized tribes with appropriate safeguards for the rights of federally recognized tribes. Interior has said that the Secretary will continue the current practice of asking the Review Committee for a recommendation on disposition requests from non-federally recognized Indian tribes. The final rule allows museums and federal agencies to transfer control of funerary objects associated with culturally unidentifiable human remains and recommends that such transfers occur if not precluded by federal or state law. Several museums and scientific organizations objected to this provision because it lacked a statutory basis and stated that this “recommendation” inappropriately pressured museums and agencies to divest themselves of objects in their collection that do not have any demonstrated cultural affiliation with NAGPRA claimants. Tribes requested that the final rule require museums and federal agencies to transfer control of the associated funerary objects belonging to culturally unidentifiable human remains. Tribes argued that funerary objects represent offerings intended as gifts and spiritual offerings to the deceased and are understood to be the property of the deceased. For Indian tribes, separation of the human remains from the funerary objects is a grievous spiritual injury to the deceased and grievous emotional injury to Native Americans. One tribe said that requiring museums and federal agencies to transfer control of associated funerary objects reflects the canons of construction for Indian laws—that the law be liberally construed in favor of Indians and all ambiguities resolved in favor of the Indians. Tribes also argued that some museums would never return the associated funerary objects unless required to do so. Section (8)(c)(5) of the act, which is the only provision in the act that refers to or uses the term culturally unidentifiable, makes the NAGPRA Review Committee responsible for recommending specific actions for developing a process for disposition of culturally unidentifiable human remains but does not mention associated funerary objects. Interior has said that it did not consider it appropriate to make the provision to transfer culturally unidentifiable associated funerary objects mandatory because of the statute’s silence, common law regarding human remains and associated funerary objects, and the right of possession and takings issues that a mandatory disposition of associated funerary objects would raise which are not clearly resolved in the statute or legislative history. A relationship of shared group identity can be reasonably traced between present day Native Hawaiian organizations and the human remains. Museum should revise determination of cultural affiliation for human remains and notify Native Hawaiian organizations directly and by Federal Register notice that the human remains are available for repatriation. Partially implemented. Museum published a Federal Register notice and repatriated the human remains. We did not determine whether the museum changed the cultural affiliation determination. The Committee was unable to determine that the preponderance of the evidence indicates that there is a relationship of shared group identity that can be reasonably traced between present day Native Hawaiian organizations and the human remains. Museum should transfer the human remains to a museum in Hawaii for future consideration of cultural affiliation and care. Fully implemented. Museum transferred the human remains to the Bishop Museum. Subsequently, the Bishop Museum determined there was a shared group identity and subsequently repatriated the remains. The object is a sacred object and a relationship of shared group identity can be reasonably traced between the Office of Hawaiian Affairs and Hui Malama I Na Kupuna O Hawai’i Nei and the Native Hawaiians who created and used it. Museum should reconsider its determination of the object’s classification. The object should be considered a sacred object. Museum should repatriate the object to a Native Hawaiian organization. Status unknown. The museum did not publish a Federal Register notice and we did not determine whether the museum reconsidered its determination of the object’s classification or whether the museum repatriated the object. Dispute resulted in litigation. Tribes were not given adequate opportunity to consult on a one-to-one basis and make concerns known outside of a public forum. Agency applied a looser criterion of cultural relationship to geographical place as a basis for determining cultural affiliation than it should have. Agency needs to do more to evaluate and weigh evidence pertaining to cultural affiliation. Agency should withdraw its published notice and reassess its determination of cultural affiliation. Agency should not use collective consultation in lieu of individual tribal consultation when requested by an Indian tribe. Not implemented. Agency declined to withdraw its published notice and reassess its determination of cultural affiliation. State Office has not given fair and objective consideration and assessment of all the available information and evidence in the dispute. The preponderance of the evidence indicates a relationship of shared group identity that can be reasonably traced between the Paiute-Shoshone Tribe of the Fallon Reservation and Colony, Nevada, and the human remains and associated funerary objects from Spirit Cave in Nevada. Agency should repatriate human remains and associated funerary objects. Not implemented. Agency has not repatriated the human remains. We did not determine whether agency repatriated the objects. Dispute resulted in litigation. The information and statements submitted and presented by the Museum and the Working Group is sufficient to establish by a preponderanc e of the evidence that the items are both sacred objects and objects of cultural patrimony. Further, they are culturally affiliated with the constituent tribes of the Working Group. Museum should consider the oral testimony provided by the Working Group, consult anthropological literature, re- evaluate the determination for repatriation, and inform the Committee of the museum’s findings within 90 days. Not implemented. Museum published a notice of intent to repatriate in the Federal Register describing the items as sacred objects to which the museum holds the right of possession. Although an official from the Western Apache Working Group reported that the museum followed the letter of the recommendation by considering the Group’s oral testimony and consulting anthropological literature, the museum did not follow the spirit of the recommendations which was, according to the official, to reclassify the object. Museum’s repatriation process for the items was flawed and is incomplete. The place and manner of the return of the items was not consistent with NAGPRA. Museum is responsible for the completion of the repatriation process for the items. Museum should recall the loan of the items to Hui Malama I Na Kupuna O Hawai’i Nei, make the items available to all consulting parties, and renew the consultation process for repatriation. Not implemented. According to an official with the Royal Hawaiian Academy of Traditional Arts, Hui Malama I Na Kupuna O Hawai’i Nei denied the Bishop Museum’s request for the items. Dispute led to litigation. Funerary objects were removed from cave and are in possession of the Bishop Museum. The Review Committee declines to come to a finding about whether the objects are objects of cultural patrimony. Further, the Committee believes that the current location of the objects is appropriate. Museum and Hui Malama o Mo’omomi should work together to revise memorandum of agreement to require consent of Hui Malama o Mo’omomi prior to the removal of the objects from the Island of Molokai. Status unknown. Items are still under the control of the Bishop Museum. Museum failed to overcome the inference that the museum did not have the right of posession to the object. Museums and federal agencies must repatriate cultural items within 90 days of receipt of a written request for repatriation that satisfies NAGPRA requirements. Museum should continue process of consultation to determine appropriate claimant(s) for unassociated funerary objects. Once repatriation has taken place, the transaction must be documented in a way consistent with Hawaii state law. Status unknown. Items are still under the control of the Bishop Museum. Agency has been very slow in going through the NAGPRA process. The number of potential claimants for the items has grown over time. Agency has not sufficiently investigated right of possession. Agency should expand the involvement of Native Hawaiian participation and testimony. Agency should initiate consultation with all claimants and interested parties, investigate the right of possession issue, and take steps to complete repatriation by 2005. Partially implemented. According to an agency official, the agency has conducted consultation and has considered the right of possession issue. Further the agency has issued a notice of intent to repatriate, but repatriation has not taken place because claimants disagree on disposition and agency cannot determine the most appropriate claimant. The items are consistent with the definition of object of cultural patrimony. Museum has not presented evidence sufficient to overcome the inference that the museum does not have a right of possession to the items. Museum should consider the oral testimony and written evidence provided by the White Mountain Apache Tribe and change its determination of the items to recognize their status as objects of cultural patrimony. Museum should acknowledge that it lacks right of possession to the items. Not implemented. Museum did not change its determination of the items and did not state that it lacked right of possession. The preponderance of the evidence shows a relationship of shared group identity between the Onondaga Nation (and the greater Haudenosaunee Confederacy, of which the Nation is a member-nation) and the human remains. Museum should expeditiously repatriate human remains to the Onondaga Nation. Further, museum should reevaluate the cultural affiliation of all Native American human remains in its possession or under its control that had been determined to be culturally unidentifiable using the preponderance of the evidence to determine cultural affiliation. Partially implemented. Museum repatriated the human remains. A museum official said that it has been and continues to be a policy of the museum to use a preponderance of all evidence as the standard for deciding cultural affiliation. However, it is unclear whether the museum has reevaluated the cultural affiliation of all of its culturally unidentifiable Native American human remains. In addition to promulgating regulations and providing administrative support to the Review Committee, National NAGPRA has conducted a number of activities to carry out the responsibilities assigned by NAGPRA to the Secretary of the Interior. This appendix summarizes these other activities. National NAGPRA has received federal agency and museum inventories and summaries and published notices in the Federal Register, as NAGPRA’s implementing regulations require. According to its Fiscal Year 2009 Annual Report, from fiscal years 1992 through 2009, National NAGPRA received inventories from 1,317 federal agencies and museums and summaries from 1,551 federal agencies and museums and has entered some of this information into a database. Along with the inventories, federal agencies and museums also submit draft notices of inventory completion and draft notices of intent to repatriate, which National NAGPRA prepares for publication. National NAGPRA’s Annual Report also states that, during this same period, it published 1,295 notices of inventory completion and 477 notices of intent to repatriate in the Federal Register for federal agencies and museums. National NAGPRA has increased the number of notices it has published in the Federal Register in recent years. Specifically, the number of notices published in the Federal Register increased to 180 in fiscal year 2008 and to 200 in fiscal year 2009 compared to about 100 per fiscal year in 2003 through 2007. Furthermore, according to the National NAGPRA Program Manager, notice publications have increased with fewer staff—there has been only one staff person dedicated to publishing notices from 2005 through 2009 while there have been multiple staff assigned to this task in previous years. In our interviews with federal agency officials and Review Committee members, a number of them complimented National NAGPRA on its increased efficiency in publishing notices. In addition to recent increases in the number of notices published, National NAGPRA has reduced a backlog of notices that were awaiting publication. In 2004, the year the current National NAGPRA Program Manager started in her position, there were about 300 draft notices awaiting publication, some of which had been submitted close to a decade earlier. These notices needed some action by the originator before they could proceed to publication. Prior National NAGPRA management had an “on-hold” category for such notices and had taken them out of the publication process, in a sense leaving them in limbo. In 2005, National NAGPRA eliminated the “on-hold” status and set out to clear this backlog by contacting the originating entity of each notice and requesting that they contact National NAGPRA to resolve it. National NAGPRA’s correspondence further stated that notices would be considered withdrawn if the originating entity did not respond within a specified time frame. Through fiscal year 2009, over 220 had been published, 21 were awaiting publication, and 79 were withdrawn—24 by federal agencies (see table 15). Notices were withdrawn by agencies and museums for a variety of reasons, including: the items had already been included in a published notice; the agency or museum had revised the cultural determination to culturally unidentifiable; and the agency or museum was actually not in control of the items. The withdrawal of these notices has been controversial and was the subject of discussion at a congressional hearing in October 2009. National NAGPRA has administered a grants program to assist Indian tribes, Native Hawaiian organizations, and museums in conducting consultations and repatriations. Since the inception of the grants program through fiscal year 2009, National NAGPRA has received 1,341 grant applications from tribes, Native Hawaiian organizations, and museums and awarded 628 grants totaling about $33 million. Of the total awarded, $22.4 million, or about 68 percent, has gone to tribes and Native Hawaiian organizations and $10.5 million, or about 32 percent, has gone to museums (see table 16). Further, 513 grants worth about $31.8 million have been awarded for consultation grants and 115 grants worth about $1.2 million have been awarded for repatriation grants. The grants program has been controversial in part due to confusion over how much funding was actually available for grants. NPS has allocated a portion of the NAGPRA grants budget request line item to cover a portion of National NAGPRA’s operating expenses (another portion has been provided by NPS’s Cultural Resources Program), but did not indicate this in its budget justifications until fiscal year 2011. Two investigations by Interior’s Office of Inspector General on the alleged improper use of NAGPRA funds found a lack of clarity over the use of the grants budget request line item. Specifically, the Inspector General responded to allegations that (1) NPS had illegally diverted millions in grant funding for purposes not covered by NAGPRA and (2) the National NAGPRA Program Manager had improperly reprogrammed grant funds for administrative purposes. Both investigations found no wrongdoing, stating that NPS and National NAGPRA had discretion to use the funds as it did. NPS’s fiscal year 2011 budget justification has addressed this issue by moving the operating expenses out of the grants budget request and into the NPS Cultural Resources Program budget request, thus separating the funding for grants and operating expenses. Table 17 shows the enacted line item for grants and NPS’s use of it for grants and operating expenses from fiscal years 1994 through 2009. National NAGPRA has made progress in making data available to tribes, museums, federal agencies, and the general public. It currently maintains six online searchable databases, such as a Native American consultation database and databases for published notices, and has plans to develop a summaries database. According to the National NAGPRA Program Manger, National NAGPRA had developed only one database as of 2005. While these databases are providing more information to NAGPRA practitioners, some federal agencies and museums have complained about the databases containing incorrect information. The National NAGPRA Program Manager told us that she is aware of this issue and is working to correct the problems. The program manager explained that part of this problem stems from earlier efforts to expedite the publication of notices, but without reconciling data. Specifically, NPS staff as well as contract employees hired in 2000 to publish notices did not reconcile the numbers of human remains and objects listed in the notices with those listed in inventories and summaries, and this left data inaccuracies. For example, an agency or museum might have listed human remains as culturally unidentifiable in an inventory, but later affiliated and repatriated those remains and not informed National NAGPRA so they could update their database. By not reconciling this information, data in the culturally unidentifiable database would be incorrect. National NAGPRA has provided training to and developed educational materials for Indian tribes, museums, and federal agencies to improve NAGPRA implementation. Course titles include Determining Cultural Affiliation and Writing and Managing a Successful Grant. A NAGPRA Basics course is typically offered the day before the beginning of each Review Committee meeting. These courses are taught by National NAGPRA staff as well as contractors and are offered in various locations across the country, as posted on National NAGPRA’s Web site. Also, starting in June 2009, National NAGPRA began offering “webinars,” which are interactive online courses. Participants follow the course online as well as via telephone and can ask questions either orally or by submitting them on the Web site. In fiscal year 2009, National NAGPRA and its contractors provided 15 courses to 612 participants. According to a National NAGPRA official, feedback obtained on these courses has generally been positive and has been used to improve training. For example, based on feedback that its NAGPRA Basics course was too simplistic for some and too complex for others, National NAGPRA now plans to offer two basics courses—one for newcomers and one for more experienced NAGPRA practitioners. In terms of educational materials, National NAGPRA is developing a series of videos to create a training series on NAGPRA-related issues. National NAGPRA has conducted about 50 interviews with tribal, museum, and federal agency officials and Review Committee members to create a historic archive of resources on consultation, notices, and repatriation, among other things. Also, in 2009, National NAGPRA published a brochure on the history of the grants program that included data as well as stories about specific grants and what they accomplished. Despite National NAGPRA’s training efforts, we found a general lack of knowledge about NAGPRA requirements among federal agencies. For example, TVA completed inventories prior to consulting with potentially affiliated Indian tribes; whereas NAGPRA requires that consultation be conducted prior to completing inventories. Further, Corps and FWS officials stated that, in some instances, their agencies had only begun developing notices of inventory completion after receiving a repatriation request from an Indian tribe for remains or associated funerary objects that had been culturally affiliated in the agency’s inventory; whereas NAGPRA requires publication of these notices regardless of whether a repatriation request has been received. In addition to those named above, Jeffery D. Malcolm, Assistant Director; Allison Bawden; Pamela Davidson; Catherine Hurley; Mark Keenan; Jill Lacey; David Schneider; John Scott; Ben Shouse; Jeanette Soares; and Maria Soriano made key contributions to this report. | The Native American Graves Protection and Repatriation Act (NAGPRA) required federal agencies and museums to (1) identify their Native American human remains and other objects, (2) try to culturally affiliate them with a present day Indian tribe or Native Hawaiian organization, and (3) repatriate them under the terms in the act. The National NAGPRA office, within the Department of the Interior's National Park Service (NPS), facilitates the government-wide implementation of NAGPRA. GAO was asked to determine, among other things, the (1) extent to which agencies have complied with their NAGPRA requirements, (2) actions taken by National NAGPRA, and (3) extent of repatriations reported by agencies. GAO reviewed records for eight key agencies with significant historical collections, surveyed agencies to obtain repatriation data, and interviewed agency, museum, and tribal officials. Almost 20 years after NAGPRA, key federal agencies still have not fully complied with the act for their historical collections acquired on or before NAGPRA's enactment. GAO examined NAGPRA implementation in detail for eight key federal agencies with significant historical collections: Interior's Bureau of Indian Affairs (BIA), Bureau of Land Management (BLM), Bureau of Reclamation (BOR), U.S. Fish and Wildlife Service (FWS) and NPS; Agriculture's U.S. Forest Service; the U.S. Army Corps of Engineers (Corps); and the Tennessee Valley Authority (TVA). First, all of the agencies acknowledge that they still have additional work to do to fully comply with the act's requirements to identify all of their NAGPRA items, establish cultural affiliations when possible, and create summaries and inventories of the items. Overall, the Corps, the Forest Service, and NPS did the most work to identify their NAGPRA items. BLM, BOR, and FWS did some work, and BIA and TVA have done the least amount of work. Second, some of the eight agencies, along with some other federal agencies, have not fully complied with NAGPRA's requirement to publish notices of inventory completion for all of their culturally affiliated human remains and associated funerary objects in the Federal Register. Until agencies (1) identify all of the possible NAGPRA items in their historical collections, (2) establish cultural affiliations to the extent possible, and (3) publish the required notices, they cannot repatriate their Native American human remains and objects. To fulfill the Secretary of the Interior's responsibilities under NAGPRA, National NAGPRA has taken some actions consistent with the act, such as publishing notices in the Federal Registerand administering a grants program. However, GAO identified some actions of concern. National NAGPRA developed a list of Indian tribes eligible under NAGPRA that was inconsistent with BIA's official list of federally recognized tribes and departmental policy. Furthermore, National NAGPRA did not always screen nominations for Review Committee positions properly and, in a few cases, inappropriately recruited nominees for Review Committee positions. Through fiscal year 2009, 55 percent of the human remains and 68 percent of the associated funerary objects that have been published in notices of inventory completion had been repatriated, according to agency data and GAO's survey results. Agencies are required to permanently document their repatriations, but they are not required to compile and report that information to anyone. Only three agencies--the Corps, the Forest Service, and NPS--centrally track their repatriations. These three agencies, however, along with the other federal agencies that have published notices, generally do not report any of their data on repatriations to National NAGPRA or to Congress. As a result, policymakers, Indian tribes, and Native Hawaiians organizations do not have access to readily available information about culturally affiliated NAGPRA items that have not been repatriated. According to officials, the remaining items have not been repatriated for a variety of reasons, such as a lack of repatriation requests and financial constraints. GAO recommends, among other things, that the Departments of Agriculture, Defense, and the Interior as well as TVA report to Congress the actions that they need to take to fully comply with the act and that they report the status of their repatriations to National NAGPRA. GAO is also recommending that National NAGPRA make improvements in its facilitation of the act. Agriculture, Interior, and TVA agreed with GAO's recommendations. The Department of Defense did not provide comments on the report. |
In December 2006, in response to SAFE Port Act requirements, DHS, and the Department of Energy (DOE) jointly announced the formation of the Secure Freight Initiative (SFI) pilot program to test the feasibility of scanning 100 percent of U.S.-bound container cargo at three foreign ports (Puerto Cortes, Honduras; Qasim, Pakistan; and Southampton, United Kingdom). According to CBP officials, while initiating the SFI program at these ports satisfied the SAFE Port Act requirement, CBP also selected the ports of Busan, South Korea; Hong Kong; Salalah, Oman; and Singapore to more fully demonstrate the capability of the integrated scanning system at larger, more complex ports. As of October 2009, SFI has been operational at five of these initial seven seaports. According to CBP and DOE officials, the SFI program builds upon existing container security measures by enhancing the U.S. government’s ability to have containers scanned for nuclear and radiological material overseas and, thus, better assess the risk of weapons of mass destruction (WMD) in inbound cargo containers. Managed by TSA and the U.S. Coast Guard, the TWIC program aims to protect the nation’s maritime transportation facilities and vessels by requiring maritime workers to complete background checks and obtain a biometric identification card in order to gain unescorted access to the secure areas of regulated facilities and vessels. A federal regulation in January 2007 set a compliance deadline, subsequently extended to April 15, 2009, whereby each maritime worker was required to hold a TWIC in order to obtain unescorted access to secure areas of regulated facilities and vessels. In addition, TSA has initiated a pilot to test the use of TWIC with related access control technologies. Concerns have grown about the security risks of small vessels and DHS has identified the four gravest risk scenarios involving the use of such vessels for terrorist attacks. Some of these risks have been shown to be real through attacks conducted outside U.S. waters, but to date, no small boat attacks have happened in the United States. These four scenarios include the use of a small vessel as (1) a waterborne improvised explosive device, (2) a means of smuggling weapons into the United States, (3) a means of smuggling humans into the United States, and (4) a platform for conducting a stand-off attack. Air cargo ranges in size from 1 pound to several tons, and can be shipped in various forms, including unit load devices (ULD) that allow many packages to be consolidated into one container or pallet, wooden crates, or individually wrapped/boxed pieces, known as loose or bulk cargo. Participants in the air cargo shipping process include shippers, such as manufacturers; freight forwarders, who consolidate cargo from shippers and take it to air carriers for transport; air cargo handling agents, who process and load cargo onto aircraft on behalf of air carriers; and air carriers that load and transport cargo. TSA’s responsibilities include, among other things, establishing security requirements governing domestic and foreign passenger air carriers that transport cargo, and domestic freight forwarders. Airport perimeter and access control security is intended to prevent unauthorized access into secured airport areas, either from outside the airport complex or from within. Airport operators generally have direct day-to-day responsibility for maintaining and improving perimeter and access control security, as well as implementing measures to reduce worker risk. However, TSA has primary responsibility for establishing and implementing measures to improve security operations at U.S. commercial airports—that is, TSA-regulated airports—including overseeing airport operator efforts to maintain perimeter and access control security. Airport workers may access sterile areas— areas of airports where passengers wait after screening to board departing aircraft— through TSA security checkpoints or through other access points that are secured by the airport operator. The airport operator is also responsible, in accordance with its security program, for securing access to secured airport areas where passengers are not permitted. Airport methods used to control access vary, but all access controls must meet minimum performance standards in accordance with TSA requirements. The federal government has developed a strategy to address cyber threats. Specifically, President Bush issued the 2003 National Strategy to Secure Cyberspace and related policy directives, such as Homeland Security Presidential Directive 7, that specify key elements of how the nation is to secure key computer-based systems, including both government systems and those that support critical infrastructures owned and operated by the private sector. The strategy and related policies also establish DHS as the focal point for cyber critical infrastructure protection and assigns DHS multiple leadership roles and responsibilities in this area, to include (1) developing a comprehensive national plan for critical infrastructure protection, including cybersecurity; (2) developing and enhancing national cyber analysis and warning capabilities; (3) providing and coordinating incident response and recovery planning, including conducting incident response exercises; (4) identifying, assessing, and supporting efforts to reduce cyber threats and vulnerabilities, including those associated with infrastructure control systems; and (5) strengthening international cyberspace security. More recently, in February 2009, President Obama directed the National Security Council and Homeland Security Council to conduct a comprehensive review to assess the United States’ cybersecurity-related policies and structures. The resulting May 2009 report made a number of recommendations to improve the nation’s approach. In October 2009, we reported that CBP has made some progress in working with the initial SFI ports to scan U.S.-bound cargo containers; but because of challenges to expanding scanning operations, especially to larger ports, the feasibility of scanning 100 percent of U.S.-bound cargo containers at over 600 foreign seaports remains largely unproven. CBP and DOE have been successful in integrating images of scanned containers onto a single computer screen that can be reviewed remotely from the United States and have also been able to use these initial ports as a test bed for new applications of existing technology, such as mobile radiation scanners. However, the SFI ports’ level of participation, in some cases, has been limited in terms of duration or scope. While 54 to 86 percent of the U.S.-bound cargo containers, on average, were scanned at 3 comparatively low volume ports that are responsible for less than 3 percent of container shipments to the United States, CBP has not been able to achieve sustained scanning rates above 5 percent at 2 comparatively larger ports— the type of ports that ship most containers to the United States. Scanning operations at the initial SFI ports have encountered a number of challenges, such as logistical problems with containers transferred from rail or other vessels, and CBP officials are concerned that they and the participating ports cannot overcome them. CBP has developed two initiatives related to SFI for improving container security; however, challenges remain as neither initiative will enable CBP to fully achieve the 9/11 Act requirement to scan 100 percent of all U.S.- bound cargo by July 2012. The first initiative, the “strategic trade corridor strategy,” involves scanning 100 percent of U.S.-bound containers at selected foreign ports where CBP believes it will mitigate the greatest risk of weapons of mass destruction (WMD) entering the United States. The Secretary of Homeland Security approved this strategy and, according to CBP, is in negotiations with foreign governments to expand SFI to ports in those countries. The second initiative, known as “10+2”, requires importers to provide 10 data elements and vessel carriers to provide 2 data elements on containers and their cargo to CBP, which provides further information to CBP, thus, improving its ability to identify containers that may pose a risk of containing WMD for additional scrutiny—such as scanning or physical inspection. Based on discussions with DHS and CBP officials, it is unclear whether DHS intends for the strategic trade corridor strategy and 10+2 to be implemented in lieu of the 100 percent scanning requirement or whether it is the first phase of implementation. While these initiatives may collectively improve container security, they will not enable CBP to fully achieve the 9/11 Act requirement to scan 100 percent of U.S.-bound containers by July 2012. According to CBP, it does not have a plan for fully implementing the scanning requirement by this date because it questions the feasibility; however, it has not performed a feasibility analysis of expanding 100 percent scanning, as required by the SAFE Port Act. To address this, in October 2009, we recommended that CBP conduct a feasibility analysis of implementing 100 percent scanning and provide the results, as well as alternatives to Congress, in order to determine the best path forward to strengthen container security. CBP concurred with our recommendation. Further, senior DHS and CBP officials acknowledge that most, if not all foreign ports, will not be able to meet the July 2012 target date for scanning all U.S.-bound cargo. As a result, DHS has recently decided to grant a blanket extension to all foreign ports, thus extending the target date for compliance with this requirement by 2 years, to July 2014. In November 2009 we reported that, based on lessons learned from its early experiences with enrollment and activation, TSA and its contractor took steps to prepare for a surge in TWIC enrollments and activations as local compliance dates approached. For example, according to TSA and port facility representatives, TSA and its contractor increased enrollment center resources, such as increasing the number of enrollment and activation stations to meet projected TWIC user demands. Likewise, the Coast Guard employed strategies to help the maritime industry meet the TWIC national compliance date while not disrupting the flow of commerce. As a result of these efforts, TSA reported enrolling 1,121,461 workers in the TWIC program, or over 93 percent of the estimated 1.2 million users, by the April 15, 2009 deadline. Although most workers received their TWICs, TSA data show that some workers experienced delays in receiving TWICs. Among the reasons for the delays was that a power failure occurred in October 2008 at the government facility that processes TWIC data that caused a hardware component failure in the TWIC enrollment and activation system for which no replacement component was on hand. In our November 2009 report on TWIC, we made recommendations to TSA to expedite the development of contingency and disaster recovery plans and system(s). DHS stated it is taking steps to address this recommendation and future potential TWIC system failures by developing a system to support disaster recovery by 2012. While DHS’s efforts are a positive step, until they are complete, TWIC systems remain vulnerable to similar disasters. In response to our 2006 recommendation and a SAFE Port Act requirement, TSA initiated a pilot in August 2008 known as the TWIC reader pilot, to test TWIC-related access control technologies. The pilot is expected to test the viability of selected biometric card readers for use in reading TWICs within the maritime environment and test the technica l aspects of connecting TWIC readers to access control systems. The results of the pilot are expected to inform the development of the card reader rule requiring TWIC readers for use in controlling access at MTSA regulated vessels/facilities. Based on the August 2008 pilot initiation date, the card reader rule is to be issued no later than 24 months from the initiation of the pilot, or by August 2010. Although TSA has made significant progress to incorporate best practices into TWIC’s schedule for implementing the reader pilot program, weaknesses continue to exist that limit TSA’s ability to use the schedule as a management tool to guide the pilot and accurately identify the pilot’s completion date. In response to limitations that we identified, the program office developed a new TWIC pilot master schedule in March 2009, and updated it in April 2009, and again in May 2009. The pilot schedule went from not meeting any of the nine scheduling best practices in September 2008 to fully addressing one of the practices, addressing seven practices to varying degrees, and not addressing one practice. While TSA has improved its technical application of program scheduling practices on the TWIC reader pilot program, as of May 2009, weaknesses remain that may adversely impact its usefulness as a management tool. For example, the schedule does not accurately reflect all key pilot activities or assign resources to those activities. To address these weaknesses, in our November 2009 report we recommended that TSA, in concert with pilot participants, fully incorporate best practices for program scheduling in the pilot. TSA concurred in part with our recommendation. In addition, shortfalls in TWIC pilot planning have presented a challenge for TSA and the Coast Guard in ensuring that the pilot is broadly representative of deployment conditions. This is in part because an evaluation plan that fully identifies the scope of the pilot and the methodology for collecting and analyzing the information resulting from the pilot has not been developed. Agency officials told us that no such evaluation plan was developed because they believe that the existing pilot documentation coupled with subject matter expertise would be sufficient to guide the pilot. However, our review of the TWIC pilot highlights weaknesses that could be rectified by the development and use of an evaluation plan. To address this, in November 2009, we recommended that TSA and the Coast Guard develop an evaluation plan to help ensure that needed information on the use of biometrics readers will result from the pilot. DHS concurred and discussed actions to implement the recommendation, but it is too early to determine if the intended actions will fully address the intent of the recommendation. While DHS and the Coast Guard have developed a strategy and programs to reduce the risks associated with small vessels, they face ongoing challenges in tracking small vessels and preventing attacks by such vessels. In April 2008, DHS issued its Small Vessel Security Strategy and is now in the process of developing and reviewing a more detailed implementation plan. After review by the Coast Guard and CBP, the draft plan was forwarded to DHS on September 18, 2009 with a recommendation for approval, but DHS has not yet issued a final decision. As part of its effort to improve security in the maritime domain, the Coast Guard is also implementing two major unclassified systems to track a broad spectrum of vessels. While these systems use proven technologies, they depend on the compliance of vessel operators to carry equipment needed to interact with these systems and to make sure the systems are turned on and functioning properly. These systems, however, generally cannot track small vessels. The Coast Guard and other agencies have other systems, though—which can include cameras and radars—that can track small vessels within ports, but these systems are not installed at all ports, and do not always work in bad weather or at night. In addition, the Coast Guard and other agencies, such as the New Jersey State Police, have several programs in place to address risks from small vessels, such as outreach efforts to the boating community to share threat information. However, the Coast Guard program faces resource limitations. For example, the Coast Guard’s program to reach out to the boating community for their help in detecting suspicious activity, America’s Waterway Watch, lost the funding it received through a Department of Defense readiness training program for military reservists in fiscal year 2008. Now it must depend on the activities of the Coast Guard Auxiliary, a voluntary organization, for most of its outreach efforts. Even with systems in place to track small vessels, there is widespread agreement among maritime stakeholders that it is very difficult to detect threatening activity by small vessels without prior knowledge of a planned attack. As we previously reported in March 2009, TSA has taken several key steps to meet the air cargo screening mandate of the 9/11 Act as it applies to domestic cargo. TSA’s approach involves multiple air cargo industry stakeholders sharing screening responsibilities across the air cargo supply chain. According to TSA officials, this decentralized approach is expected to minimize carrier delays, cargo backlogs, and potential increases in cargo transit time, which would likely result if screening were conducted primarily by air carriers at the airport. The specific steps that TSA has taken to address domestic air cargo screening include the following: Revised air carrier security programs: Effective October 1, 2008, TSA established a requirement for 100 percent screening of nonexempt cargo transported on narrow-body passenger aircraft. Effective February 1, 2009, TSA also required air carriers to ensure the screening of 50 percent of all nonexempt air cargo transported on all passenger aircraft. Furthermore, effective February 2009, TSA revised or eliminated most of its screening exemptions for domestic cargo. Created the Certified Cargo Screening Program (CCSP): TSA created a voluntary program to allow screening to take place earlier in the shipping process and at various points in the air cargo supply chain—including before the cargo is consolidated. In this program, air cargo industry stakeholders—such as freight forwarders and shippers—voluntarily apply to become certified cargo screening facilities (CCSF). CCSFs in the program were required to begin screening cargo as of February 1, 2009. Issued an interim final rule: On September 16, 2009, TSA issued an interim final rule, effective November 16, 2009, that among other things, codifies the statutory air cargo screening requirements of the 9/11 Act and establishes requirements for entities participating in the CCSP. Established the Air Cargo Screening Technology Pilot: To operationally test explosives trace detection (ETD) and X-ray technology among CCSFs, TSA created the Air Cargo Screening Technology Pilot in January 2008, and selected some of the largest freight forwarders to use the technologies and report on their experiences. This pilot is ongoing, with an anticipated end date of August 2010, and the results have not yet been finalized. Expanded its explosives detection canine program: To assist air carriers in screening cargo, TSA has taken steps to expand the use of TSA-certified explosives detection canine teams. TSA now has 120 allocated canine teams dedicated to air cargo screening at 20 major airports. While these steps are encouraging, TSA faces several challenges in meeting the air cargo screening mandate. First, although industry participation in the CCSP is vital to TSA’s approach to move screening responsibilities across the supply chain, the voluntary nature of the program may make it difficult to attract program participants needed to screen the required levels of domestic cargo. Attracting certified cargo screening facilities (CCSF) is important because much cargo is currently delivered to air carriers in a consolidated form and the requirement to screen individual pieces of cargo will necessitate screening earlier in the air cargo supply chain. However, there are concerns about potential program costs, including acquiring expensive technology, hiring additional personnel, conducting additional training, and making facility improvements. Second, while TSA has taken steps to test technologies for screening and securing air cargo, it has not yet completed assessments of the technologies it plans to allow air carriers and program participants to use in meeting the August 2010 screening mandate. According to TSA officials, the agency has conducted laboratory assessments and plans to complete operational testing of X-ray technologies by late 2009, and laboratory and operational testing of explosives trace detection technology by August 2010. However, these technologies, which have not yet been fully tested for effectiveness, are currently being used by industry participants to meet air cargo screening requirements. Third, TSA faces challenges overseeing compliance with the CCSP due to the size of its current Transportation Security Inspector (TSI) workforce. Under the CCSP, in addition to performing inspections of air carrier and freight forwarders, TSIs are to also perform compliance inspections of new regulated entities that voluntarily become CCSFs, as well as conduct additional CCSF inspections of existing freight forwarders. TSA officials have stated that there may not be enough TSIs to conduct compliance inspections of all the potential CCSFs once the program is fully implemented by August 2010. Until TSA completes its staffing study, TSA may not be able to determine whether it has the necessary staffing resources to ensure that entities involved in the CCSP are meeting TSA requirements to screen and secure air cargo. Finally, TSA has taken some steps to meet the screening mandate as it applies to inbound cargo but does not expect to achieve 100 percent screening of inbound cargo by the August 2010 deadline. TSA revised its requirements to, in general, require carriers to screen 50 percent of nonexempt inbound cargo. TSA also began harmonization of security standards with other nations through bilateral and quadrilateral discussions. In addition, TSA continues to work with CBP to leverage an existing CBP system to identify and target high-risk air cargo. However, TSA does not expect to meet the mandated 100 percent screening level by August 2010. This is due, in part, to existing inbound screening exemptions, which TSA has not reviewed or revised, and to challenges TSA faces in harmonizing the agency’s air cargo security standards with those of other nations. Moreover, TSA’s international inspection resources are limited. We will continue to explore these issues as part of our ongoing review of TSA’s air cargo security efforts, to be issued next year. In our September 2009 report on airport security, we reported that TSA has implemented a variety of programs and protective actions to strengthen the security of commercial airports. For example, in March 2007, TSA implemented a random worker screening program—the Aviation Direct Access Screening Program (ADASP)—nationwide to enforce access procedures, such as ensuring that workers do not possess unauthorized items when entering secured areas. In addition, TSA has expanded requirements for background checks and the population of individuals who are subject to these checks, and has established a statutorily directed pilot program to assess airport security technology. In 2004 TSA initiated the Airport Access Control Pilot Program to test, assess, and provide information on new and emerging technologies, including biometrics. TSA issued a final report on the pilots in December 2006. As we reported in September 2009, while TSA has taken numerous steps to enhance airport security, it continues to face challenges in several areas, such as assessing risk, evaluating worker screening methods, addressing airport technology needs, and developing a unified national strategy for airport security. For example, while TSA has taken steps to assess risk related to airport security, it has not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS’s National Infrastructure Protection Plan . To address these issues, we recommended, among other things, that TSA develop a comprehensive risk assessment of airport security and milestones for its completion, and evaluate whether the current approach to conducting vulnerability assessments appropriately assesses vulnerabilities. DHS concurred with these recommendations. Further, to respond to the threat posed by airport workers, the Explanatory Statement accompanying the DHS Appropriations Act, 2008, directed TSA to use $15 million of its appropriation to conduct a pilot program at seven airports to help identify the potential costs and benefits of 100 percent worker screening and other worker screening methods. In July 2009 TSA issued a final report on the results and concluded that random screening is a more cost-effective approach because it appears “roughly” as effective in identifying contraband items at less cost than 100 percent worker screening. However, the report also identified limitations in the design and evaluation of the program and in the estimation of costs. Given the significance of these limitations, we reported in September 2009 that it is unclear whether random worker screening is more or less cost- effective than 100 percent worker screening. In addition, TSA did not document key aspects of the pilot’s design, methodology, and evaluation, such as a data analysis plan, limiting the usefulness of these efforts. To address this, we recommended that TSA ensure that future airport security pilot program evaluation efforts include a well-developed and well- documented evaluation plan, to which DHS concurred. Moreover, although TSA has taken steps to develop biometric worker credentialing, it is unclear to what extent TSA plans to address statutory requirements regarding biometric technology, such as developing or requiring biometric access controls at airports, establishing comprehensive standards, and determining the best way to incorporate these decisions into airports’ existing systems. To address this issue, we have recommended that TSA develop milestones for meeting statutory requirements for, among other things, performance standards for biometric airport access control systems. DHS concurred with this recommendation. Finally, 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 that incorporates key characteristics of effective security strategies, such as measurable goals and priorities, to which DHS concurred. Federal law and policy establish DHS as the focal point for efforts to protect our nation’s computer-reliant critical infrastructures. Since 2005, we have reported that DHS has not yet fully satisfied its key responsibilities for protecting these critical infrastructures and have made recommendations for DHS to address in key cyberscurity areas, to include the five key areas shown in table 1. DHS has since developed and implemented certain capabilities to satisfy aspects of its responsibilities, but the department has not fully implemented our recommendations and, thus, further action needs to be taken to address these areas. For example, in July 2008, we reported that DHS’s United States Computer Emergency Readiness Team did not fully address 15 key attributes of cyber analysis and warning capabilities related to four key areas. As a result, we recommended that the department address shortfalls in order to fully establish a national cyber analysis and warning capability. DHS agreed in large part with our recommendation. Similarly, in September 2008, we reported that since conducting a major cyber attack exercise, called Cyber Storm, DHS had demonstrated progress in addressing eight lessons it had learned from these efforts, but its actions to address the lessons had not been fully implemented. Consequently, we recommended that DHS complete corrective activities to strengthen coordination between public and private sector participants in response to significant cyber incidents. DHS concurred with our recommendation and has made progress in completing some identified activities. We also testified in March 2009 on needed improvements to the nation’s cybersecurity strategy. In preparing for that testimony, we obtained the views of experts (by means of panel discussions) on critical aspects of the strategy, including areas for improvement. The experts, who included former federal officials, academics, and private sector executives, highlighted 12 key improvements that are, in their view, essential to improving the strategy and our national cybersecurity posture. The key strategy improvements identified by these experts are listed in table 2. These recommended improvements to the national strategy are in large part consistent with our previous reports and extensive research in this area. Until they are addressed, our nation’s most critical federal and private sector cyber infrastructure remain at unnecessary risk to attack from our adversaries. Mr. Chairman, this concludes my statement for the record. For questions about this statement, please contact Cathleen A. Berrick at 202-512-8777, or berrickc@gao.gov. For further information regarding maritime security issues, please contact Stephen L. Caldwell at 202-512- 9610, or caldwells@gao.gov. For further information regarding aviation security issues, please contact Stephen M. Lord at 202-512-4379, or lords@gao.gov. For further information regarding cybersecurity issues, contact David A. Powner at 202-512-9286, or pownerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contacts named above, Christopher Conrad, Assistant Director, managed this review. Jonathan Bachman, Dave Bruno, Lisa Canini, Joseph Cruz, Michael Gilmore, Barbara Guffy, Lemuel Jackson, Steve Morris, Robert Rivas, Yanina Golburt Samuels, and Rebecca Kuhlmann Taylor made significant contributions to the work. Frances Cook, Geoffrey Hamilton, Tom Lombardi, and Jan Montgomery provided legal support. Linda Miller provided assistance in testimony preparation. 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. | Securing the nation's transportation and information systems is a primary responsibility of the Department of Homeland Security (DHS). Within DHS, the Transportation Security Administration (TSA) is responsible for securing all transportation modes; U.S. Customs and Border Protection (CBP) is responsible for cargo container security; the U.S. Coast Guard is responsible for protecting the maritime environment; and the National Protection and Programs Directorate is responsible for the cybersecurity of critical infrastructure. This statement focuses on the progress and challenges DHS faces in key areas of maritime, aviation, and cybersecurity. It is based on GAO products issued from June 2004 through November 2009, as well as ongoing work on air cargo security. GAO reviewed relevant documents; interviewed cognizant agency officials; and observed operations at 12 airports, chosen by size and other factors. The results are not generalizable to all airports. DHS hasmade progress in enhancing security in the maritime sector, but key challenges remain. For example, as part of a statutory requirement to scan 100 percent of U.S.-bound container cargo by July 2012, CBP has implemented the Secure Freight Initiative at select foreign ports. However, CBP does not have a plan for fully implementing the 100 percent scanning requirement by July 2012 because it questions the feasibility, although it has not performed a feasibility analysis of the requirement. Rather, CBP has planned two new initiatives to further strengthen the security of container cargo, but these initiatives will not achieve 100 percent scanning. Further, TSA, the Coast Guard, and the maritime industry took a number of steps to enroll over 93 percent of the estimated 1.2 million users in the Transportation Worker Identification Credential (TWIC) program (designed to help control access to maritime vessels and facilities) by the April 15, 2009 compliance deadline, but they experienced challenges resulting in delays and in ensuring the successful execution of the TWIC pilot. While DHS and the Coast Guard have developed a strategy and programs to reduce the risks posed by small vessels, they face ongoing resource and technology challenges in tracking small vessels and preventing attacks by such vessels. In the aviation sector, TSA has made progress in meeting the statutory mandate to screen 100 percent of air cargo transported on passenger aircraft by August 2010 and in taking steps to strengthen airport security, but TSA continues to face challenges. TSA's efforts include developing a system to allow screening responsibilities to be shared across the domestic air cargo supply chain, among other steps. Despite these efforts, TSA and the industry face a number of challenges including the voluntary nature of the program, and ensuring that approved technologies are effective with air cargo. TSA also does not expect to meet the mandated 100 percent screening deadline as it applies to air cargo transported into the U.S., in part due to existing screening exemptions for this type of cargo and challenges in harmonizing security standards with other nations. GAO is reviewing these issues as part of its ongoing work and will issue a final report next year. In addition, TSA has taken a variety of actions to strengthen airport security by, among other things, implementing a worker screening program; however, TSA still faces challenges in this area. DHS has made progress in strengthening cybersecurity, such as addressing some lessons learned from a cyber attack exercise, but further actions are warranted. Since 2005, GAO has reported that DHS has not fully satisfied its key responsibilities for protecting the nation's computer-reliant critical infrastructures and has made related recommendations to DHS, such as bolstering cyber analysis and warning capabilities and strengthening its capabilities to recover from Internet disruptions. DHS has since developed and implemented certain capabilities to satisfy aspects of its responsibilities, but it has not fully implemented GAO's recommendations and, thus, more action is needed to address the risk to critical cybersecurity infrastructure. |
Executive Order 12958, Classified National Security Information, as amended, specifies three incremental levels of classification— Confidential, Secret, and Top Secret—to safeguard information pertaining to the following: military plans, weapons systems, or operations; foreign government information; intelligence activities (including special activities), intelligence sources/methods, cryptology; foreign relations/activities of the United States, including confidential sources; scientific, technological, or economic matters relating to national security, which includes defense against transnational terrorism; United States government programs for safeguarding nuclear materials vulnerabilities or capabilities of systems, installations, infrastructures, projects, plans, or protection services relating to the national security, which includes defense against transnational terrorism; or weapons of mass destruction. The requisite level of protection is determined by assessing the damage to national security that could be expected if the information were compromised (see table 1). Executive Order 12958, as amended, prohibits classifying information so as to conceal violations of law, inefficiency, or administrative error; prevent embarrassment to a person, organization, or agency; restrain competition; or prevent or delay the release of information, which does not require protection in the interest of national security. Classification decisions can be either original or derivative. Original classification is the initial determination that information requires protection against unauthorized disclosure in the interest of national security. An original classification decision typically results in the creation of a security classification guide, which is used by derivative classifiers and identifies what information should be protected, at what level, and for how long. Derivative classification is the incorporation, paraphrasing, or generation of information in new form that is already classified, and marking it accordingly. In 2004, 1,059 senior-level officials in DOD were designated original classification authorities, and as such, they were the only individuals permitted to classify information in the first instance. But any of the more than 1.8 million DOD personnel who possess security clearances potentially have the authority to classify derivatively. According to DOD, less than 1 percent of the estimated 63.8 million classification decisions the department made during fiscal years 2000 through 2004 were original; however, ultimately, original classification decisions are the basis for 100 percent of derivative classification decisions. Executive Order 12958, as amended, assigns ISOO the responsibility for overseeing agencies’ compliance with the provisions of the Executive Order. In this capacity, ISOO (1) performs on-site inspections of agency information security operations, (2) conducts document reviews, (3) monitors security education and training programs, and (4) reports at least annually to the President on the degree to which federal agencies are complying with the Executive Order. ISOO also issued Classified National Security Information Directive No. 1 to implement the Executive Order. The Executive Order and the ISOO directive stipulate a number of specific responsibilities expected of federal agencies, including DOD. Examples of responsibilities are promulgating internal regulations; establishing and maintaining security education and self-inspection programs; conducting periodic declassification reviews; and committing sufficient resources to facilitate effective information security operations. The Executive Order and the ISOO directive also require classifiers to apply standard markings to classified information. For example, originally classified records must include the overall classification as well as portion or paragraph marking, a “Classified by” line to identify the original classifier, a reason for classification, and a “Declassify on” date line. Executive Order 12958, as amended, states that information shall be declassified when it no longer meets the standards for classification. The point at which information generally becomes declassified is set when the decision is made to classify, and it is either linked to the occurrence of an event, such as the completion of a mission, or to the passage of time. Classified records that are more than 25 years old and have permanent historical value are automatically declassified unless an exemption is granted because their contents could cause adverse national security repercussions. The Defense Security Service Academy is responsible for providing security training, education, and awareness to DOD components, DOD contractors, and employees of other federal agencies and selected foreign governments. The academy’s 2005 course catalog includes more than 40 courses in general security and in specific disciplines of information, information systems, personnel, and industrial security, and special access program security. These courses are free for DOD employees and are delivered by subject matter experts at the academy’s facilities in Linthicum, Maryland, and at student sites worldwide via mobile training teams. Some courses are available through video teleconferencing and the Internet. In fiscal year 2004, more than 16,000 students completed academy courses, continuing an upward trend over the past 4 years. According to ISOO, DOD is one of the most prolific classifiers (original and derivative combined) among federal government agencies. From fiscal year 2000 to fiscal year 2004, DOD and the Central Intelligence Agency had individual classification activity that were each more than all other federal agencies combined. In 3 of these 5 years, DOD’s classification activity was higher than that of the Central Intelligence Agency’s (see figure 1). During these same 5 years, DOD declassified more information than any other federal agency, and it was responsible for more than three-quarters of all declassification activity in the federal government. A lack of oversight and inconsistent implementation of DOD’s information security program are increasing the risk of misclassification. DOD’s information security program is decentralized to the DOD component level, and OUSD(I) involvement in, and oversight of, components’ information security programs is limited. Also, while some DOD components and subordinate commands appear to manage their programs effectively, we identified weaknesses in others’ training, self-inspections, and security classification guide management. As a result, we found that many of the organizations we reviewed do not fully satisfy federal and DOD classification management requirements, which contributes to an increased risk of misclassification. Specifically, most of the components and subordinate commands we examined did not establish procedures to ensure that personnel authorized to and actually performing classification actions are adequately trained to do so, did not conduct rigorous self- inspections, and did not take required actions to ensure that derivative classification decisions are based on current, readily available documentation. According to the ISOO Director, adequate training, self- inspections, and documentation are essential elements of a robust information security program and their absence can impede effective information sharing and possibly endanger national security. As required by Executive Order 12958, OUSD(I) issued a regulation in January 1997, Information Security Program, outlining DOD’s information security program. This regulation does not specifically identify oversight responsibilities for OUSD(I), but instead decentralizes the management of the information security program to the heads of DOD components. Consequently, according to the DOD regulation, each DOD component is responsible for establishing and maintaining security training, conducting self-inspections, and issuing documentation to implement OUSD(I) guidance and security classification guides. OUSD(I) exercises little oversight over how the components manage their programs. As a result, OUSD(I) does not directly monitor components’ compliance with federal and DOD training, self-inspection, and documentation requirements stipulated in Executive Order 12958, as amended; the ISOO directive; and the DOD regulation. For example, OUSD(I) does not require components to report on any aspects of the security management program. Also, OUSD(I) does not conduct or oversee self-inspections, nor does it confirm whether self-inspections have been performed or review self-inspection findings. At the time of our review, OUSD(I)’s involvement consisted of accompanying ISOO on periodic inspections of select DOD components and subordinate commands that are not under the four military services. Additionally the DOD implementing regulation does not describe what self-inspections should cover, such as the recommended standards in the ISOO directive. Based on our analysis, we believe that OUSD(I)’s decentralized approach, coupled with the lack of specificity in the department’s implementing regulation on what components must do to satisfy the Executive Order and ISOO directive self-inspection requirement, has resulted in wide variance in the quality of components’ information security programs. Because all cleared personnel have the authority to derivatively classify information, they are required to have annual refresher training, whether or not they engaged in derivative classification actions. All of the 19 DOD components and subordinate commands we reviewed offer initial and annual refresher training for their personnel who are involved with derivative classification activities, and most track attendance to ensure that the training is received, as required by the ISOO directive and the DOD regulation (see table 2). However, from our analysis of the components’ and subordinate commands’ initial and annual refresher training, we determined that only 11 of the 19 components and subordinate commands cover the fundamental classification principles cited in the ISOO directive, the DOD regulation, and specifically defined as the minimum training that classifiers must have in a November 2004 memorandum signed by the Under Secretary of Defense for Intelligence. That is, the training offered by 8 of the components and subordinate commands does not describe the basic markings that must appear on classified information, the difference between original and derivative classification, the criteria that must be met to classify information, and the process for determining the duration of classification. Consequently, this training will not provide DOD with assurance that it will reduce improper classification practices, as called for in the ISOO directive. We also noted that 14 of the DOD components and subordinate commands do not assess whether participants understand the course material by administering a proficiency test. Components and subordinate commands that cover the classification principles cited in the ISOO directive and the DOD regulation include: the Army Intelligence and Security Command, which issues the Command’s A Users Guide to the Classification and Marking of Documents to personnel; the Army Materiel Command, which uses information obtained from the Defense Security Service Academy to develop its refresher training on marking classified records; the Naval Surface Warfare Center, Dahlgren Division, which requires personnel to complete an online refresher course and pass a proficiency test before they can print out a certificate indicating a passing score; the 88th Air Base Wing, which requires personnel to attend four quarterly briefings each year on relevant classification management topics; the Special Operations Command, which developed an online refresher course, complete with a proficiency test that must be passed to receive credit for attending; the National Geospatial-Intelligence Agency, which requires personnel to sign an attendance card indicating that they completed initial and annual refresher training, and issues them the agency’s Guide to Marking Documents; and the Defense Intelligence Agency, which provides personnel a 13-page reference guide that explains how to comply with Executive Order 12958, as amended. All of the components and subordinate commands that we examined provide their original classification authorities with initial training, frequently in one-on-one sessions with a security manager. However, only about half of the components and subordinate commands we examined provide the required annual refresher training to original classification authorities. Eleven of the 19 DOD components and subordinate commands we reviewed do not perform required self-inspections as part of the oversight of their information security programs. The ISOO directive requires agencies to perform self-inspections at all organizational levels that originate or handle classified information. Agencies have flexibility in determining what to cover in their self-inspections, although ISOO lays out several standards that it recommends DOD and other agencies consider including, such as: reviewing a sample of records for appropriate classification and proper markings; assessing familiarity with the use of security classification guides; reviewing the declassification program; evaluating the effectiveness of security training; and assessing senior management’s commitment to the success of the program. In its Information Security Program regulation, DOD components are directed to conduct self-inspections based on program needs and the degree of involvement with classified information; components and subordinate commands that generate significant amounts of classified information should be inspected at least annually. “Program needs,” “degree of involvement,” and “significant amounts” are not quantified, and components and subordinate commands have interpreted these phrases differently. For example, the Marine Corps performs self-inspections annually; the Naval Sea Systems Command performs self-inspections every 3 years; and Headquarters, Department of the Army, does not perform them. Navy and Army officials with whom we spoke cited resource constraints, and, in particular, staffing shortages, as the reason why inspections were not performed more often. Based on information provided by OUSD(I) for end of fiscal year 2003. The actual number of DOD personnel who completed an academy information security course in fiscal years 2003 and 2004 is less than 4,775 because some personnel completed multiple courses. The DOD regulation’s chapter on training requires DOD components to evaluate the quality and effectiveness of security training during self- inspections; however, none of the 19 components and subordinate commands we examined does so. Evaluating the quality of training during self-inspections can identify gaps in personnel’s skill and competencies, and focus efforts to improve existing training. Ten of the 19 DOD components and subordinate commands we reviewed perform staff assistance visits of their lower echelon units in lieu of more rigorous self-inspections. Staff assistance visits, which typically are not staffed by inspectors, train the visited organization on how to meet inspection requirements, and any noted deficiencies are informally briefed to the local command staff. However, no official report is created for tracking and resolving deficiencies. According to ISOO officials, staff assistance visits do not fulfill the inspection requirement specified in Executive Order 12958, as amended. However, in commenting on a draft of this report, DOD officials stated that they were unaware of ISOO’s position on staff assistance visits. Of the 19 DOD components and subordinate commands we reviewed, only 7 conduct periodic document reviews as part of their self-inspections, although they are required to do so. In addition to revealing the types and extent of classification and marking errors, a document review can offer insight into the effectiveness of annual refresher training. DOD has no assurance that personnel who derivatively classify information are using up-to-date security classification guides; however, our review showed that more than half of the estimated number of guides at the 17 organizations that could identify the number of guides they had were tracked for currency and updated at least every 5 years. DOD’s approach to providing personnel access to up-to-date classification guides through a central library at its Defense Technical Information Center has been ineffective. OUSD(I) is studying ways to improve the centralized availability of up-to-date classification guides. Executive Order 12958, as amended, directs agencies with original classification authority, such as DOD, to prepare security classification guides to facilitate accurate and consistent derivative classification decisions. Security classification guides identify what information needs protection and the level of classification; the reason for classification, to include citing the applicable categories in the Executive Order; and the duration of classification. The ISOO directive and DOD regulation also require agencies to review their classification guides for currency and accuracy at least once every 5 years, and to update them as necessary. As table 3 shows, some DOD components and subordinate commands did not manage their classification guides to facilitate accurate derivative classification decisions. Since 2 of the 19 organizations were unable to provide us with the number of classification guides that they are responsible for, we could not determine the total number of classification guides belonging to the components and subordinate commands we reviewed. However, the remaining 17 organizations estimated their combined total to be 2,243 classification guides. Of the 13 components and subordinate commands we reviewed that possess multiple classification guides: 10 maintain paper or electronic copies of classification guides in a central location, or are in the process of doing so; 8 track the currency of more than half of their combined classification guides to facilitate their review, to ensure that they are updated at least every 5 years, in accordance with the ISOO directive; and 8 either have made or are in the process of making their classification guides available to authorized users electronically. These 8 components and subordinate commands represent over 1,700—more than 75 percent— of the classification guides belonging to the DOD organizations that we reviewed. DOD’s strategy for providing personnel ready access to up-to-date security classification guides to use in making derivative classification decisions has been ineffective for two reasons. Officials at some of the DOD components and subordinate commands we examined told us that they routinely submit copies of their classification guides to the Defense Technical Information Center, as required, while others told us they do not. However, because of the way in which the Defense Technical Information Center catalogs its classification guide holdings, center officials could not tell us the names and the number of classification guides it possesses or is missing. In addition, center officials told us that they cannot compel original classification authorities to submit updated versions of their classification guides or report a change in status, such as a classification guide’s cancellation. When the center receives a new classification guide, it enters up to three independent search terms in an electronic database to create a security classification guide index. As of October 2005, the center had in excess of 4,000 index citations for an estimated 1,400 classification guides, which is considerably fewer than the estimated 2,234 classification guides that 17 of the 19 components and subordinate commands reported possessing. The absence of a comprehensive central library of up-to-date classification guides increases the potential for misclassification, because DOD personnel may be relying on insufficient, outdated reference material to make derivative classification decisions. Navy and Air Force officials showed us evidence of classification guides that had not been reviewed in more than five years, as the ISOO directive and DOD regulation require. As table 3 shows, several components and subordinate commands have taken or are taking action to improve derivative classifiers’ access to security classification guides; however, except for the Air Force, there is no coordination among these initiatives, and neither the Defense Technical Information Center nor the OUSD(I) is involved. During our review, OUSD(I) officials told us that the department is studying how to improve its current approach to making up-to-date classification guides readily available, departmentwide. In our review of a nonprobability sample of 111 classified OSD documents we questioned DOD officials’ classification decisions for 29 documents— that is, 26 percent of the sample. We also found that 93 of the 111 documents we examined (84 percent) had at least one marking error, and about half had multiple marking errors. Executive Order 12958, as amended, lists criteria for what information can be classified, and for markings that are required to be placed on classified records. While the results from this review cannot be generalized across DOD, they are indications of the lack of oversight and inconsistency that we found in DOD’s implementation of its information security program. To determine the extent to which personnel in five OSD offices followed established procedures for classifying information, we reviewed 111 documents recently classified by OSD, which revealed several questionable classification decisions and a large number of marking errors. In all, we questioned the classification decisions in 29, comprising 26 percent of the documents in the OSD sample. The majority of our questions pertained to whether all of the information marked as classified met established criteria for classification (16 occurrences), the seemingly inconsistent treatment of similar information within the same document (10 occurrences), and the apparent mismatch between the reason for classification and the document’s content (5 occurrences). We gave the OSD offices that classified the documents an opportunity to respond to our questions, and we received written responses from the Offices of the Under Secretaries of Defense for Policy; Comptroller/Chief Financial Officer; and for Acquisition, Technology, and Logistics; regarding 17 of the 29 documents. In general, they agreed that several of the documents in question contained errors of misclassification. For example, we questioned the need to classify all of the information marked Confidential or Secret in 13 of the 17 documents. In their written responses, the three OSD offices agreed that, in 5 of the 13 documents, the information was unclassified, and in a sixth document the information should be downgraded from Secret to Confidential. The OSD offices did not state an opinion on 3 documents. We did not receive responses to our questions from the other two OSD offices on the remaining 12 documents. The Executive Order, ISOO directive, and DOD’s regulation together establish criteria for the markings that are required on classified records (see table 4). The documents included in our document review were created after September 22, 2003, which is the effective date of ISOO’s Classified National Security Information Directive No. 1 and almost 6 months after Executive Order 12958 was last amended. The ISOO directive prescribes a standardized format for marking classified information that, according to the directive, is binding except in extraordinary circumstances or as approved by the ISOO Director. To implement classification marking changes that resulted from the Executive Order and directive, DOD issued its own interim guidance on April 16, 2004. Our review revealed that 93 of the 111 OSD documents (84 percent) had at least one marking error and about half of the documents had multiple marking errors, resulting in 1.9 errors per document we reviewed. As figure 2 shows, the marking errors that occurred most frequently pertained to declassification, the sources used in derivative classification decisions, and portion marking. The most common marking errors that we found in the OSD document sample, by type of marking error, are listed in table 5. Since ISOO issued its directive in September 2003, it has completed 19 classified document reviews of DOD components and subordinate commands. The types of marking errors that ISOO reported finding were similar to what we found among the OSD documents. Specifically, marking errors associated with declassification, source, and portion marking represented more than 60 percent of the errors in both document samples. DOD’s estimate of how many classification decisions it makes each year is of questionable accuracy. Although ISOO provides DOD components with guidance as to how they should calculate classification decisions, we found considerable variance within the department in how this guidance was implemented. For example, there was inconsistency regarding which records are included in the estimate, the number and types of lower echelon units that are included, when to estimate, and for how long to estimate. ISOO requires federal agencies to estimate the number of original and derivative classification decisions they made during the previous fiscal year, which ISOO includes in its annual report to the President. Agency estimates are based on counting the number of Confidential, Secret, and Top Secret original and derivative classification decisions during a designated time period and extrapolating an annual rate from them. According to ISOO guidance, agencies typically count their classification decisions during a consecutive 2-week period in each of the four quarters of the fiscal year, for a combined total of 8 weeks. OUSD(I) officials told us that two highly classified categories of information, sensitive compartmented information and special access programs, are included in the count; however, several components and subordinate commands we examined omit these categories from their totals. In addition, some components and subordinate commands—such as the Army’s Research, Development, and Engineering Command and the National Geospatial-Intelligence Agency—include e-mails in their count, while others—such as the Defense Intelligence Agency and the Central Command—do not. Whether or not to include e-mails can dramatically affect counts. For example, the National Security Agency’s classification estimate declined from 12.5 million in fiscal year 2002 to only 7 in fiscal year 2003. Agency officials attributed this dramatic drop to e-mails being included in the totals for fiscal year 2002 and not for fiscal year 2003. Some DOD components and subordinate commands do not query their entire organization, to encompass all personnel who may be classifying information. For example, the Defense Intelligence Agency randomly selects four of its eight directorates to participate, and the National Security Agency and the Naval Air Systems Command selects only lower echelon organizations that have an original classification authority. As a result, these locations omit an unknown number of derivative classification decisions. The Navy bases its annual estimate on data covering a 2-week period from each of its major commands once per year rather than from all of its commands, four times per year as suggested in ISOO guidance. For example, during the first quarter, the Marine Corps is queried, and during the second quarter, the fleet commands are queried. Also, some of the combatant commands’ service components are not queried at all, such as the Army’s component to the European Command, the Navy’s component to the Transportation Command, the Air Force’s component to the Southern Command, and the Marine Corps’ component to the Central Command. In commenting on a draft of this report, the department correctly points out that guidance issued by ISOO allows each component to decide who to include in its classification decisions estimate. The Special Operations Command and the Central Command both schedule their counts at the end of the fiscal year; 4 consecutive weeks at the former, and 8 consecutive weeks at the latter. Special Operations Command officials told us that the end of the fiscal year tends to be a slower operational period, thereby allowing more time to conduct the data collection. DOD components and subordinate commands convert their estimates in different ways to project an entire year. Those that conform to the suggested ISOO format of four 2-week counting periods a year (that is, 8 weeks) multiply their counts by 6.5 (that is, 8 weeks x 6.5 = 52 weeks). The Navy, however, multiplies each of its four separate counts by 429 to account for all of the lower echelon units not represented in the estimate. Our review of DOD’s submissions to ISOO of its estimated number of classification decisions for fiscal years 2000 through 2004, revealed several anomalies. For example, the National Reconnaissance Office reported making more than 6 million derivative and zero original classification decisions during this 5-year period, and the Marine Forces, Atlantic, reported zero derivative and zero original classification decisions during fiscal years 2003 and 2004. Subsequent conversations with Marine Forces, Atlantic, officials indicated that a misunderstanding as to what constitutes a derivative classification decision resulted in an underreporting for those 2 years. Other examples of DOD component data submissions during this 5-year time period that had either a disproportionate reporting of original versus derivative classification decisions or a significant change in counts from 1 year to the next include: DOD reported in fiscal year 2004 that, departmentwide, about 4 percent of its classification decisions were original, yet the Defense Advanced Research Projects Agency and the Joint Forces Command both reported that more than 70 percent of their classification decisions were original. DOD reported in fiscal year 2003, that departmentwide, less than 2 percent of its classification decisions were original, yet the Joint Staff and the European Command both reported more than 50 percent of their classification decisions were original. DOD reported in fiscal year 2002 that, departmentwide, less than 1 percent of its classification decisions were original, yet the Office of the Secretary of Defense and the Southern Command both reported more than 20 percent of their classification decisions were original. DOD reported an increase in the number of original classification decisions during the fiscal year 2002 through 2004 period, from 37,320 to 47,238 (about a 27 percent increase), to 198,354 (about a 300 percent increase). However, during this same 3-year period, the Navy’s trend for original classification decisions was from 1,628 to 16,938 (about a 900 percent increase) to 1,898 (about a 90 percent decrease); and the Army’s trend was from 10,417 to 2,056 (about an 80 percent decrease) to 133,791 (about a 6,400 percent increase). DOD reported a 75 percent decrease in the total number of classification decisions (that is, original and derivative) from fiscal year 2002 to fiscal year 2004, yet several DOD components reported a significant increase in overall classification decisions during this same time period, including the Defense Threat Reduction Agency (a 20,107 percent increase), the Southern Command (1,998 percent increase), Defense Intelligence Agency (a 1,202 percent increase), and the National Geospatial-Intelligence Agency (a 354 percent increase). OUSD(I) has decided to discontinue the practice of DOD components submitting their classification decisions estimates directly to ISOO. Beginning with the fiscal year 2005 estimates, OUSD(I) will scrutinize the classification decision estimates of its components before consolidating and submitting them to ISOO. Properly conducted, OUSD(I)’s review could improve the accuracy of these estimates, if methodological inconsistencies are reduced. Army, Navy, and Air Force classification officials told us that the military services are on pace to meet the target date of 2006 for reviewing their own classified documents that qualify for automatic declassification, and for referring records that contain classified information belonging to other agencies to those agencies—an assertion endorsed by ISOO in its 2004 report to the President. However, these officials told us that they are less likely to meet the target date of 2009 for reviewing records referred to them, and of 2011 for reviewing special media (such as audio and video recordings). DOD’s ability to satisfy the 2009 and 2011 target dates depends, to a great extent, on the actions of other federal agencies. We limited our review of DOD’s automatic declassification program to the four military services because, as figure 3 shows, they performed 85 percent of all the declassification within DOD in fiscal year 2004. Executive Order 12958, as amended, stipulates that on December 31, 2006, and on December 31 of every year thereafter, classified records that are (1) at least 25 years old and (2) of permanent historical value shall in general be automatically declassified, whether or not they have been reviewed. The Executive Order sets a record’s date of origination as the time of original classification, and it also exempts certain types of information from automatic declassification, such as information related to the application of intelligence sources and methods. The automatic declassification deadline for records containing information classified by more than one agency, such as the Army and the Air Force or the Army and the Central Intelligence Agency, is December 31, 2009, and for special media it is December 31, 2011. For the most part, only the originating agency can declassify its own information. Consequently, if the Army discovers classified information that was originated by the U.S. State Department, the Army must alert the State Department and refer the information to the State Department for resolution. The Executive Order describes special media as microforms, motion pictures, audiotapes, videotapes, or comparable media that make its review for possible declassification exemptions “more difficult or costly.” The ISOO directive mirrors these requirements and directs ISOO, in conjunction with its parent organization, the National Archives and Records Administration, and other concerned agencies to develop a standardized process for referring records containing information classified by more than one agency across the federal government. Army, Navy/Marine Corps, and Air Force classification officials told us that they face a variety of challenges impacting their ability to meet the target dates of 2009 for reviewing records referred to them, and of 2011 for reviewing special media. Based on information provided by officials from the military services and the National Archives and Records Administration who are responsible for the automatic declassification effort, it appears that three obstacles hinder their progress toward meeting these deadlines. DOD’s ability to remove these obstacles without the involvement of other federal agencies is limited. First, there is no federal government standard for annotating classified records that contain information classified by more than one agency. For example, two non- DOD agencies both annotate their records with a “D” and an “R,” but for opposite purposes. That is, one of the agencies uses a “D” to denote “deny automatic declassification” and an “R” to denote “release,” while the other agency uses a “D” to denote “declassify” and an “R” to denote “retain.” The National Archives and Records Administration and various interagency working groups and task forces have sought a federal government standard, but National Archives officials told us that they were not optimistic that agencies would reach agreement soon. According to these officials, the lack of a federal government standard has contributed to the inadvertent release of classified information. Second, there is no central location within DOD or the federal government for storing records eligible for automatic declassification that contain information classified by multiple DOD components or non-DOD agencies. To review records originated by the four military services, agencies must send personnel trained to evaluate information for declassification suitability to as many as 14 different sites where the records are stored. For example, the Air Force has records eligible for automatic declassification at storage sites located in Ohio, Alabama, and Texas (see figure 4). National Archives officials pointed out that consolidating the records at fewer sites may be more efficient, and likely more cost- effective. A third factor that may cause DOD to miss meeting the Executive Order deadlines is the lack of a common database that federal government agencies can use to track the status of records containing information classified by more than one agency. The ISOO directive allows federal government agencies to utilize electronic databases to notify other agencies of their referrals; however, agencies have created their own databases that operate independently of one another. In commenting on a draft of this report, DOD officials stated that, despite the lack of federal government standards, the department has been a leading proponent of working collaboratively with other federal agencies to meet automatic declassification deadlines. We cannot confirm the accuracy of DOD’s characterization because DOD’s relationship with other agencies involved in automatic declassification was not part of our review. The Under Secretary of Defense for Intelligence has delegated the execution and oversight of information security to the DOD component level. This decentralized approach, coupled with inconsistency in the implementation of components’ information security programs, has resulted in wide variance in the quality of these programs. For example, the OUSD(I) does not directly monitor components’ compliance with federal and DOD training, self-inspection, and documentation requirements stipulated in Executive Order 12958, as amended; the ISOO directive; and the DOD regulation. Inadequate classification management training, self-inspections, and security classification guide documentation among the various DOD components increase the risk of (1) poor classification decisions and marking errors, similar to what we observed in our OSD document review; (2) restricting access to information that does not pose a threat to national security; and (3) releasing information to the general public that should still be safeguarded. OUSD(I) oversight could reduce the likelihood of classification errors. For example, if OUSD(I) ensured that components evaluated the quality and effectiveness of training and periodically included document reviews in their self-inspections, prevalent classification errors could be addressed through annual refresher training that derivative classifiers complete. Evaluating the quality of training can assist components in targeting scarce resources on coursework that promotes learning and reduces misclassification. Although the results of our review of a sample of OSD documents cannot be generalized departmentwide, we believe these results coupled with the weaknesses in training, self-inspections, and documentation that we found at numerous components and subordinate commands increases the likelihood that documents are not being classified in accordance with established procedures. DOD’s estimate of how many original and derivative classification decisions it makes annually is unreliable because it is based on data from the DOD components that were derived using different assumptions about what should be included and about data collection and estimating techniques. Still, this estimate is reported to the President and to the public, and it is routinely cited in congressional testimony by DOD officials and freedom of information advocates as authoritative. During our review, OUSD(I) decided to resume its practice of reviewing components’ classification estimates before they are submitted to ISOO. If properly implemented, this review could improve data reliability to some extent, but only if it addresses the underlying lack of uniformity in how the individual DOD components are collecting and manipulating their data to arrive at their estimates. The automatic declassification provision in Executive Order 12958, as amended, requires agencies generally to declassify records that are 25 years old or more and that no longer require protection. The Army, Navy/Marine Corps, and Air Force reported they are on track to review all of the documents they classified before the deadline; however, they are less likely to complete their review of the untold number of records containing information classified by other DOD components and non-DOD agencies by the deadlines set in the Executive Order. As the deadlines pass and these records are automatically declassified, information that could still contain national security information becomes more vulnerable to disclosure. DOD’s ability to meet these deadlines is jeopardized both by conditions beyond and conditions within its direct control. For example, DOD cannot require non-DOD agencies to adopt a national standard for annotating classified records, but it can take action to streamline the process of reviewing records containing information classified by more than one DOD component. To reduce the risk of misclassification and create greater accountability across the department, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to establish a centralized oversight process for monitoring components’ information security programs to ensure that they satisfy federal and DOD requirements. This oversight could include requiring components to report on the results of self-inspections or other actions, targeted document reviews, and/or reviews by the DOD Inspector General and component audit agencies. to issue a revised Information Security Program regulation to ensure that those personnel who are authorized to and who actually perform classification actions, receive training that covers the fundamental classification principles as defined in the Under Secretary’s memorandum of November 30, 2004 and that completion of such training is a prerequisite for these personnel to exercise this authority; the frequency, applicability, and coverage of self-inspections, and the reporting of inspection results are based on explicit criteria; and authorized individuals can access up-to-date security classification guides necessary to derivatively classify information accurately. To support informed decision making with regard to information security, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to institute quality assurance measures to ensure that components implement consistently the DOD guidance on estimating the number of classification decisions, thereby increasing the accuracy and reliability of these estimates. To assist DOD in its efforts to meet automatic declassification deadlines, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Intelligence to evaluate the merits of consolidating records eligible for automatic declassification that contain information classified by multiple DOD components at fewer than the current 14 geographically dispersed sites. In commenting on a draft of this report, DOD concurred with all six recommendations; however, the department expressed concern that we did not accurately portray the Navy’s program for managing its security classification guides. Upon further review, we modified table 3 in the report and accompanying narrative to indicate that the Navy (1) does have a centralized library containing paper copies of its security classification guides, and (2) is developing an automated database to make its classification guides available to authorized users electronically. We disagree with the department’s assertion that the Navy is tracking its classification guides to ensure that they are reviewed at least once every 5 years for currency and are updated accordingly. Based on our discussions with Navy information security officials, including the Retrieval and Analysis of Navy (K)lassified Information (RANKIN) Program Manager, and observing a demonstration of the spreadsheet used to catalog security classification guide holdings, we saw no evidence to suggest that currency of guides is being systematically tracked. With respect to our fifth recommendation that focuses on how DOD estimates the number of classification decisions it makes each year, we endorsed the department’s decision to continue scrutinizing its components’ estimates before consolidating and submitting them to ISOO. However, we continue to believe that OUSD(I) should augment its after-the-fact review with measures to ensure that components follow a similar process to derive their classification decisions estimates, such as standardizing the types of records to be included. Adopting a consistent methodology across the department and from year to year should improve the reliability and accuracy of this estimate that is reported to the President. DOD also provided technical comments for our consideration in the final report, which we incorporated as appropriate. DOD’s formal comments are reprinted in appendix II. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Directors of the Defense Intelligence Agency, the National Geospatial-Intelligence Agency, and the National Security Agency. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-5431 or dagostinod@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To conduct our review of the Department of Defense’s (DOD’s) information security program, we met with officials and obtained relevant documentation from the following DOD components and subordinate commands: Department of the Army, Office of the Deputy Chief of Staff for Intelligence, Arlington, Virginia; U.S. Army Intelligence and Security Command, Fort Belvoir, U.S. Army Materiel Command, Fort Belvoir, Virginia; U.S. Army Research, Development and Engineering Command, Aberdeen Proving Ground, Maryland; Department of the Navy, Office of the Chief of Naval Operations, Arlington, Virginia; Naval Sea Systems Command, Washington, D.C.; Naval Surface Warfare Center Dahlgren Division, Dahlgren, Virginia; Naval Air Systems Command, Patuxent River, Maryland; Department of the Air Force Air and Space Operations, Directorate of Security Forces, Information Security Division, Rosslyn, Virginia; Air Force Air Combat Command, Langley Air Force Base, Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base, 88th Security Forces Squadron, Wright-Patterson Air Force Base, Headquarters, U.S. Marine Corps, Arlington, Virginia; U.S. Marine Forces, Atlantic, Norfolk Naval Base, Virginia; Headquarters, U.S. Central Command, MacDill Air Force Base, Florida; Headquarters, U.S. Special Operations Command, MacDill Air Force National Geospatial-Intelligence Agency, multiple sites in the Washington, D.C. metropolitan area; Defense Intelligence Agency, Washington, D.C.; National Security Agency, Fort Meade, Maryland; and Headquarters, Defense Technical Information Center, Fort Belvoir, Virginia. The information security programs of these nine components, collectively, were responsible for about 83 percent of the department’s classification decisions each of the last 3 fiscal years that data are available (2002 through 2004). We selected the information security programs of three Army, three Navy, three Air Force, and one Marine Corps subordinate command because they had among the largest number of classification decisions for their component during the fiscal year 2002 through 2004 time period. To examine whether DOD’s implementation of its information security management program in the areas of training, self-inspections, and security classification guide management effectively minimizes the risk of misclassification, we compared the DOD components’ and subordinate commands’ policies and practices with federal and DOD requirements, including Executive Order 12958, Classified National Security Information, as amended; Information Security Oversight Office (ISOO) Directive 1, Classified National Security Information; and DOD Information Security Program regulation 5200.1-R. Additionally, we visited the Defense Security Service Academy in Linthicum, Maryland, to discuss DOD training issues, and the Defense Technical Information Center at Fort Belvoir, Virginia, to discuss the availability of current security classification guides. We also met with officials from the Congressional Research Service, the Federation of American Scientists, and the National Classification Management Society to obtain their perspectives on DOD’s information security program and on misclassification of information in general. To assess the extent to which DOD personnel in five offices of the Office of the Secretary of Defense (OSD) followed established procedures for classifying information, to include correctly marking classified information, we examined 111 documents classified from September 22, 2003 to June 30, 2005. Because the total number of classified documents held by DOD is unknown, we could not pursue a probability sampling methodology to produce results that could be generalized to either OSD or DOD. The September 22, 2003 start date was selected because it coincides with when the ISOO directive that implements the Executive Order went into effect. OSD was selected among the DOD components because it has been the recipient of fewer ISOO inspections than most of the other DOD components, and we expected comparatively greater compliance with the Executive Order since DOD’s implementing regulation, DOD 5200.1-R, was published by an OSD office. We selected the following five OSD offices located in Washington, D.C. to sample: Office of the Director of Program Analysis and Evaluation; Office of the Under Secretary of Defense for Policy; Office of the Under Secretary of Defense for Acquisition, Technology Office of the Assistant Secretary of Defense for Networks and Information Integration/Chief Information Officer; and Office of the Under Secretary of Defense Comptroller/Chief Financial Officer. These five offices were responsible for 84 percent of OSD’s reported classification decisions (original and derivative combined) during fiscal year 2004. According to the Pentagon Force Protection Agency, the office responsible for collecting data on classification activity for OSD, we obtained 100 percent of these five office’s classification decisions during the 21-month time period. Two GAO analysts independently reviewed each document using a 16-item checklist that we developed based on information in the Executive Order, and feedback from ISOO classification management experts. GAO analysts who participated in the document review completed the Defense Security Service Academy’s online Marking Classified Information course and passed the embedded proficiency test. Each document was examined for compliance with classification procedures and marking requirements in the Executive Order. The two analysts’ responses matched in more than 90 percent of the checklist items. On those infrequent occasions where the analysts’ responses were dissimilar, a third GAO analyst conducted a final review. We examined the rationale cited by the classifier for classifying the information, and whether similar information within the same document and across multiple documents was marked in the same manner. We also performed Internet searches on official U.S. Government Web sites to determine if the information had been treated as unclassified. For those documents that we identified as containing questionable classification decisions, we met with security officials from the applicable OSD offices to obtain additional information and documentation. To assess the reliability of DOD’s annual classification decisions estimate and the existence of material inconsistencies, we compared the guidance issued by ISOO and the Office of the Under Secretary of Defense for Intelligence on methods to derive this estimate with how DOD components and subordinate commands implemented this guidance. We also scrutinized the data to look for substantial changes in the data estimates reported by DOD components during fiscal years 2002 through 2004. To determine the likelihood of DOD’s meeting automatic declassification deadlines contained in Executive Order 12958, as amended, we met with officials from the Army, Navy/Marine Corps, and Air Force declassification offices. We decided to focus exclusively on the four military services, because, collectively they were responsible for more than 85 percent of the department’s declassification activity during fiscal year 2004. We also met with ISOO officials to discuss their evaluation of DOD’s progress towards meeting the Executive Order deadlines. To increase our understanding of the impediments that federal agencies in general, and DOD in particular, face with regard to satisfying automatic declassification deadlines, we met with declassification officials from the National Archives and Records Administration in College Park, Maryland. We met with ISOO officials to discuss the assignment’s objectives and methodology, and received documents on relevant information security topics, including inspection reports. We conducted our work from March 2005 through February 2006 in accordance with generally accepted government auditing standards. Davi M. D’Agostino (202) 512-5431 or dagostinod@gao.gov. Ann Borseth, Mattias Fenton, Adam Hatton, Barbara Hills, David Keefer, David Mayfield, Jim Reid, Terry Richardson, Marc Schwartz, Cheryl Weissman, and Jena Whitley made key contributions to this report. | Misclassification of national security information impedes effective information sharing, can provide adversaries with information to harm the United States and its allies, and incurs millions of dollars in avoidable administrative costs. As requested, GAO examined (1) whether the implementation of the Department of Defense's (DOD) information security management program, effectively minimizes the risk of misclassification; (2) the extent to which DOD personnel follow established procedures for classifying information, to include correctly marking classified information; (3) the reliability of DOD's annual estimate of its number of classification decisions; and (4) the likelihood of DOD's meeting automatic declassification deadlines. A lack of oversight and inconsistent implementation of DOD's information security program are increasing the risk of misclassification. DOD's information security program is decentralized to the DOD component level, and the Office of the Under Secretary of Defense for Intelligence (OUSD(I)), the DOD office responsible for DOD's information security program, has limited involvement with, or oversight of, components' information security programs. While some DOD components and their subordinate commands appear to manage effective programs, GAO identified weaknesses in others in the areas of classification management training, self-inspections, and classification guides. For example, training at 9 of the 19 components and subordinate commands reviewed did not cover fundamental classification management principles, such as how to properly mark classified information or the process for determining the duration of classification. Also, OUSD(I) does not have a process to confirm whether self-inspections have been performed or to evaluate their quality. Only 8 of the 19 components performed self-inspections. GAO also found that some of the DOD components and subordinate commands that were examined routinely do not submit copies of their security classification guides, documentation that identifies which information needs protection and the reason for classification, to a central library as required. Some did not track their classification guides to ensure they were reviewed at least every 5 years for currency as required. Because of the lack of oversight and weaknesses in training, self-inspection, and security classification guide management, the Secretary of Defense cannot be assured that the information security program is effectively limiting the risk of misclassification across the department. GAO's review of a nonprobability sample of 111 classified documents from five offices within the Office of the Secretary of Defense shows that, within these offices, DOD personnel are not uniformly following established procedures for classifying information, to include mismarking. In a document review, GAO questioned DOD officials' classification decisions for 29--that is, 26 percent of the sample. GAO also found that 92 of the 111 documents examined (83 percent) had at least one marking error, and more than half had multiple marking errors. While the results from this review cannot be generalized across DOD, they are consistent with the weaknesses GAO found in the way DOD implements its information security program. The accuracy of DOD's classification decision estimates is questionable because of the considerable variance in how these estimates are derived across the department, and from year to year. However, beginning with the fiscal year 2005 estimates, OUSD(I) will review estimates of DOD components. This additional review could improve the accuracy of DOD's classification decision estimates if methodological inconsistencies also are reduced. |
IRS relies on automated information systems to process over 200 million taxpayer returns and collect over $1.6 trillion in taxes annually. IRS uses its computer systems to, among other things, process tax returns, maintain taxpayer data, calculate interest and penalties, and generate refunds. IRS operates facilities throughout the United States that process tax returns and other information supplied by taxpayers. The data are then electronically transmitted to master files of taxpayer information that are maintained and updated. Because of IRS’ heavy reliance on its facilities, effective security controls are critical to IRS’ ability to maintain the confidentiality of sensitive taxpayer data, safeguard assets, and ensure the reliability of financial management information. Federal law, Department of the Treasury directives, and IRS’ own internal policies and procedures require the implementation of sound security practices and standards. The Computer Security Act and the Clinger-Cohen Act require, among other things, the establishment of standards and guidelines for ensuring the security and privacy of sensitive information in federal computer systems. Similarly, IRS’ tax information security guidelines require that all computer and communications systems that process, store, or transmit taxpayer data adequately protect these data, and the Internal Revenue Code prohibits the unauthorized disclosure of federal returns and return information outside IRS. To adequately comply with these guidelines, IRS must ensure that (1) access to computer data, systems, and facilities is properly restricted and monitored, (2) changes to computer systems software are properly authorized and tested, (3) backup and recovery plans are prepared, tested, and maintained to ensure continuity of operations in the case of a disaster, and (4) data communications are adequately protected from unauthorized intrusion and interception. The need for strong and effective computer security over taxpayer information is clear. IRS computer systems contain sensitive taxpayer information such as name, address, social security number, and details on each taxpayer’s financial holdings. As we previously reported, these and similar types of information have been used to commit financial crimes and identity fraud nationwide. Commonly reported financial crimes include using someone’s personal information to fraudulently establish credit, run up debt, or take over and deplete existing financial accounts. Taxpayers can suffer injury to their reputations when credit is fraudulently established and debts incurred in their names. Bad credit could in turn lead to difficulties in obtaining loans or jobs and require a lengthy and expensive process to clear one’s personal records. Over the past 5 years, we have reviewed the effectiveness of IRS security and general controls as part of our annual audit of IRS’ financial statements. During this period, we testified and reported numerous times on the ineffectiveness of these controls in safeguarding IRS computer systems and facilities. In April 1997, we reported on serious weaknesses at five IRS facilities that we visited. These weaknesses were in eight functional areas, which are (1) physical security, (2) logical security,(3) data communications management, (4) risk analysis, (5) quality assurance, (6) internal audit and security, (7) security awareness, and (8) contingency planning. We also noted that IRS’ ability to monitor and detect the unauthorized access and perusal of electronic taxpayer records by IRS employees, also known as browsing, was limited. We reported that until these weaknesses are corrected, IRS runs the risk of its tax processing operations being disrupted and taxpayer data being improperly used, modified, or destroyed. Because of the seriousness of the weaknesses, we recommended, among other things, that IRS (1) reevaluate its current approach to computer security and report its plans for improving computer security to the Congress and (2) prepare and submit a plan to the Congress for correcting all the weaknesses identified at the five facilities and for identifying and correcting security weaknesses at the other IRS facilities. In 1997, the Congress passed the Taxpayer Browsing Protection Actwhich amended the Internal Revenue Code of 1986 to make unlawful unauthorized access and inspection of taxpayer records a crime and to establish penalties for unlawful access and inspection of taxpayer records. The objectives of our review were to determine and summarize the status of the computer-related general control weaknesses identified at the five IRS facilities discussed in our April 1997 report and to assess the effectiveness of computer controls at a sixth facility. To determine the effectiveness of IRS’ corrective actions taken to resolve these weaknesses, we interviewed agency officials responsible for correcting them, reviewed these officials’ action plans and status reports, and conducted on-site evaluations to verify the effectiveness of corrective actions taken. Our on-site evaluations of IRS computer-related general controls were conducted in conjunction with our audit of IRS’ fiscal year 1997 custodial financial statements and with the assistance of the independent public accounting firm which also participated in the review supporting our April 1997 report. Our evaluations included the review of related IRS policies and procedures; on-site tests and observations of computer-related controls; and discussions with IRS headquarters and facility personnel, security representatives, and other pertinent officials at the locations visited. Our evaluation did not include external penetration testing of IRS computer facilities. We performed evaluations at six IRS facilities—the five facilities visited during our previous review and one additional facility. We requested and received IRS comments on the results of our on-site evaluations from the Director of the Office of Systems Standards and Evaluation, who has servicewide responsibility for computer security. We did not verify IRS’ statements regarding corrective actions taken subsequent to our site visits but plan to do so during future reviews. To evaluate IRS’ computer security management, we assessed information pertaining to computer controls in place at headquarters and field locations and held discussions with headquarters officials. We did not assess the computer-related controls that IRS plans to incorporate under any of its long-term plans to modernize its tax processing systems. We also did not assess IRS efforts to resolve the Year 2000 computing crisis. Our work was performed at IRS headquarters in Washington, D.C., and at six facilities located throughout the United States from November 1997 through July 1998. We performed our work in accordance with generally accepted government auditing standards. IRS has taken and is taking action to implement the recommendations contained in our April 1997 report to improve computer security. For example, IRS designated computer security as a material weakness in its fiscal year 1997 Federal Managers’ Financial Integrity Act report, acknowledging the seriousness of these computer-related general control weaknesses and the risk they pose to the agency’s operations. IRS has established the Office of Systems Standards and Evaluation to centralize responsibility for IRS security and privacy issues. The office is staffed with over 60 security, privacy, systems life-cycle, and administrative specialists led by two senior executives who report to the Chief Information Officer. The office is responsible for establishing and enforcing standards and policies for all major security programs including, but not limited to, physical security, data security, and systems security. IRS has acted to address recommendations made in our April 1997 report by preparing and transmitting to the Congress a high-level action plan for identifying and correcting the security weaknesses at all of its facilities including the five facilities discussed in our prior report; reevaluating and establishing a new approach to managing computer security that involves the resolution of security weaknesses and issues by facility type, including computing centers, service centers, district offices, and others; and submitting to the Congress its plan for improving the service’s management approach to computer security. In addition, the Office of Systems Standards and Evaluation has developed computer security awareness briefings on unauthorized access to taxpayers’ records, conducted computer security reviews at IRS facilities, and developed a tracking system for reporting the status of actions planned or taken to correct the weaknesses identified in our April 1997 report. We confirmed that IRS has corrected or has implemented compensating controls that mitigated the risks associated with 63 percent of the total weaknesses identified in our April 1997 report. Each facility had varying degrees of success resolving the weaknesses previously reported. The actual rate of resolution ranged from 42 percent to 80 percent. Corrective actions taken by one or more of the five facilities include strengthening the overall controls over physical access to IRS facilities, reducing the number of IRS employees authorized to read or change sensitive system files and/or taxpayer data, conducting risk analyses of the facilities and of locally developed computer programs, updating and testing some disaster recovery plans, and improving overall security awareness. Although IRS has made significant strides in improving computer security at certain facilities, an effective servicewide computer security management program has not yet been fully implemented. Our study of the security management practices of leading organizations found that these organizations successfully managed their information security risks through an ongoing cycle of risk management activities. As shown in figure 1, each of these activities is linked in a cycle to help ensure that business risks are continually monitored, policies and procedures are regularly updated, and controls are in effect. The risk management cycle begins with an assessment of risks and a determination of needs. This assessment includes identifying cost-effective policies and related controls. The policies and controls, as well as the risks that prompted their adoption, must be communicated to those responsible for complying with them and implemented. Finally, and perhaps most important, there must be procedures for evaluating the effectiveness of policies and related controls and reporting the resulting conclusions to those who can take appropriate corrective action. In addition, our study found that a strong central security management focal point can help ensure that the major elements of the risk management cycle are carried out and can serve as a communications link among organizational units. Since our April 1997 report, IRS has taken several actions consistent with the risk management cycle described above to improve its servicewide computer security management program. For example, IRS created the Office of Systems Standards and Evaluation as the central focal point for computer security within IRS, published revised computer security policies and procedures, promoted security awareness, and is evaluating controls at many of its facilities. However, several actions have not yet been completed or performed. For example, IRS has not fully (1) assessed risks for all of its facilities, networks, major systems, and data, (2) evaluated controls over key computing resources, and (3) implemented actions to eliminate or mitigate all of the weaknesses identified during computer control evaluations. IRS is planning or taking actions to implement these elements as part of its new strategy for its servicewide computer security management program. Until IRS fully implements an effective computer security management program, IRS is exposed to the risk that other computer control weaknesses could occur and not be detected promptly enough to prevent unnecessary losses or disruptions. Although IRS has mitigated many computer security weaknesses, weaknesses in IRS’ computer security controls continue to place IRS’ automated systems and taxpayer data at serious risk to both internal and external threats that could result in the denial of computer services or in the unauthorized disclosure, modification, or destruction of taxpayer data. Serious weaknesses still persist at all five of the facilities included in our April 1997 report and at a sixth facility reviewed in conjunction with this audit. Our current review identified weaknesses that remain uncorrected at the five facilities visited during our prior audit and additional weaknesses we identified at those locations and at a sixth facility included in this review. The weaknesses primarily pertained to the following six functional areas: physical security, logical security, data communications, risk analysis, quality assurance, and contingency planning. These weaknesses expose taxpayers to an increased risk of loss and damages due to identity theft and other financial crimes resulting from the unauthorized disclosure and use of information they provide to IRS. A synopsis of these weaknesses by functional area follows. Physical security involves restricting physical access to computer resources, usually by limiting access to the buildings and rooms where these resources are housed to protect them from intentional or unintentional loss or impairment. Physical access control measures such as locks, guards, fences, and surveillance equipment are critical to safeguarding taxpayer data and computer operations from internal and external threats. We found continuing and new physical security weaknesses at the facilities visited. The following are examples of weaknesses that have not yet been corrected. Access to sensitive computing areas, such as computer rooms, data communications areas, and tape libraries was not adequately controlled. For example, non-librarians without a legitimate business need could gain unauthorized access to sensitive tape libraries because there were no additional control measures restricting access to tape libraries from other controlled areas. Facilities visited could not account for a total of 397 missing computer tapes, some of which contain sensitive taxpayer data or privacy information. Logical security controls are designed to limit or detect access to computer programs, data, and other computing resources to protect these resources from unauthorized modification, loss, and disclosure. Logical security control measures include the use of safeguards incorporated in computer hardware, system and application software, communication hardware and software, and related devices. These safeguards include user identification codes, passwords, access control lists, and security software programs. Logical controls restrict the access of legitimate users to the specific systems, programs, and files they need to conduct their work and prevent unauthorized users from gaining access to computing resources. Controls over access to and modification of system software are essential to protect the overall integrity and reliability of information systems. We identified weaknesses relating to logical security controls at the six sites reviewed. Examples of uncorrected vulnerabilities include the following. Computer support personnel whose job responsibilities did not require it were given the ability to change, alter, or delete taxpayer data and associated programs. Access to system software was not limited to individuals with a need to know. For example, we found that database administrators had access to system software, although their job functions and responsibilities did not require it. The powerful “root” authority, which allows users to read, modify, and delete any data file, execute any program, and activate or deactivate audit logs, had been granted to 12 computer systems analysts at one facility whose assigned duties did not require such capabilities. Individuals without a need to know had access to key system logs that provided the capability to perform unauthorized system activities and then alter the audit trail to avoid detection. Tapes and disks containing taxpayer data were not overwritten prior to reuse, thus potentially allowing unauthorized access to sensitive data and computer programs. Security software was not configured to provide optimum security over tape media. In addition, IRS’ ability to detect and monitor unauthorized access by employees remains limited. The information system, Electronic Audit Research Log, developed by IRS to monitor and detect browsing can not detect all instances of browsing or unauthorized access to taxpayer records because it only monitors employees using the Integrated Data Retrieval System, the primary computer system IRS employees use to access and adjust taxpayer accounts. The Electronic Audit Research Log does not monitor the activities of IRS employees using other systems, such as the Distributed Input System and Totally Integrated Examination System, which are also used to create, access, or modify taxpayer data. In addition, the Electronic Audit Research Log does not adequately distinguish potential unauthorized accesses to taxpayer data from legitimate activity. As a result, the effort to investigate potential unauthorized accesses is time-consuming and difficult. IRS is developing a new system, the Audit Trail Lead Analysis System, which is intended to improve its capability to distinguish between unauthorized accesses and legitimate activity. If properly implemented, this system would improve IRS’ capability to detect unauthorized accesses to taxpayer data. However, the Audit Trail Lead Analysis System is not scheduled to be implemented until January 1999 and will only monitor the activities of IRS employees using the Integrated Data Retrieval System and not other systems used to create, access, or modify taxpayer data. As a result of these logical security weaknesses, taxpayer and other sensitive data and programs were placed at unnecessary risk of unauthorized modification, loss, and disclosure without detection. Data communications management is the function of monitoring and controlling communications networks to ensure that they operate as intended and securely transmit timely, accurate, and reliable data. Without adequate data communications security, the data being transmitted can be destroyed, altered, or diverted, and the equipment itself can be damaged. We identified data communications weaknesses at IRS facilities. Examples of the weaknesses existing at the time of our review include the following. Telecommunications equipment was still not physically protected, thus increasing the risk of improper use, modification, or destruction of data, as well as potential equipment damage. For example, telecommunications patch panels were not placed in a locked closet or enclosure, thereby increasing the risk of unauthorized tampering with these telecommunication connections. Dial-in access was not adequately protected. For example, data transmitted over telecommunications lines were not encrypted. Because plain text was transmitted, sensitive taxpayer data remained vulnerable to unauthorized access and disclosure. The purpose of a risk analysis is to identify security threats, determine their magnitude, and identify areas needing additional safeguards. Without these analyses, systems’ vulnerabilities may not be identified and appropriate controls may not be implemented to correct them. We found weaknesses in this area at the facilities visited. For example, we found that risk analyses of the facilities’ local networks had not been performed or were not available. Without these analyses, IRS system vulnerabilities may go undetected, thereby jeopardizing IRS processing operations and sensitive taxpayer data. Controls over the design, development, and modification of computer software help to ensure that all programs and program modifications are properly authorized, tested, and approved. An effective quality assurance program requires reviewing software products and software change control activities to ensure that they comply with the applicable processes, standards, and procedures and satisfy the control and security requirements of the organization. One aspect of a quality assurance program is validating that software changes are adequately tested and will not introduce vulnerabilities into the system. We identified weaknesses at IRS facilities. Examples of these weaknesses follow. There was no independent quality assurance review or testing of locally developed programs. Application programmers have the capability to access or modify production computer software programs after the programs have been reviewed or tested, increasing the risk of unauthorized changes to production programs. Application programmers use real taxpayer data for software testing purposes, increasing the risk that sensitive taxpayer data could be disclosed to unauthorized individuals. Without adequate quality assurance and control over the software development and change process, IRS runs a greater risk that software supporting its operations will not (1) produce reliable data, (2) execute transactions in accordance with applicable laws, regulations, and management policies, or (3) effectively meet operational needs. An organization’s ability to accomplish its mission can be significantly affected if it loses the ability to process, retrieve, and protect information that is maintained electronically. For this reason, organizations should have (1) established procedures for protecting information resources and minimizing the risk of unplanned interruptions, (2) a disaster recovery plan for restoring critical data processing capabilities, and (3) a business resumption plan for resuming business operations should interruptions occur. Disaster recovery and business resumption plans specify emergency response procedures, backup operations, and postdisaster recovery procedures to ensure the availability of critical resources and facilitate the continuity of operations in an emergency. These plans address how an organization will deal with a full range of contingencies, from electrical power failures to catastrophic events, such as earthquakes, floods, and fires. The plans also identify essential business functions and rank resources in order of criticality. To be most effective, disaster recovery and business resumption plans should be periodically tested and employees should be trained in and familiar with the use of these plans. We found weaknesses relating to contingency planning at the facilities reviewed, as the following examples illustrate. Disaster recovery plans had not been completed or lacked essential information, such as designation of an alternate computer processing site, telecommunications requirements, and procedures for restoring mission-critical processes and applications. Disaster recovery procedures were not adequately tested to determine IRS’ ability to restore and operate all mission-critical applications. Disaster recovery goals and milestones were not developed based on users’ business needs, which provides little assurance that users’ processing needs will be met in the event of a disaster. Business resumption plans had not been developed or were incomplete. Backup generator capacity or the alternate electrical power source did not effectively meet the needs of the facilities. Due to the nature of these and other weaknesses, IRS facilities may not be able to recover their data processing capabilities, resume business operations, and restore critical data promptly in the event of a disaster or disruption of service. Consequently, IRS has little assurance that during a crisis (1) the cost of recovery efforts or the reestablishment of operations at a remote location will be kept to a minimum, (2) taxpayer data will not be lost, (3) transactions will be processed accurately and correctly, and (4) complete and accurate taxpayer, financial, or management information will be readily available. IRS has made significant progress in correcting its serious weaknesses in computer security controls intended to safeguard IRS computer systems, data, and facilities. However, serious weaknesses remain uncorrected and IRS has not yet fully assessed all of the risks to its computer processing operations nor has it evaluated the effectiveness of computer controls over key computing resources, which indicates that the service does not know the full extent of its computer security vulnerabilities. Until IRS identifies and corrects all of its critical computer security weaknesses and fully institutionalizes an effective servicewide computer security management program, the service will continue to expose its tax processing operations to the risk of disruption; taxpayer data to the risk of unauthorized use, modification, and destruction; and taxpayers to loss and damages resulting from identity fraud and other financial crimes. We recommend that the Commissioner of Internal Revenue direct the Chief Information Officer and Director of the Office of Systems Standards and Evaluation to work in conjunction with the facility directors as appropriate to continue efforts to implement appropriate control measures to limit physical access to facilities, computer rooms, and computing resources based on job responsibility; limit access authority to only those computer programs and data needed to perform job responsibilities and review access authority regularly to identify and correct inappropriate access; configure security software to provide optimum security over tape media; establish adequate safeguards over telecommunications equipment and remote access to IRS systems; ensure that all computer programs and program modifications are authorized, tested, and independently reviewed and that real taxpayer data is not used for software testing; and establish controls that ensure that disaster recovery plans and business resumption plans are comprehensive, current, and fully tested. We also recommend that the Commissioner of Internal Revenue ensure that IRS completes the implementation of an effective servicewide computer security management program. This program should include procedures for assessing risks for all of IRS’ facilities, networks, major systems, and taxpayer data on a regular, ongoing basis to ensure that controls are adequate; periodically evaluating the effectiveness of controls over key computing resources at IRS facilities; and implementing actions to correct or mitigate weaknesses identified during such computer control evaluations. In commenting on a draft of this report, IRS agreed with our recommendations and stated that the report’s conclusions and recommendations are consistent with its ongoing actions to improve systems security. IRS specified the actions it has taken or plans to take to adequately mitigate the remaining weaknesses and stated that an additional 12 percent of the weaknesses have been corrected since the completion of our review. We will review the actions taken by IRS to mitigate the remaining weaknesses as part of our audit of IRS’ fiscal year 1998 financial statements. As agreed with your office, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from the date of this letter. At that time, we will send copies to the Chairman and Ranking Minority Members of the Subcommittee on Treasury, Postal Service, and General Government, House Committee on Appropriations; Subcommittee on Treasury, General Government, and Civil Service, Senate Committee on Appropriations; Senate Committee on Finance; House Committee on Ways and Means; and House Committee on Government Reform and Oversight. We will also send copies to the Secretary of the Treasury, Commissioner of Internal Revenue, and Director of the Office of Management and Budget. Copies will be made available to others upon request. If you have questions about this report, please contact me at (202) 512-3317. Major contributors to this report are listed in appendix II. Gregory C. Wilshusen, Assistant Director, (202) 512-6244 Ronald E. Parker, Senior Information Systems Analyst Walter P. Opaska, Senior Information Systems Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 Internal Revenue Service's (IRS) progress in correcting serious computer security weaknesses at five IRS facilities, focusing on: (1) additional security weaknesses identified at the five facilities and at an IRS facility not included in GAO's previous report; and (2) steps IRS has taken or plans to take to implement a service-wide computer security management program. GAO noted that:(1) IRS is making significant progress to improve computer security over its facilities; (2) since GAO's April 1997 report, IRS has acknowledged the seriousness of its computer security weaknesses, consolidated overall responsibility for computer security management within one executive-level office under its Chief Information Officer, reevaluated its approach to computer security management, and developed a high-level plan for mitigating the weaknesses GAO identified; (3) GAO found that IRS has corrected or mitigated the risks associated with 63 percent of the weaknesses discussed in its prior report; (4) while progress has been made, serious weaknesses continue to exist at the five facilities visited during GAO's prior audit, and it identified several additional weaknesses at those locations and at a sixth facility included in this review; (5) these weaknesses exist primarily because IRS has not yet fully institutionalized its computer security management program; (6) these weaknesses affect IRS' ability to control physical access to its data processing facilities and sensitive taxpayer data and computer programs, prevent or detect unauthorized changes to taxpayer data or computer software, and restore essential IRS operations following an emergency or natural disaster; (7) until these weaknesses are mitigated, IRS continues to run the risk of its tax processing operations being disrupted; (8) furthermore, sensitive taxpayer data entrusted to IRS could be disclosed to unauthorized individuals, improperly used or modified, or destroyed, thereby exposing taxpayers to loss or damages resulting from identity fraud and other financial crimes; (9) in comments agreeing with GAO's recommendations, IRS stated that since the end of GAO's review, it had also specified actions planned and under way to address the remaining weaknesses; and (10) GAO will review those actions as part of its audit of IRS' fiscal year 1998 financial statements. |
Bid protests and related litigation have resulted in changes to DHS’ approach for the TASC program and have contributed to a significant delay in awarding a contract. The initial TASC approach was to migrate its component systems to two financial management systems—Oracle Federal Financials and SAP—that were already in use by several DHS components. Figure 1 shows the key events that have occurred affecting the TASC program. One of these key events was the filing of a bid protest regarding DHS’ initial TASC approach to migrate its components to two financial management systems already in use. DHS subsequently issued its January 2009 TASC request for proposal for the provision of an integrated financial, acquisition, and asset management COTS system already in use at a federal agency to be implemented departmentwide. A second bid protest was filed over this January 2009 request for proposal and the U.S. Court of Federal Claims dismissed the protestor’s complaint, allowing DHS to proceed with this request for proposal. However, the protestor filed an appeal of this dismissal in July 2009. DHS responded to the July 2009 appeal in September 2009 and DHS officials indicated that the protestor responded to DHS’ response in October 2009. In June 2007, we made six recommendations to DHS to help the department reduce the risks associated with acquiring and implementing a departmentwide financial management system. Our preliminary analysis indicates that DHS has begun to take actions toward the implementation of four of the recommendations, as shown in table 1. However, all six recommendations remain open. We do recognize that DHS cannot fully implement all of our recommendations until a contract is awarded because of its selected acquisition approach. DHS has developed certain elements for its financial management strategy and plan for moving forward with its financial system integration efforts but it faces significant challenges in completing and implementing its strategy. DHS has defined its vision for the TASC program, which is to consolidate and integrate departmentwide mission-essential financial, acquisition, and asset management systems, by providing a seamless, real- time, web-based system to execute mission-critical end-to-end integrated business processes. DHS has also established several major program goals for TASC which include, but are not limited to: creating and refining end-to-end standard business processes and a standard line of accounting, supporting timely, complete, and accurate financial management and reporting, enabling DHS to acquire goods and services of the best value that ensure that the department’s mission and program goals are met, and enabling consolidated asset management across all components. DHS officials stated that this system acquisition is expected to take a COTS-based system already configured and being used at a federal agency as a starting point for its efforts. This approach is different than other financial management system implementation efforts reviewed by GAO where an agency acquired a COTS product and then performed the actions necessary to configure the product to meet the agency’s specific requirements. Our review found that the strategy being taken by DHS does not contain the elements needed to evaluate whether the acquired system will provide the needed functionality or meet users’ needs. For example, it does not require DHS to (1) perform an analysis of the current processes to define the user requirements to be considered when evaluating the various systems, (2) perform a gap analysis before the system is selected and (3) assess the extent to which the COTS-based system used at another agency has been customized for the respective federal entities. Studies have shown that when an effective gap analysis was not performed, program offices and contractors later discovered that the selected system lacked essential capabilities. Furthermore, adding these capabilities required expensive custom development, and resulted in cost and schedule overruns that could have been avoided. Without a comprehensive strategy and plan that considers these issues, DHS risks implementing a financial management system that will be unnecessarily costly to maintain. The January 2009 request for proposal states that the selected contractor will be required to provide a concept of operations for TASC. This concept of operations is expected to provide an operational view of the new system from the end users’ perspective and outline the business processes as well as the functional and technical architecture for their proposed systems. On October 21, 2009, DHS provided us with a concept of operations for the TASC program that we have not had the opportunity to fully evaluate to assess whether it comprehensively describes the new system’s operations and characteristics. According to DHS officials, this concept of operations document was prepared in accordance with the Institute of Electrical and Electronics Engineers (IEEE) standards. However, it is unclear how the DHS-prepared concept of operations document will relate to the selected contractor’s concept of operations document called for in the request for proposal. According to the IEEE standards, a concept of operations is a user- oriented document that describes the characteristics of a proposed system from the users’ viewpoint. A concept of operations document also describes the operations that must be performed, who must perform them, and where and how the operations will be carried out. The concept of operations for TASC should, among other things: define how DHS’ day-to-day financial management operations are and will be carried out to meet mission needs; clarify which component and departmentwide systems are considered financial management systems; include a transition strategy that is useful for developing an understanding of how and when changes will occur; develop an approach for obtaining reliable information on the costs of its financial management systems investments; and link DHS’ concept of operations for the TASC program to its enterprise architecture. A completed concept of operations prior to issuance of the request for proposal would have benefited the vendors in developing their proposals so that they could identify and propose systems that more closely align with DHS’ vision and specific needs. While DHS has draft risk management, project management, and configuration management plans, DHS officials told us that other key plans relating to disciplined processes generally considered to be best practices will not be completed until after the TASC contract is awarded. These other plans include the requirements management, data conversion and system interfaces, quality assurance, and testing plans. Offerors were instructed in the latest request for proposal to describe their testing, risk management, and quality assurance approaches as well as component migration and training approaches. The approaches proposed by the selected contractor will become the basis for the preparation of these plans. While we recognize that the actual development and implementation of these plans cannot be completed until the TASC contractor and system have been selected, it will be critical for DHS to ensure that these plans are completed and effectively implemented prior to moving forward with the implementation of the new system. Disciplined processes represent best practices in systems development and implementation efforts that have been shown to reduce the risks associated with software development and acquisition efforts to acceptable levels and are fundamental to successful system implementations. The key to having a disciplined system development effort is to have disciplined processes in multiple areas, including project planning and management, requirements management, configuration management, risk management, quality assurance, and testing. Effective processes should be implemented in each of these areas throughout the project life cycle because change is constant. Effectively implementing the disciplined processes necessary to reduce project risks to acceptable levels is hard to achieve because a project must effectively implement several best practices, and inadequate implementation of any one may significantly reduce or even eliminate the positive benefits of the others. Although, DHS has identified nine end-to-end business processes that will be addressed as part of the TASC program, the department has not yet identified all of its existing business processes that will be reengineered and standardized as part of the TASC program. It is important for DHS to identify all of its business processes so that the department can analyze the offerors’ proposed systems to assess how closely each of these systems aligns with DHS’ business processes. Such an analysis would position DHS to determine whether a proposed system would work well in its future environment or whether the department should consider modifying its business processes. Without this analysis, DHS will find it challenging to assess the difficulties of implementing the selected system to meet DHS’ unique needs. For the nine processes identified, DHS has not yet begun the process of reengineering and standardizing those processes. DHS has asked offerors to describe their proposed approaches for the standardization of these nine processes to be included in the TASC system. According to an attachment to the TASC request for proposal, there will be additional unique business processes or sub-processes, beyond the nine standard business processes identified, within DHS and its components that also need to be supported by the TASC system. For DHS’ implementation of the TASC program, reengineering and standardizing these unique business processes and sub-processes will be critical because the department was created from 22 agencies with disparate processes. A standardized process that addresses, for example, the procurement processes at the U.S. Coast Guard, Federal Emergency Management Agency (FEMA), and the Secret Service, as well as the other DHS components, is essential when implementing the TASC system and will be useful for training and the portability of staff. Although DHS officials have stated that they plan to migrate the new system first to its smaller components and have recently provided a high- level potential approach it might use, DHS has not outlined a conceptual approach or plan for accomplishing this goal throughout the department. Instead, DHS has requested that TASC offerors describe their migration approaches for each of the department’s components. While the actual migration approach will depend on the selected system and events that occur during the TASC program implementation, critical activities include (1) developing specific criteria requiring component agencies to migrate to the new system rather than attempting to maintain legacy business systems; (2) defining and instilling new values, norms, and behaviors within component agencies that support new ways of doing work and overcoming resistance to change; (3) building consensus among customers and stakeholders on specific changes designed to better meet their needs; and (4) planning, testing, and implementing all aspects of the migration of the new system. For example, a critical part of a migration plan for the new system would describe how DHS will ensure that the data currently in legacy systems is fully prepared to be migrated to the new system. An important element of a migration plan is the prioritizing of the conversion of the old systems to the new systems. For example, a FEMA official stated that the component has not replaced its outdated financial management system because it is waiting for the implementation of the TASC program. However, in the interim, FEMA’s auditors are repeatedly reporting weaknesses in its financial systems and reporting, an important factor to be considered by DHS when preparing its migration plan. Because of the known weaknesses at DHS components, it will important for DHS to prioritize its migration of components to the new system and address known weaknesses prior to migration where possible. Absent a comprehensive migration strategy, components within DHS may seek other financial management systems to address their existing weaknesses. This could result in additional disparate financial management systems instead of the integrated financial management system that DHS needs. While DHS’ RMTO has begun recruiting and hiring employees and contractors to help with the TASC program, the department has not identified the gaps in needed skills for the acquisition and implementation of the new system. DHS officials have said that the department is unable to determine the adequate staff levels necessary for the full implementation of the TASC program because the integrated system is not yet known; however, as of May 2009, the department had budgeted 72 full-time equivalents (FTE) for fiscal year 2010. The 72 FTEs include 38 government employees and 34 contract employees, (excluding an IV&V contractor). DHS officials told us that this level of FTEs may be sufficient for the first deployments of the new system. According to RMTO officials, as of August 2009, RMTO had 21 full-time federal employees with expertise in project management, financial business processes, change management, acquisition management, business intelligence, accounting services, and systems engineering. In addition, RMTO officials stated that there are seven contract workers supporting various aspects of the TASC program. RMTO also utilizes the services of the Office of the Chief Financial Officer and component staff. According to RMTO officials, some of DHS’ larger components, such as Immigration and Customs Enforcement have dedicated staff to work on the TASC program. Many of the department’s past and current difficulties in financial management and reporting can be attributed to the original stand-up of a large, new, and complex executive branch agency without adequate organizational expertise in financial management and accounting. Having sufficient human resources with the requisite training and experience to successfully implement a financial management system is a critical success factor for the TASC program. While updating the status of the six prior recommendations, we identified two issues that pose unnecessary risks to the success of the TASC program. These risks are DHS’ significant reliance on contractors to define and implement the new system and the lack of independence of DHS’ V&V function for the TASC program. The department plans to have the selected contractor prepare a number of key documents including plans needed to carry out disciplined processes, define additional business processes to be standardized, and propose a migration approach. However, DHS has not developed the necessary contractor oversight mechanisms to ensure that its significant reliance on contractors for the TASC program does not result in an unfavorable outcome. Work with other systems acquisition and implementation efforts have shown that placing too much reliance on contractors can result in systems efforts plagued with serious performance and management problems. For example, DHS’ Office of Inspector General (OIG) recently reported that the U.S. Customs and Border Protection (CBP) had not established adequate controls and effective oversight of contract workers responsible for providing Secure Border Initiative (SBI) program support services. Given the department’s aggressive SBI program schedule and shortages of program managers and acquisition specialists, CBP relied on contractors to fill the staffing needs and get the program underway. However, CBP had not clearly distinguished between roles and responsibilities that were appropriate for contractors and those that must be performed by government employees. CBP also had not provided an adequate number of contracting officer’s technical representatives (COTR) to oversee support services contractors’ performance. As a result, according to the OIG report, contractors were performing functions that should have been performed by government workers. According to the OIG, this heavy reliance on contractors increased the risk of CBP relinquishing its responsibilities for SBI program decisions to support contractors, while remaining responsible and accountable for program outcomes. DHS’ V&V contractor was not an independent reviewer because RMTO was responsible for overseeing the contractor’s work and authorizing payment of the V&V invoices. On October 21, 2009, DHS officials indicated that they have restructured the V&V contract to address our concerns by changing the reporting relationship and the organization that is responsible for managing the V&V contract. Under the previous arrangement, the V&V contractor was reporting on work of the RMTO, the program manager for the TASC program and the RMTO Director was serving as the COTR for the V&V contract. As part of the COTR’s responsibilities, RMTO approved the V&V contractor’s invoices for payment. The independence of the V&V contractor is a key component to a reliable verification and validation function. Use of the V&V function is a recognized best practice for large and complex system development and acquisition projects, such as the TASC program. The purpose of the V&V function is to provide management with objective insight into the program’s processes and associated work products. For example, the V&V contractor would review system strategy documents that provide the foundation for the system development and operations. According to industry best practices, the V&V activity should be independent of the project and report directly to senior management to provide added assurance that reported results on the project’s status are unbiased. An effective V&V review process should provide an objective assessment to DHS management of the overall status of the project, including a discussion of any existing or potential revisions to the project with respect to cost, schedule, and performance. The V&V reports should identify to senior management the issues or weaknesses that increase the risks associated with the project or portfolio so that they can be promptly addressed. DHS management has correctly recognized the importance of such a function and advised us that they have taken prompt steps so that the V&V function is now being overseen by officials in DHS’ Office of the Chief Information Officer. It is important that V&V is technically, managerially, and financially independent of the organization in charge of the system development and/or acquisition it is assessing. In conclusion, Mr. Chairman, six years after the department was established, DHS has yet to implement a departmentwide, integrated financial management system. DHS has started, but not completed implementation of the six recommendations we made in June 2007, aimed at helping the department to reduce risk to acceptable levels, while acquiring and implementing an integrated departmentwide financial management system. The open recommendations from our prior report continue to be vital to the success of the TASC program. In addition, as DHS moves toward acquiring and implementing a departmentwide financial management system, it has selected a path whereby it is relying heavily on contractors to define and implement the TASC program. Therefore, adequate DHS oversight of key elements of the system acquisition and implementation will be critical to reducing risk. Given the approach that DHS has selected, it will be paramount that DHS develop oversight mechanisms to minimize risks associated with contractor- developed documents such as the migration plans, and plans associated with a disciplined development effort including requirements management plans, quality assurance plans, and testing plans. DHS faces a monumental challenge in consolidating and modernizing its financial management systems. Failure to minimize the risks associated with this challenge could lead to acquiring a system that does not meet cost, schedule, and performance goals. To that end, our draft report includes specific recommendations, including a number of actions that, if effectively implemented, should mitigate the risks associated with DHS’ heavy reliance on contractors for acquiring and implementing an integrated departmentwide financial management system. In addition, we also recommended that DHS designate a COTR for the IV&V contractor that is not in RMTO, but at a higher level of departmental management, in order to achieve the independence needed for the V&V function. As discussed earlier, DHS officials advised us that they have already taken steps to address this recommendation and we look forward to DHS expeditiously addressing our other recommendations too. Mr. Chairman, this completes our prepared statement. We would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For more information regarding this testimony, please contact Kay L. Daly, Director, Financial Management and Assurance, at (202) 512-9095 or dalykl@gao.gov, or Nabajyoti Barkakati, Chief Technologist, at (202) 512- 4499 or barkakatin@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the contacts name above, other team members include John C. Martin, Senior Level Technologist; Chanetta R. Reed, Assistant Director; and Sandra Silzer, Auditor-in-Charge. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In June 2007, GAO reported that the Department of Homeland Security (DHS) had made little progress in integrating its existing financial management systems and made six recommendations focused on the need for DHS to define a departmentwide strategy and embrace disciplined processes. In June 2007, DHS announced its new financial management systems strategy, called the Transformation and Systems Consolidation (TASC) program. GAO's testimony provides preliminary analysis of the status of its prior recommendations and whether there were additional issues identified that pose challenges to the successful implementation of the TASC program. GAO reviewed relevant documentation, such as the January 2009 Request for Proposal and its attachments, and interviewed key officials to obtain additional information. GAO provided a draft report that this testimony is based on to DHS on September 29, 2009, for review and comment. After reviewing and considering DHS' comments, GAO plans to finalize and issue the report including providing appropriate recommendations aimed at improving the department's implementation of the TASC program. GAO's preliminary analysis shows that DHS has begun to take actions to implement four of the six recommendations made in the 2007 report; however, none of these recommendations have been fully implemented. GAO recognizes that DHS cannot fully implement some of the recommendations aimed at reducing the risk in accordance with best practices until the contract for TASC is awarded. DHS has taken, but not completed, actions to (1) define its financial management strategy and plan, (2) develop a comprehensive concept of operations, (3) incorporate disciplined processes, and (4) implement key human capital practices and plans for such a systems implementation effort. DHS has not taken the necessary actions on the remaining two recommendations, to standardize business processes across the department, including applicable internal control, and to develop detailed consolidation and migration plans since DHS will not know the information necessary to develop these items until a contractor is selected. While some of the details of the department's standardization of business processes and migration plans depend on the selected new system, DHS would benefit from performing critical activities, such as identifying all of its affected current business processes so that DHS can analyze how closely the proposed system will meet the department's needs. GAO's preliminary analysis during this review also identified two issues that pose challenges to the TASC program--DHS' significant risks related to the reliance on contractors to define and implement the new system and the lack of independence of the contractor hired to perform the verification and validation (V&V) function for TASC. DHS plans to rely on the selected contractor to complete key process documents for TASC such as detailed documentation that governs activities such as requirements management, testing, data conversion, and quality assurance. The extent of DHS' reliance on contractors to define and implement key processes needed by the TASC program, without the necessary oversight mechanisms to ensure that (1) the processes are properly defined and (2) effectively implemented, could result in system efforts plagued with serious performance and management problems. Further, GAO identified that DHS' V&V contractor was not independent with regard to the TASC program. DHS management agreed that the V&V function should be performed by an entity that is technically, managerially, and financially independent of the organization in charge of the system development and/or acquisition it is assessing. Accordingly, DHS officials indicated that they have restructured the contract to address our concerns by changing the organization that is responsible for managing the V&V function. |
Over the last decade, our government and our nation have become increasingly reliant on computer systems to support critical operations and infrastructures, such as telecommunications, power distribution, financial services, emergency services, national defense, and critical government operations. Over the same period, computer interconnectivity experienced an unprecedented growth, most notably in the use of the Internet, that has revolutionized the way our government, our nation, and much of the world communicate and conduct business. The benefits have been enormous in terms of facilitating communications, business processes, and access to information. However, without proper safeguards, this widespread interconnectivity poses enormous risks to our computer systems and, more importantly, to the critical operations and infrastructures they support. Attacks could severely disrupt computer-supported operations, compromise the confidentiality of sensitive information, and diminish the integrity of critical data. A significant concern is that terrorists or hostile foreign states could severely damage or disrupt critical operations, resulting in harm to the public welfare. Threats are increasing, in part, because the number of individuals with computer skills is increasing and because intrusion, or “hacking,” techniques have become readily accessible through magazines, computer bulletin boards, and Internet Web sites. However, the sources of and motives behind cyber attacks often cannot be readily determined. This is because groups or individuals can attack remotely from anywhere in the world, over the Internet, other networks, or dial-up lines, and they can disguise their identity, location, and intent by launching attacks across a span of communications systems and computers. Figure 1 provides an overview of the various types of risks to computer-based operations. The federal government has recognized that mitigating risks to our nation’s critical computer-dependent infrastructures, many of which are privately owned, is a serious challenge requiring coordination and cooperation among federal agencies, public and private-sector entities, and other nations. In 1991, the National Research Council studied the issue and reported that “as computer systems become more prevalent, sophisticated, embedded in physical processes, and interconnected, society becomes more vulnerable to poor system design, accidents that disable systems, and attacks on computer systems.” In July 1996, the President’s Commission on Critical Infrastructure Protection was established to investigate the nation’s vulnerability to both cyber and physical threats. The commission’s October 1997 report, Critical Foundations: Protecting America’s Infrastructures, described the potentially devastating implications of poor information security from a national perspective. In May 1998, in response to the commission’s 1997 report, the President issued Presidential Decision Directive (PDD) 63, which outlined a strategy for combating the threat of cyber attacks by terrorists, nation states, criminals, or others. The directive tasked federal agencies with developing critical infrastructure protection plans. In addition, PDD 63 recognized the importance of establishing mechanisms for sharing information on system vulnerabilities, threats, intrusions, and anomalies so that both government and industry could better prepare to warn and defend against computer-based attacks. Specifically, it designated “lead agencies” within the federal government to work with private-sector and government entities in each of eight infrastructure sectors and five special function areas. The eight infrastructures identified were (1) information and communications; (2) banking and finance; (3) water supply; (4) aviation, highway, mass transit, pipelines, rail, and waterborne commerce; (5) emergency law enforcement; (6) emergency fire services and continuity of government; (7) electric power and oil and gas production and storage; and (8) public health services. The five special function areas were (1) law enforcement and internal security, (2) intelligence, (3) foreign affairs, (4) national defense, and (5) research and development. The directive also encouraged the creation of ISACs that could serve as mechanisms for gathering, analyzing, appropriately sanitizing, and disseminating information to and from infrastructure sectors and the government. Further, it recognized the Federal Bureau of Investigation’s National Infrastructure Protection Center as a national threat assessment, warning, vulnerability, and law enforcement investigation and response center. Information sharing and coordination among organizations are central to producing comprehensive and practical approaches and solutions to combating computer-based threats. Having information on threats and on actual incidents experienced by others can help an organization identify trends, better understand the risks it faces, and determine what preventative measures should be implemented. In addition, comprehensive, timely information on incidents can help federal and nonfederal analysis centers determine the nature of an attack, provide warnings, and advise on how to mitigate an imminent attack. However, we previously reported that progress in implementing PDD 63, including the establishment of information-sharing relationships, has been slow. Although six ISACs in five industry sectors had been established as of March 2001, three had been in existence only since December 2000.Further, as we reported in April 2001, the National Infrastructure Protection Center had mixed success in establishing information-sharing relationships with other government entities and private industry. Despite this limited progress, a number of government and private organizations have gained experience in establishing information-sharing relationships. These organizations range from groups that disseminate information on immediate threats and vulnerabilities, to those that seek to facilitate information sharing between public and private entities on industry-specific threats, to those that promote coordination across infrastructure sectors and on an international scale. However, developing the information-sharing and coordination capabilities that could assist in effectively addressing computer-based threats and actual incidents has proven to be challenging as organizations grapple with ways to ensure that useful and complete data are collected; appropriately analyzed; protected from inappropriate disclosure; and efficiently and effectively disseminated, often in the form of warnings. The organizations identified several critical success factors that they viewed as essential to establishing, developing, and maintaining effective information-sharing relationships, which could benefit critical infrastructure protection efforts. These factors included (1) fostering trust and respect; (2) establishing effective, timely, and appropriately secure communication; (3) obtaining top management support; (4) ensuring organization leadership continuity; and (5) generating clearly identifiable membership benefits. An underlying element to the success of information-sharing organizations was developing trusted relationships among the members and the organizations’ staffs. Several of the organizations had professional and administrative staffs that provided analytical capabilities and facilitated their members’ participation in the organization’s activities. Others were less formally structured organizations that relied primarily on members for such support. Trust was critical to overcome members’ reluctance to disclose their weaknesses, vulnerabilities, and other confidential or proprietary business information to other members—some of whom were business competitors. In general, members were reluctant to share information due to concerns that an inadvertent release of this type of information could damage reputations; lower customer confidence; provide an advantage to competitors; and possibly negatively affect members’ businesses and lead to punitive measures against an individual member or a member organization. All of the organizations agreed that trust had to be built over time and through personal relationships, and they had taken various steps to facilitate the process, such as the following: Most held regular—bimonthly, quarterly, or annual—meetings or forums to discuss issues and establish face-to-face contact. Beyond the time used to discuss technical issues, these meetings included time for members to build personal relationships and contacts. Many of the organizations and the members stated that the personal relationships and contacts developed through participating in information-sharing organizations was as important, if not more important, in developing trust than the information received by attending an organization’s function. Many organizations encouraged consistent member participation, noting that trust was built most effectively when members consistently attended and participated in the organizations’ activities. Also important was for members to consistently send the same representatives and not rotate different people as representatives to the organizations’ functions. To maintain consistency, some organizations did not allow alternate attendees when designated representatives could not attend. Most followed established procedures or performed background checks to evaluate prospective members before allowing their participation. For example, some organizations allowed nonmembers to participate only if the organization invited them or an existing member invited and escorted them. Another organization had an official board that reviewed membership applications to determine whether the applicant and the applicant's organization met established membership criteria. Also, groups that served specific audiences had established lists of pertinent organizations that were allowed to participate as members and receive information of specific interest to that group. Many attempted to establish an atmosphere of mutual respect among the members so that each member’s issues and expertise merited consideration regardless of the company they represented or the individual representative’s position in that company. Often, each member was required to share information or, in some cases, time was set aside to give each member an opportunity to raise issues for discussion. In addition, many organizations encouraged members to subordinate individual or individual organizations’ interests to the interests of the entire information-sharing group. For example, one organization had simple rules of behavior. Members were to support one another in improving the security posture of each other’s organization without regard for their own self-promotion or for the profit or publicity of their individual organization. All had established procedures for handling violations of the rules because any violation of trust undermined the organization’s purpose and diminished members’ willingness to share in the future. The organizations had both formal and informal means of encouraging compliance and sanctioning violators. In some cases, members were formally asked to terminate their participation, a member’s access was terminated, or a member’s organization was asked to replace its representative. For example, one organization would restrict access to a secure server, thereby terminating the individual’s ability to share or receive information. Informally, other members would no longer include a violator in sensitive conversations. One participant emphasized that once the group lost trust in a member, trust could not be easily restored. Our study participants said that their organizations rarely experienced a violation of trust because members did not want to jeopardize their ability to participate and, thus, lose the benefits of membership. The organizations used a variety of mechanisms to ensure effective and timely communication among members and with the professional and administrative staffs that some of the organizations had established. In addition, the organizations were concerned about appropriately securing the information being shared to maintain member anonymity, when desired, and avoid inappropriately disseminating sensitive or proprietary information to nonmembers. Regularly scheduled meetings were the primary method for sharing information as well as a method for building trust, as previously discussed. These meetings offered a generally secure environment to share information, while also encouraging broader member participation. The organizations also adjusted the meeting times and lengths to accommodate member needs and attempted to enhance the meeting’s efficiency and effectiveness by limiting the time for presentations, approving most topics and presentations before the meetings, and adjusting meeting times to maximize face-to-face discussions between members. Typically, the meetings lasted 1/2 day to 2 days for the entire membership, and some meetings included separate sessions for smaller groups to discuss specific technical or member issues. For example, one organization had quarterly 2-day meetings, the first day of which was typically restricted to a small number of members with expertise pertinent to the specific topic under discussion. These closed meetings tended to be more technical than the open meetings and include information and discussions that were more sensitive and detailed. The second day’s meeting, which was for all members of the organization, included discussions about the latest software tools and the latest technology and allowed time for any member to openly discuss specific topics. Another organization held more informal quarterly half-day meetings that included presentations about a wide variety of topics and allowed considerable time for members to develop personal contacts and have face-to-face discussions. Beyond the regularly scheduled meetings, three organizations had created committees to perform specific tasks, such as policy setting, that allowed for greater contact between some members and more topic-based information sharing. Various types of information technology provided important communication mechanisms as well. For example, Web sites were used to (1) disseminate all types of information, including alerts, advisories, reports, and other analysis; (2) make databases available to the members; and (3) provide methods for members to ask each other about particular incidents, vulnerabilities, or potential solutions. Many organizations had secure Web sites to share sensitive information; others used open sites to share general information with their members and the public. One organization established a secure telephone line that allowed immediate contact with multiple parties, thereby speeding communication of time- critical information. In addition, some organizations used e-mail to communicate less sensitive information to the entire membership. However, members from one organization did not typically use e-mail because of the lack of security and the inability to control subsequent distribution. This organization relied primarily on regular mail and telephone conversations to disseminate information about most things, including meeting agendas and real-time problem solving. Due to concerns about the inadvertent release of sensitive information, membership lists, and victim identification, some of the organizations had implemented special security procedures. For example, several organizations carefully sanitized victim identifiers from documentation or did not document discussions about specific vulnerabilities and incidents. One organization took special precautions to hide the identity of victims by limiting its staff’s access to the information and segregating the information on a special network. Another organization’s membership list was maintained by only one person and never generally released to all members. Several representatives stated that an underlying requirement for communications was establishing standard terms and reporting thresholds so that the magnitude of an incident could be easily and consistently understood and members could quickly determine an incident’s potential impact on them. According to one official, such standardization helped to ensure that (1) members understood the level of risk imposed by the circumstance, (2) information was appropriately sanitized to protect the victim’s identity, and (3) solutions were easily understood. One organization had developed an extensive policy that defined each member’s responsibility for reporting information, the terms that would be used for the reporting, and the thresholds that required reporting. Also, two organizations were developing reporting forms to standardize the mechanism and language used to report incidents to the organization for further analysis and dissemination. In addition, organizations sought member input in developing new systems and mechanisms for communicating information, thereby better fulfilling member needs and giving the members a sense of ownership in the system or product. For example, one organization solicited suggestions about how to improve existing databases and what new databases were needed by the members. Members told us that senior management support for their participation in an information-sharing organization was critical to their success in obtaining valuable information and contributing to the success of the entire information-sharing organization. For example, management approval was needed before individuals could share information about potentially sensitive incidents and vulnerabilities. Without such support, members could not fully participate in the information-sharing process. Top management support was also needed to ensure that a member organization’s representative could obtain funding for travel and other resources. For example, two organizations charged membership fees—one of which exceeded $25,000 a year—and other organizations requested people to provide support staff and analysts. Several organizations were led by individuals who had spent years building personal relationships with members and working to champion the purpose and mission of their organizations. In our discussions with members, these leaders were given considerable credit for the quality and value of the information that the members received and the success of the information-sharing organizations. These long-term leaders told us that, to help ensure continuity and diminish reliance on a single individual, they attempted to institutionalize their roles by bringing in additional people to assist in leading their organizations and performing such duties as enforcing membership rules and keeping current on issues and topics affecting their organization’s members. Organization representatives said that generating clearly identifiable benefits was essential for maintaining active member participation and support in their organizations. Many representatives told us that due to members’ own resource and time constraints, members would not participate in information-sharing organizations unless they received benefits. Benefits the representatives cited included the following: Members were provided access to current information about incidents, threats, and vulnerabilities that had been analyzed by trusted experts. Some of the organizations performed expert analysis on incidents reported to them by members or the public and provided analyses and alerts to the members that included information on the incident’s level of threat and any possible mitigation techniques. Another organization provided its members with a method for soliciting advice from the entire membership. In this case, a member would send a query to the organization’s experts, who would review the request, clarify any questions with the member, and then send the request to the rest of the membership. While the rest of the membership reviewed and commented on the query, the organization’s experts continued to analyze the problem, eventually providing its final analysis, which could include a threat rating and potential solutions to the entire membership. Some participants stated that the amount of analysis performed before informing the members had to be balanced with the need to quickly warn the members about the potential threat. Several participants stated that sharing information for the sake of sharing was not valuable because information security professionals need analyses that offer solutions. Members were informed about emerging technology so that they could discuss or at least be aware of possible vulnerabilities and the associated risks. These discussions were valuable to members because the information was useful in their employer’s planning efforts. For example, several of the organizations had recently discussed, or were planning to discuss, the vulnerabilities surrounding the use of wireless networking technology. Members shared information concerning information security management practices, including corporate governance practices, business risk management processes, computing and network contract provisions, application development and support, disaster recovery planning, and performance measurement regarding control effectiveness. Members shared lessons learned and offered free expert advice on individual projects. The opportunity to draw on a network of experts gave members insight into their own problems and the shortfalls in proposed projects. For example, in many cases, one organization’s members were willing to help each other by reviewing the requirement documentation for new systems development projects or system enhancement projects and participate in meetings to expose weaknesses and raise questions about a proposed project. According to one participant, his employer had received hundreds of thousands of dollars worth of free expert advice during a half-day discussion of a proposed information system that his employer was developing. The discussion led to the development of a better, more secure system. The sharing of free advice also occurred more informally. Members received real-time assistance in response to problems. For example, one member’s entity experienced a sophisticated network intrusion that was originating from a foreign Internet service provider. Through the contacts made at one of the information-sharing organizations, the system administrator was able to contact the Internet service provider and stop the intrusion. According to an individual involved, this incident was stopped much faster than it otherwise would have been because of the trusted relationships developed through the information-sharing organization that allowed open and candid discussions to occur. Members established more cooperative relationships with law enforcement entities than would have otherwise occurred. Of 11 organizations, 2 were sponsored by law enforcement entities and most included members from the law enforcement community. Although law enforcement organizations could not share certain sensitive information, including them in the information-sharing groups led to trusted relationships between law enforcement organizations and the others; shared expertise about computer forensics and evidence gathering related to electronic crimes; and, thus, awareness about these topics, which encouraged organizations to report crimes. Representatives of one group told us that their members’ ability to properly gather and protect computer-related evidence had facilitated law enforcement investigations, thus limiting the time and resources that the victim and the law enforcement officers needed to carry out an investigation. In addition, the trusted relationships provided law enforcement with a greater pool of experts to use as expert witnesses or consultants. Members developed valuable professional relationships through participation. Many members that participated in our study stated that their exposure to other experts and cutting-edge technology was a valuable learning experience that increased their own technical expertise. In addition, the large network of colleagues that members developed by participating assisted their employers in identifying potential professionals to fill open positions. Members told us that they believed that the information sharing their organizations engaged in contributed to the overall security of the nation’s critical infrastructures—an effort that they viewed as being in their own self-interest, as well as that of others. In addition to the critical success factors previously discussed, organizations identified a number of related challenges to effective information sharing. These challenges included (1) initially establishing and maintaining trust relationships, (2) developing agreements on the use and protection of shared information, (3) obtaining adequate funding, (4) developing and retaining a membership base, and (5) developing and maintaining an organization staff with appropriate skills. All of the participating organizations told us that initially establishing trust among the original members was a challenge. This was because members were reluctant to share their organization’s problems and vulnerabilities with outsiders, some of whom were commercial competitors. Members stated that the first meetings discussed broad subjects that individuals were concerned about or equally affected by, such as computer forensics. In some cases, members initially participated because of an existing trust relationship with individual leaders or sponsors, and it was a challenge to keep them returning until they saw value in participating and had built trust with other members. In such situations, the persistence of trusted leaders in encouraging effective member participation was essential. Over time, this challenge diminished as members became familiar with each other, enthusiastic members moved past general topics, and rules of behavior were clarified. In addition, over time, members began to better understand the perspectives of others. For example, discussions among members gradually led those from the private sector to gain an understanding of the law enforcement community’s approach to investigating crime. Further, some members from federal agencies said that it took time for them to determine how they could share sensitive, including classified, information with nonfederal government entities. Another challenge, previously mentioned, was the need to institutionalize trust, rather than depend indefinitely on personal one-on-one relationships. Institutionalizing trust was especially important for large organizations and federal entities that typically experienced a great deal of staff turnover. Information sharing is impeded when there is a lack of clearly understood agreements and expectations on how potentially sensitive information will be used and protected by the recipients. To overcome this obstacle, most of the organizations required members to sign confidentiality or information- sharing agreements. These agreements varied among the organizations: some agreements were general, while others were specific. Though many of the organizations did not consider these agreements to be essential, representatives of one organization considered them important because they clarified and helped to institutionalize agreements, ensured senior management understanding and support, and fostered acceptance of new members. For example, one organization determined that more formal agreements were needed when its membership was significantly expanded. The more formal agreements helped ensure that new members were familiar with the organization’s practices, which had previously been informal and undocumented. These new agreements described how the sensitivity of information would be defined, how shared information would be protected from dissemination outside the group, and what information could be shared with nonmembers. Noting that information-sharing agreements cannot cover every situation that may arise, one organization emphasized the importance of promoting an attitude of sensitivity to the concerns of others regarding disclosure of potentially confidential or damaging information. Officials from this organization described a situation in which a company had notified them of a newly identified vulnerability. Before disseminating information on the vulnerability to its constituent members, the information-sharing organization worked with the company to develop a message that would provide the needed vulnerability information but not disclose sensitive details. This collaborative effort helped ensure and maintain trust between the organization and the company. Representatives of a few organizations said that members had raised concerns about their potential liability for any damage that occurred as a result of the information they shared and the advice they gave. Specifically, members were concerned that they might be held liable if other members took their advice and experienced negative results. Officials from one organization were also concerned that they might be held responsible if their advice adversely affected a vendor. To mitigate the risk of any such liability, some organizations addressed this issue specifically in their information-sharing agreements, stating that members who took the advice of others did so at their own risk. In addition, some members of federally sponsored organizations expressed the concern that members’ potentially sensitive information voluntarily shared with federal entities could be required to be made publicly available under provisions of the Freedom of Information Act, despite existing exemptions for sensitive or proprietary information. The organizations also faced challenges obtaining adequate funding for various items, including mailings; meeting space; technological enhancements; and other administrative activities and, when applicable, salaries for permanent staff. They noted that the funding must be reliable so that the organization could plan, budget, and remain consistent in its activities. For example, one organization had to stop development of a secure Web site because the sponsor withdrew its support. Representatives from several organizations that relied on voluntary contributions from members emphasized, however, that such funding must be unbiased—that is, used for promoting open and honest information sharing rather than furthering an individual’s or organization’s stature in the community or for gaining clients. Most of the organizations said that they had to work to overcome the challenge of maintaining their memberships’ enthusiasm and participation so that members would use the communication mechanisms, maintain confidentiality, and continue to share relevant information. In addition, organizations had to solicit new members to stay at their chartered number and to keep an influx of new ideas. For the organizations that strictly controlled their membership or the number of members, developing and maintaining their membership base was a formidable challenge. For these organizations, the loss of members (e.g., due to the loss of the members’ management support or difficult economic times) threatened their survival. For one organization, this meant that the leaders had to continually establish contacts in their industry and determine which prospective companies would provide the most benefit to the entire group. In addition, the organizations that focused on the information technology area faced the challenge of a very transient membership because information technology professionals often moved from organization to organization. When the individuals moved, the information-sharing organizations had to determine if they would be allowed to continue participating, which was usually based on the contributions and the enthusiasm of the individual. The organizations usually allowed individual members who had changed employers to continue participation. However, two organizations specifically did not allow individuals to continue participating if they changed employers and their new employer was not a member of the organizations because their membership was based on the organizations, not the individuals. Most of the organizations faced the challenge of developing and maintaining an organization with the appropriate operational skills to facilitate the members’ participation and oversee administrative activities that ensured continued and effective information sharing. For example, the organizations that had professional and administrative staffs said that it was difficult to find and retain employees with the level of skills and foresight that would contribute to the organization’s mission. Staff members were expected to assist members in participating in information sharing by arranging meetings and travel, maintaining the communications mechanisms, and keeping abreast of current and emerging issues. Further, to build trusted relationships and gain the acceptance of member organizations, staff needed to have pertinent skills and knowledge. Because the job market was so competitive, one of the sponsoring organizations established flexible working arrangements for and gave competitive pay to their professional staff that supported its information- sharing organization. Another organization recruited staff from its industry who had relevant technical experience and understood the organization’s role in the industry. In addition, one of the organizations used contractors to maintain its communications mechanisms and analyze reported incidents. In addition, the representatives from organizations without professional and administrative staffs believed that an even more difficult challenge was encouraging volunteers to donate additional time to perform the administrative tasks required to organize meetings and further facilitate information sharing. In one organization, the leader had taken most of the responsibility for these tasks. Information sharing and coordination among organizations are important aspects of producing comprehensive and practical approaches to combating computer-based attacks. Information on threats and incidents experienced by others can help an organization identify trends, better understand the risks it faces, and determine what preventative measures should be implemented. In addition, comprehensive, timely information on incidents can help federal and nonfederal analysis centers determine the nature of an attack, provide warnings, and advise on how to mitigate an imminent attack. The critical success factors and challenges described by organizations experienced in sharing sensitive and time-critical information and the lessons they have learned provide useful insights for other entities who are also trying to develop means of appropriately sharing information on computer-based vulnerabilities and the related risks. As the government’s critical infrastructure protection strategy evolves, both public and private- sector entities can adopt the practices described to establish trusted relationships with a wide variety of federal and nonfederal entities that may be in a position to provide potentially useful information and advice on vulnerabilities and incidents; develop standards and agreements on how shared information will be establish effective and appropriately secure communication take steps to ensure that sensitive information is not inappropriately disseminated, which may require statutory changes; ensure that benefits are realized by developing and maintaining staff with the skills to support analytical capabilities and facilitate communication among information-sharing partners; obtain the support of senior officials in both federal and nonfederal obtain adequate funding. The Congress can play a key role in facilitating the information-sharing aspect of critical infrastructure protection, as it did regarding the Year 2000 computing challenge. For example, the Congress can actively monitor progress in meeting critical infrastructure protection goals, including improved information sharing, and promote trust by assisting in clarifying the way federal agencies may use sensitive information provided for critical infrastructure protection purposes. Prior to 2000, the Congress held important hearings on Year 2000 readiness, and, in 1998, passed legislation intended to address concerns from private-sector entities about exposure to legal liability and antitrust law violations that might arise due to sharing information on Year 2000 readiness. The Congress is currently considering measures intended to address several of the practices and challenges we identified. Two recently introduced bills, S. 1456 and H.R. 2435, include provisions that address the receipt, care, and storage of critical infrastructure protection information as well as specific exemptions from public disclosure of such information. Implementation of such provisions, as well as other monitoring actions, could facilitate information sharing and, thus, federal and private efforts to protect critical infrastructures. Participants Comments In commenting on a draft of this report, the participants of our study agreed with the critical success factors and challenges that we identified. Several provided additional supporting points and examples, which we have included in the report as appropriate. As we agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to the Chairman, Vice Chairman, and Ranking Minority Member of the Joint Economic Committee. In addition, we are sending copies to other interested congressional committees. We are also sending copies to the heads of the lead agencies, including the Secretaries of Commerce, Defense, Energy, Health and Human Services, State, Transportation, and the Treasury and the U.S. Attorney General; the Administrator, Environmental Protection Agency; the Director, Federal Emergency Management Agency; the Director, Federal Bureau of Investigation; the Director of Central Intelligence; the Assistant to the President for Science and Technology; the Director, Critical Infrastructure Assurance Office; the Director, National Infrastructure Protection Center; the organizations that participated in our study; and other interested parties. We will make copies available to other interested parties upon request. This report also will be available on our Web site at www.gao.gov. If you have any questions, please call me at (202) 512-3317, or you may e- mail me at daceyr@gao.gov. Major contributors to this report included Jean Boltz, Michael Gilmore, Danielle Hollomon, and Catherine Schweitzer. Our overall objective was to identify information-sharing practices that federal organizations and others can adopt to improve their ability to understand, anticipate, and address computer-based vulnerabilities and incidents. Our specific objectives were to identify (1) critical success factors in building information-sharing relationships and (2) related challenges and how to address them. To meet these objectives, we studied 11 federal and nonfederal entities experienced in developing relationships and procedures for information sharing. We identified these organizations by soliciting suggestions from a variety of sources, including our analysts familiar with information-sharing organizations and members of our Executive Council on Information Management and Technology, which is a group of executives with extensive experience in information technology management who advise us on major information management issues affecting federal agencies. These sources recommended over 30 public and private organizations. After initial discussions and further research, we narrowed our focus to 11 organizations that most closely met our criteria of being a recognized, competent information-sharing entity, primarily sharing sensitive or time- critical information pertaining to computer-based vulnerabilities and incidents. These 11 organizations included among their membership representatives from federal, state, and local governments; private companies of varying sizes; and the academic community. The individuals who were involved in the organizations had various technical and business backgrounds—such as information security specialists, computer scientists, engineers, auditors, lawyers, law enforcement officers, and medical professionals. Each of the 11 organizations covered by our review is described in Appendix II. To identify common critical success factors, we researched each organization, analyzed relevant documents, interviewed pertinent organization officials and knowledgeable members, observed meetings and other operations, and compared their experiences for similarities. To identify challenges associated with successful information sharing, we obtained the views of officials and members of each organization and reviewed supporting documentation, when it was available. We solicited comments from each of the eleven organizations that we studied. Additional supporting points and examples were incorporated as appropriate. We conducted our study from May 2001 through October 2001 in accordance with generally accepted government auditing standards. The Agora is a Seattle-based regional network of over 600 professionals representing a variety of fields, including information systems security; law enforcement; local, state, and federal governments; engineering; information technology; academics; and other specialties. The participants represent over 150 commercial firms and 140 government entities located in 20 U.S. States and 5 Canadian Provinces. Founded in 1995, the Agora formed to address the enormous security challenges brought about by new computer, network, and Internet technologies. The Agora’s objectives are to establish confidential ways for organizations to share sensitive information about common problems and best practices for dealing with security threats, develop and share knowledge about how to protect electronic establish shared services that enhance participants’ ability to successfully perform their daily jobs, prompt more research specific to electronic information systems share educational opportunities, and enjoy the benefits of the fostered relationships. Information sharing occurs primarily through quarterly meetings that typically include 175 Agora members. In addition to the quarterly meetings, informal meetings and teleconferences are held among members on an ad hoc basis to discuss issues as they arise, such as assisting entities under attack. The Centers for Disease Control and Prevention (CDC), which is an agency of the Department of Health and Human Services, is recognized as the lead federal agency for protecting the health and safety of people at home and abroad. CDC seeks to accomplish its mission by working with partners throughout the nation and world to monitor health, detect and investigate health problems, conduct research to enhance the prevention of disease, foster safe and healthful environments, and provide leadership and training. CDC uses several information-sharing computer systems to help accomplish its mission, three of which were covered by our review and are described below. In 1998, CDC officially announced the establishment of PulseNet, a national network of public health laboratories that helps epidemiologists rapidly identify clusters of foodborne illness and alerts others in the surrounding geographic area and throughout the country regarding a possible outbreak. By sharing information on outbreaks quickly through computer systems connected to the Internet, PulseNet allows CDC to very quickly notify public health officials and food regulators of the health threat and assist investigators in identifying and removing the food source of the outbreak from distribution channels, thus mitigating the health risks associated with such outbreaks. In November 2000, the Epidemic Information Exchange system was implemented as an interactive, secure, Internet-based network that provides information on epidemic outbreaks, toxic exposures, and other health events as they occur. Epidemic Intelligence Service officers at CDC, state and local laboratory personnel, and other public health officials use the system to securely conduct on-line discussions about posted events, communicate with public health officials, and request both financial and nonfinancial assistance. Because of the sensitivity of the system’s information, both users and providers of the information must be granted access to the system. In addition, before the information is made available to the system's users, editors and a medical director, who is a physician, review the information to ensure accurate information exchange. The Data Web, jointly developed by CDC and the U.S. Census Bureau, is a newly implemented system for cataloging and sharing social science data across the Internet. In this regard, the Data Web brings together demographic, economic, environmental, health, and other data maintained on different systems by different organizations wishing to make available their social-science-related data to a wide audience using a variety of systems. The primary users of the Data Web are scientists, researchers, academicians, business personnel, and professionals who need real-time access to government and scientific data originating from diverse systems and disciplines. While most data are widely accessible, the system provides a means for data providers to restrict access to sensitive information. The CERT® Coordination Center (CERT/CC) was established in 1988 by the Defense Advanced Research Projects Agency. The center is charged with (1) establishing a capability to quickly and effectively coordinate communication among experts to limit the damage associated with, and respond to, computer-based incidents; (2) conducting research into the prevention of security incidents; and (3) building awareness of security issues across the Internet community. In this role, CERT/CC (1) receives from and provides to system and network administrators, technology managers, and policy makers Internet security-related information and (2) provides guidance and coordination for responding to major Internet security events, such as the Melissa virus and Year 2000 conversion challenge. The center attempts to be an unbiased and trusted source of information, in part by providing trend and composite information only, by deleting information that would allow victims to be identified, and by coordinating the response information it provides with academic, government, and corporate experts. Through this collaboration, CERT/CC has developed a distributed model for incident response teams. It also provides leadership in the response team community by assisting organizations in developing their own emergency response capabilities. The Federal Computer Incident Response Center (FedCIRC) is the focal point for dealing with computer-related incidents affecting federal civilian agencies. Originally established in 1996 by the National Institute of Standards and Technology, the center has been administered by the General Services Administration since October 1998. FedCIRC’s primary purposes are to provide a means for federal civilian agencies to work together to handle security incidents, share related information, and solve common security problems. In this regard, FedCIRC provides federal civilian agencies with technical information, tools, methods, assistance, and guidance; provides coordination and analytical support; encourages development of quality security products and services through collaborative relationships with federal agencies, academia, and private industry; promotes incident response and handling procedural awareness within fosters cooperation among federal agencies for effectively preventing, detecting, handling, and recovering from computer security incidents; communicates alert and advisory information regarding potential threats and emerging incident situations; and augments the incident response capabilities of federal agencies. In accomplishing these efforts, FedCIRC draws on expertise from the Department of Defense, the intelligence community, academia, and federal civilian agencies. In addition, FedCIRC collaborates with the Federal Bureau of Investigation’s (FBI) National Infrastructure Protection Center in planning for and dealing with criminal activities that pose a threat to the critical information infrastructure. The International Information Integrity Institute (I-4) is sponsored by AtomicTangerine, a provider of information security consulting services whose clients include major global corporations. I-4 is a forum for sharing information among its member companies on developing and sustaining effective information security programs to support their global business environments. Its membership is limited to 75 of Business Week’s Global 1000 companies. In addition, I-4 maintains alliances with leading research organizations, such as SRI International and Kent Ridge Digital Labs, to stay abreast of the latest technical, communications, legal, and economic developments. AtomicTangerine also maintains a number of alliance partnerships with companies that specialize in various areas of emerging technology and architecture, which help provide information to I-4 members. I-4 members communicate primarily through forums, regional meetings, and a secure Web site that allows for member queries and distribution of analytical reports. I-4 forums are held three times a year, allowing representatives from all 75 I-4 member companies an opportunity to establish and maintain personal contacts, make formal presentations with follow-on discussions, and hold informal discussions about information protection and risk-management issues. Each member company is encouraged to send two representatives. Regional meetings, held five to six times a year, are generally shorter and targeted at members in a specific geographic region, such as the United States, Europe, or Asia. During these meetings, selected topics are discussed in greater depth than at forums. Throughout the year, members continuously carry on dialogs through queries on information security policy, procedure, and technology management issues, moderated by the I-4 staff. The National InfraGard Program began as a pilot project in 1996 in the Cleveland FBI Field Office to build a better relationship between the FBI and the private sector in addressing cyber and physical threats. The National Infrastructure Protection Center, which is an interagency center housed at the FBI, in conjunction with representatives from private industry, the academic community, and government, has worked to expand InfraGard by encouraging development of local chapters associated with each of the FBI’s 56 field offices. As of October 2001, InfraGard had over 2,000 members and 65 chapters. InfraGard chapters establish direct contact between law enforcement and infrastructure owners and operators, such as utility companies and health care organizations, through periodic meetings and a secure Web site. These communication mechanisms allow the InfraGard to gather information on cyber threats, vulnerabilities, and intrusions and distribute it to members, educate the public and members on infrastructure protection, disseminate sensitive information to members who have signed a secure distribute analytical products on information received from InfraGard members. In June 2001, InfraGard members elected a National Executive Board to govern the national InfraGard program and draft new policies and procedures to enhance the program’s effectiveness. The Joint Task Force–Computer Network Operations (JTF-CNO) (formerly the Joint Task Force–Computer Network Defense) is the primary Department of Defense entity for coordinating and directing internal activities to detect computer-based attacks, contain damage, and restore computer functionality when disruptions occur. The unit was established in 1998 to serve as one organization with overall authority for directing defensive actions against computer-based attacks across the entire Department. As such, JTF-CNO is supported by the Departments of the Army, Navy, and Air Force and the Marine Corps computer emergency- response teams and other Defense components. In April 2001, the JTF-CNO’s scope of responsibility was expanded to include a new operational mission: computer network attack. In addition to expanding mission responsibilities, the JTF-CNO is growing in size and depth to better meet increased network defense responsibilities. The JTF- CNO expansion significantly increases its ability to perform the following: (1) preventive activities, such as conducting security reviews and issuing vulnerability alerts; (2) coordination and monitoring detection activities performed by components, including monitoring automated intrusion- detection systems; (3) investigative and diagnostic activities; and (4) event handling and response activities, which involve disseminating information and providing technical assistance to system administrators so that they can appropriately respond to cyber attacks. JTF-CNO maintains a close relationship with the CERT/CC, the NIPC, and FedCIRC by participating in joint technical exchanges, working groups, and countermeasure development teams. In 1983, the National Coordinating Center for Telecommunications (NCC), which is operated by the National Communications System and staffed by government employees and representatives from major telecommunications service providers, was created by Executive Order 12472 as a joint industry and government organization to handle emergency requests related to the physical telecommunications network. The NCC’s industry and government representatives’ specific functions include advising executives and senior officials, maintaining points of contact with the parent organizations, coordinating and directing prompt restoration of telecommunications services in support of national security and emergency preparedness needs during crises such as natural disasters or war, and producing emergency response plans and procedures as a result of lessons learned during actual events. In January 2000, the NCC was recognized by the President’s National Security Council as the information sharing and analysis center (ISAC) for the telecommunications sector. As such, the NCC is responsible for facilitating the exchange of information among government and industry participants regarding computer-based vulnerability, threat, and intrusion information affecting the telecommunications infrastructure. Also, it analyzes data received from telecommunications industry members, government, and other sources to avoid or lessen the impact of a crisis affecting the telecommunications infrastructure. Since its recognition as an ISAC, NCC’s membership has expanded beyond traditional telecommunications entities, such as telephone companies, to include other technology companies involved in the telecommunications infrastructure. In 1991, government and industry Network Security Information Exchanges (NSIEs) were established by the National Communications System and the President’s National Security Telecommunications Advisory Committee (NSTAC) to identify, research, and share information about computer-based incidents that could negatively affect national security and emergency preparedness telecommunications. The goal of the NSIEs is to exchange information about the security of the public telecommunications network, including the Internet, to improve the overall reliability and security of the entire network. In addition, the NSIEs strive to improve each member’s total knowledge and understanding of the risks to the nation’s telecommunications. Although the two NSIEs are managed separately, their activities are closely coordinated, and they meet jointly every 2 months to exchange information and views about current threats, vulnerabilities, incidents, and solutions. As of August 2001, the government and industry NSIEs collectively had over 50 members from federal agencies and NSTAC member corporations, as well as a limited number of invited experts. Federal government members represent agencies that have functions related to telecommunications research, standards, regulation, law enforcement, or intelligence or are major telecommunications users. Industry NSIE members include representatives from telecommunications service providers, equipment vendors, systems integrators, and the financial services industry—a major telecommunications user. In 1995, the New York Electronic Crimes Task Force was formed by the United States Secret Service to investigate electronic crimes associated with computer-generated counterfeit currency, counterfeit checks, credit card fraud, telecommunications fraud, and access device fraud, to name a few. In addition, the task force has developed educational and training programs for children and parents to protect children from being exploited through the Internet, encouraged research and development of tools and methodologies to supported law enforcement education, and promoted development of trusted relationships between the public and the private sector. The task force has over 400 individual members drawn from 50 different federal, state, and local law enforcement agencies; 100 private companies; and 6 universities. The Secret Service has also assigned eight agents who have received specialized training in all areas of electronic crimes through its Electronic Crimes Special Agent Program. The task force has created this alliance to pool the expertise, authorities, and technical resources required to address electronic crimes—an effort that has been recognized by communities across the country and internationally as a model for local interagency cooperation and private/public partnership. South Carolina has recently implemented a similar model. The North American Electric Reliability Council (NERC) was formed in 1968 after a 1965 power outage crippled much of the northeastern United States. The council is a voluntary organization of organizations involved in bulk power production and distribution to promote standards and procedures and improve the reliability of the electric power supply. Due to the interconnectivity and interdependency of the electric power grid, information sharing is a necessity for (1) maintaining the reliability of the power supply and (2) conducting business transactions in a deregulated environment. NERC depends on reciprocity, peer pressure, and the mutual self-interest of its members to prevent any future occurrence like the 1965 incident. It also serves as an officially recognized ISAC for combating computer-based attacks on the electric power industry. In this capacity, it cooperates with the federal National Infrastructure Protection Center to identify threat trends and vulnerabilities and disseminate assessments, advisories, and alerts to its members. NERC membership consists of representatives from each of the 10 regional councils that represent geographic regions encompassing the entire United States and Canada and a small part of Mexico. Because any organization that is part of the power grid can potentially affect the operation and stability of the entire grid, members of these regional councils come from all segments of the electric industry: investor-owned utilities; federal power agencies; rural electric power cooperatives; state, municipal, and provincial utilities; independent power producers; power marketers; and other interested parties. The council primarily uses various databases accessible through secure Web sites for disseminating and collecting shared information on many aspects of energy generation and transfer. In addition, NERC allows members to create committees designed to solve particular problems or support ongoing efforts, such as standards setting and critical infrastructure protection. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents 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 our home page and complete the easy-to-use electronic order form found under “To Order GAO Products.” Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: fraudnet@gao.gov, or 1-800-424-5454 (automated answering system). | Information sharing and coordination are key elements in any defense against cyber attacks. The organizations GAO reviewed identified factors they considered critical to their success in building successful information-sharing relationships with and among their members. All of the organizations identified trust as essential to successful relationships. They said that trust could only be built over time and through personal relationships. One of the most difficult challenges identified was the initial reluctance of new members to share information. Other challenges included (1) developing agreements on the use and protection of shared information, (2) obtaining adequate funding for websites and meetings while avoiding contributions intended primarily to promote the interests of an individual organization, (3) maintaining a focus on emerging issues of interest to members, and (4) maintaining appropriately skilled professional and administrative staff. |
Air power has played a pivotal role in America’s military force since World War I when aircraft were first used in combat. In World War II, it was indispensable to U.S. forces to achieve victory. After the war, the Department of the Navy invested in longer-range aircraft and larger aircraft carriers to provide worldwide coverage from the sea. With the proven success of air power and development of the intercontinental-range bomber, the Department of the Air Force was established in 1947, with the Air Force taking its place alongside the other three services. During the Cold War, America’s air power was a critical element of both its nuclear deterrent forces and its conventional combat forces. A massive U.S. aerospace industry developed, giving the United States a research, development, and production base that has dramatically advanced airframes, propulsion, avionics, weapons, and communications, and helped shape and broaden the role of air power in U.S. military strategy. Today the Department of Defense (DOD) has what some refer to as the “four air forces,” with each of the services possessing large numbers of aircraft. Air power includes not only fixed-wing aircraft but also attack helicopters, long-range missiles, unmanned aerial vehicles, and other assets that give the United States the ability to maintain air superiority and to project power worldwide through the air. During the Persian Gulf War, the unparalleled capabilities of these forces were demonstrated as U.S. and coalition forces dominated the conflict. Sweeping changes in the global threat environment, sizable reductions in resources devoted to defense, technological advancements in combat systems, and other factors have significantly affected DOD’s combat air power. Ensuring that the most cost-effective mix of combat air power capabilities is identified, developed, and fielded in such an environment to meet the needs of the combatant commanders is a major challenge. In October 1993, DOD reported on its bottom-up review of defense needs in the post-Cold War security environment. The review outlined specific dangers to U.S. interests, strategies to deal with the dangers, an overall defense strategy for the new era, and force structure requirements. The strategy called on the military to be prepared to fight and win two nearly simultaneous major regional conflicts, engage in smaller-scale operations, meet overseas presence requirements, and deter attacks by weapons of mass destruction. Table 1.1 shows the overall size and structure of the general purpose forces DOD determined are needed to execute the strategy and the approximate number of associated combat aircraft. DOD currently has about 5,900 such aircraft as it continues drawing down its forces. In addition to these fighter and attack aircraft, DOD has other important combat aviation elements, including over 1,500 specialized support aircraft, such as those used for refueling, command and control, reconnaissance, and suppressing enemy air defenses, and about 250 aircraft in its special operations forces. Appendix I identifies the principal aircraft, long-range missiles, and other weapons and assets that were covered by our review. Two key DOD documents that provide guidance concerning the planning for and use of combat air power are the Secretary of Defense’s Defense Planning Guidance and the Chairman of the Joint Chiefs of Staff’s current National Military Strategy dated 1995. These documents build on the strategy, plans, and programs identified in the Bottom-Up Review. According to the Defense Planning Guidance and the National Military Strategy, U.S. forces, in concert with regional allies, are to be of sufficient size and capabilities to credibly deter and, if necessary, decisively defeat aggression by projecting and sustaining U.S. power during two nearly simultaneous major regional conflicts. The services’ forces are also expected to be prepared to fight as a joint team, with each service providing trained and ready forces to support the commanders in chief (CINC) of the combatant commands. U.S. air power is to be able to seize and control the skies, hold vital enemy capabilities at risk throughout the theater, and help destroy the enemy’s ability to wage war. Air power is also expected to provide sustained, precision firepower; reconnaissance and surveillance; refueling; and global lift. The ability of combat aircraft to respond quickly to regional contingencies makes them particularly important in the post-Cold War era. Both documents discuss the criticality of enhancements to existing systems and the selected modernization of forces to DOD’s ability to carry out the military strategy. Each expresses concerns about upgrading and replacing weapon systems and equipment under constrained budgets. In recognition of the costly recapitalization planned and the projected budgetary resources to support it, the Chairman’s strategy states that major modernization programs involving significant investment are to be undertaken “only where there is clearly a substantial payoff.” A new document—Joint Vision 2010—provides the military services a common direction in developing their capabilities within a joint framework. Like the guidance and strategy documents, the vision document cites the need for more efficient use of defense resources. It stresses the imperativeness of jointness—of integrating service capabilities with less redundancy in and among the services—if the United States is to retain effectiveness when faced with flat budgets and increasingly more costly readiness and modernization. The authority of the military departments to acquire air power and other assets stems from their broad legislative responsibilities to prepare forces for the effective prosecution of war (Title 10 U.S. Code). DOD Directive 5100.1, which identifies the functions of the DOD and its major components, authorizes the military departments to develop and procure weapons, equipment, and supplies essential to fulfilling their assigned functions. Under the directive, the Army’s primary functions include the preparation of forces to defeat enemy land forces and seize, occupy, and defend land areas; the Navy’s and/or Marine Corps’ functions include the preparation of forces to gain and maintain general naval supremacy and prosecute a naval campaign; and the Air Force, the preparation of forces to gain and maintain air supremacy and air interdiction of enemy land forces and communications. The Marine Corps is also expected to conduct amphibious operations. All services are authorized to develop capabilities to attack land targets through the air to accomplish their primary missions. The directive also states that the military departments are to fulfill the current and future operational requirements of the combatant commands to the maximum extent practical; present and justify their respective positions on DOD plans, programs, and policies; cooperate effectively with one another; provide for more effective, efficient, and economical administration; and eliminate duplication. The individual services have always had the primary role in weapons acquisition. In an attempt to strengthen the joint orientation of the Department, Congress enacted the Goldwater-Nichols Department of Defense Reorganization Act of 1986. This act, which amended title 10, gave the Chairman of the Joint Chiefs of Staff and the combatant commanders stronger roles in Department matters, including weapons acquisition. It designated the Chairman as principal military adviser to the President, the National Security Council, and the Secretary of Defense and gave him several broad authorities. For example, the Chairman is expected to provide for strategic direction of the armed forces, prepare strategic plans, perform net assessments of the capabilities of U.S. and allied armed forces compared with those of potential adversaries, and advise the Secretary on the requirements, programs, and budgets of the military departments in terms of the joint perspective. Regarding this latter responsibility, the Chairman is expected to (1) provide advice on the priorities of requirements identified by the commanders of the combatant commands, (2) determine the extent to which program recommendations and budget proposals conform with the combatant commands’ priorities, (3) submit alternative program recommendations and budget proposals within projected resource levels to achieve greater conformance with these priorities, and (4) assess military requirements for major defense acquisition programs. In addition to these responsibilities, the National Defense Authorization Act for fiscal year 1993 directed the Chairman to examine what DOD can do to eliminate or reduce duplicative capabilities. Assisting the Chairman in providing the Secretary advice on military requirements and the programs and budgets of the military departments is the Joint Requirements Oversight Council (JROC) and the Joint Staff, which are subject to the authority, direction, and control of the Chairman. Within the Office of the Secretary of Defense (OSD), the Office of the Director of Program Analysis and Evaluation provides, in part, analytical support to the Secretary in the management and oversight of service programs and budgets. The overall objective of this review was to assess whether the Secretary of Defense has sufficient information from a joint perspective to help him decide whether new investments in combat air power should be made, whether programmed investments should continue to be funded, and what priority should be given to competing programs. To gain a broad perspective on the context in which these decisions are made, we sought to determine (1) how U.S. air power capabilities have changed since the end of fiscal year 1991; (2) what potential threat adversary forces pose to U.S. air power; (3) what contribution combat air power modernization programs will make to aggregate U.S. capabilities; and (4) how joint warfighting assessments are used to support the Secretary in making air power decisions. The scope of our review included (1) fighter and attack aircraft, including attack helicopters and long-range bombers equipped for conventional missions; (2) key specialized support aircraft that enhance the capability of combat aircraft; (3) munitions employed by combat aircraft; and (4) other major systems—particularly long-range missiles, theater air defense systems, and unmanned aerial vehicles—that perform missions traditionally assigned to combat aircraft. Our scope did not encompass assets dedicated primarily to airlift, such as the C-17 and V-22 aircraft, and U.S. special operations forces. Also, the potential contribution of allied forces was not considered. We reviewed in detail six key mission areas in which combat air power plays a prominent role: performing offensive and defensive operations to achieve and maintain air superiority in areas of combat operations, interdicting enemy forces before they can be used against friendly forces, providing close support for ground forces by attacking hostile forces in close proximity to friendly forces, suppressing enemy air defenses by jamming or destroying enemy air refueling combat aircraft in the air to sustain combat operations, and performing surveillance and reconnaissance to obtain intelligence data for combat operations. In conducting these reviews, we reviewed numerous reports, studies, and other documents containing information on these missions and the primary platforms and weapons used. We discussed capabilities, requirements, force structure, and modernization issues with officials and representatives of various offices within OSD, the Organization of the Joint Chiefs of Staff, the military services, and the operational commands. We compared and contrasted performance data on current and planned weapon systems by mission area to acquire a good understanding of the joint capabilities of the military forces to perform the missions and to identify overlaps and gaps in capabilities. Separate reports on the interdiction, close support, suppression of enemy air defenses, and air refueling reviews have already been issued, while our reports on air superiority and surveillance and reconnaissance are still being prepared. A listing of the four issued reports and of other GAO reports related to this body of work is included at the end of this report. We supplemented the six mission reviews with more detailed assessments of (1) recent and planned changes in the capabilities of U.S. forces and of the current and projected capabilities of potential adversaries to counter U.S. air power and (2) the military advice on joint requirements and capabilities being developed through the Chairman of the Joint Chiefs of Staff for the Secretary of Defense. For information on changes in U.S. capabilities, we drew upon information gathered on the six mission reviews. We also used examples from our other published reports on major DOD modernization programs to illustrate our findings. For information on current and projected capabilities of potential adversaries, we reviewed reports of the Central Intelligence Agency, Defense Intelligence Agency, and Arms Control and Disarmament Agency and discussed threat information with intelligence agency personnel. To assess information being developed for the Secretary of Defense on joint air power requirements and aggregate capabilities of the services to meet those requirements, we evaluated the JROC and its supporting joint warfighting capabilities assessment (JWCA) process, which assist the Chairman in carrying out his responsibilities. We discussed the functioning of this process and air power issues being examined with Joint Staff officials who oversee the process as well as assessment team representatives from the Joint Staff and OSD. We reviewed the May 1995 report by the independent Commission on Roles and Missions of the Armed Forces. We also discussed the report with Commission staff and reviewed documents the Commission developed or acquired. We conducted this review from May 1994 through June 1996 in accordance with generally accepted government auditing standards. While force downsizing may give the appearance of a loss in capability, the United States continues to retain in its conventional inventory about 5,900 modern fighter and attack aircraft, including 178 long-range bombers and 1,732 attack helicopters, and over 1,500 specialized support aircraft. It also has growing inventories of advanced precision air-to-air and air-to-ground weapons for its combat aircraft to carry and an expanding arsenal of accurate long-range surface-to-surface missiles to strike ground targets. Inventory levels for the aircraft included in our review are shown in appendix II. DOD has spent billions of dollars in recent years to make its current frontline combat aircraft and helicopters more efficient and effective. These enhancements include improved navigation, night fighting, target acquisition, and self-protection capabilities as well as more aircraft capable of using advanced munitions. Specialized support aircraft used for air refueling and surveillance and reconnaissance, which are vital to the effectiveness of combat aircraft, have also been improved, while forces for suppressing enemy air defenses are being restructured. Additionally, advances in the ability of U.S. forces to identify targets and communicate that information quickly to combatant units should further enhance the capabilities of current forces. The size and composition of the U.S. combat air power force structure have changed considerably since fiscal year 1991, the year the Persian Gulf War ended. Cutbacks in the number of combat aircraft adopted by the Bush administration and further cutbacks by the Clinton administration in its 1993 Bottom-Up Review are scheduled to be completed in 1997. While the number of fighter and attack aircraft, including B-1B bombers and attack helicopters, is being reduced about 28 percent from 1991 levels, other new and emerging elements of combat air power, such as long-range missiles and theater air defense forces, have grown in number and capability. Specialized support aircraft have experienced varying levels of change in their inventory. Changes in aviation needs since the end of the Cold War, coupled with cuts in defense spending, have led DOD to reduce its combat aircraft inventory. These changes have been most pronounced for Air Force, Navy, and Marine Corps fixed-wing fighter and attack aircraft and Air Force bombers—from about 6,400 in 1991 to about 4,160 in 1996. DOD considers about 65 percent of these aircraft as authorized to combat units to perform basic combat missions and 35 percent of them as backup aircraft maintained for training, testing, maintenance, and attrition replacement reserves. Figure 2.1 shows the change in the total inventories of these types of aircraft from 1991 to 1996. This smaller combat force structure has been accomplished primarily by retiring older aircraft that are often expensive to operate and maintain, such as the Navy and Marine Corps A-6 medium bomber and A-7 light attack plane and the Air Force A-7, F-4 fighter, and F-111 strike aircraft. At the same time, many newer model aircraft have entered the fleet since the Persian Gulf War, including about 70 F-15E strike fighters, about 250 F-16 multimission fighters, and 200 F/A-18 fighter and attack aircraft. Changes in inventory levels by aircraft model are shown in appendix II. Some important capabilities are being retired as these older aircraft are removed from the inventory. For example, the Navy will lose the payload, range, and all-weather capability of the A-6, and the Air Force will lose the speed and nighttime-precision bombing capability of the F-111. DOD believes, however, that it can do without these assets, given the dangers it expects to face and the high costs of upgrades, operations, and support that it can avoid by retiring these aircraft. Attack helicopter inventories have fallen only 4 percent—1,811 to 1,732. Many of the older helicopters in the 1991 inventory have been replaced by newer more capable ones. The Army has added about 150 AH-64A Apache attack helicopters and nearly 300 OH-58D Kiowa Warrior armed reconnaissance helicopters to its fleet, and the Marine Corps has added over 70 AH-1W Cobras to its fleet. At the same time, both services have retired nearly 600 older AH-1 Cobras. Figure 2.2 shows attack helicopter inventory changes. From fiscal years 1991 through 1996, about $4.5 billion was appropriated to acquire long-range missiles, and the combined inventories of these missiles more than tripled from 1,133 to over 3,750. (This does not include conventional air-launched cruise missiles as inventory data on those weapons is classified.) The Navy Tomahawk land-attack cruise missile and the Army tactical missile system (ATACMS) have been used to attack a variety of fixed targets, including air defense and communications sites, often in high-threat environments. The Gulf War and subsequent contingency operations, including, most recently, September 1996 attacks on Iraqi military installations, have demonstrated that long-range missiles can carry out some of the missions of strike aircraft while they reduce the risk of pilot losses and aircraft attrition. Although the number of ships (including attack submarines) capable of firing the Tomahawk grew only slightly—from 112 to 119—between 1991 and 1996, the Navy’s overall ability to fire these land-attack missiles has grown considerably. This is because a greater number of the ships capable of firing the missile are now surface ships and surface ships are able to carry more Tomahawks than submarines. The Navy has also demonstrated that the ATACMS can be fired successfully from surface ships. This offers the possibility of future enhancements to the Navy’s long-range missile capabilities. DOD has not reduced its inventories of combat support aircraft used for nonlethal suppression of enemy air defenses (SEAD) and air refueling to the same extent as its fixed-wing combat forces. Inventory levels of specialized surveillance and reconnaissance aircraft have been reduced significantly but will be replaced by other reconnaissance assets. Figure 2.3 shows the changes in the inventory levels for these type of specialized aircraft. Percent of 1991 fleet size The 5-percent reduction in specialized nonlethal SEAD aircraft reflects a decline of 10 aircraft (from 188 in fiscal year 1991 to 178 in fiscal year 1996); the 16-percent reduction in air refueling aircraft reflects a decline of 171 aircraft (from 1,046 to 875); and the 44-percent reduction in surveillance and reconnaissance aircraft reflects a decline of 415 aircraft (from 943 to 528). Most of the latter decline was due to the retirement of 184 Air Force RF-4C penetrating reconnaissance aircraft and 159 Navy P-3 antisubmarine warfare aircraft. The Air Force is making a transition to greater use of unmanned aerial vehicles to provide reconnaisssance over enemy airspace and is equipping some F-16 fighters with sensors for such missions. The submarine threat to U.S. forces has diminished since the fall of the Soviet Union, reducing the need for antisubmarine warfare assets. Though DOD’s aviation force is smaller today, many of the combat aircraft are newer and more highly capable, allowing for greater flexibility in the employment of force across a broader range of operating environments. Acting on lessons learned from the Persian Gulf War and recommendations made by organizations such as the Defense Science Board, DOD has taken steps to make many of the remaining combat aircraft more capable, to include improvements such as autonomous navigation, night fighting, target acquisition, and self-protection and the employment of advanced munitions. Based on aircraft performance during the Gulf War, DOD has identified these capabilities as vital to the efficiency and effectiveness of attack aircraft. Advances in miniaturizing and modularizing subsystems have allowed DOD to enhance aircraft capabilities within existing airframes, overcoming concerns about space and weight limitations. Theater air defense systems are also being improved as concern increases about cruise and ballistic missiles armed with weapons of mass destruction. Similarly, DOD has enhanced the capabilities of specialized support aircraft and long-range missiles and plans further improvements to these systems. Congress has mandated that all DOD aircraft be able to use the global positioning system by the end of fiscal year 2000. This system allows for precise positioning and navigation across a broad range of missions, contributing to better situational awareness and more efficient use of forces. It also can be used to deliver munitions accurately in all weather conditions. The number of aircraft with night fighting and target acquisition capabilities—both critical to the flexibility and effectiveness of combat aircraft—has increased significantly since fiscal year 1991. What constitutes a night fighting capability varies between platforms. During the Gulf War, night capability for the F-15E consisted of LANTIRN (low altitude navigation targeting infrared for night) targeting pods only. These pods give pilots the ability to accurately target weapons day or night in adverse weather. Night-capable F-16s used during the Gulf War had LANTIRN navigation pods only. Today, F-15E and F-16 night capability consists of aircraft using both LANTIRN targeting and navigation pods. Gulf War night capability for the F/A-18 consisted of either a navigation or targeting forward-looking infrared pod and/or night vision goggles. No night-capable A-10 or AV-8B Harrier aircraft were used during the Gulf War, but today A-10 pilots can use night vision goggles, and the night attack AV-8B is equipped with a navigation forward-looking infrared pod, and its pilots are equipped with night vision goggles. The number of night-capable helicopters has grown by more than 500 as more Apaches and Kiowa Warriors have entered the Army fleet and more AH-1W Cobra helicopters have entered the Marine Corps fleet. The change in night fighting capability since 1991 for selected aircraft types is shown in figure 2.4. Today, more than 600 F-15Es and F-16s can use all or part of LANTIRN for night fighting. The Air Force plans to equip 250 F-16s with cockpit changes that will enable their pilots to use night vision goggles to complement the LANTIRN capability. Inventories of night-capable F/A-18 aircraft have grown by more than 350 from 1991 to 1996, as DOD invested hundreds of millions of dollars in forward-looking infrared pods. More than 250 A-10 attack aircraft have been equipped for night operations. Although about 355 night-capable Navy A-6 and Air Force F-111F aircraft will be gone from the inventory by the end of fiscal year 1996, overall, DOD increased the number of night-capable combat aircraft by over 900. Beginning in 1996, many Navy F-14 aircraft started receiving LANTIRN and night vision cockpit modifications. To enhance the survivability of attack aircraft, the services are equipping them with new self-protection jammers, upgraded radar warning receivers, and increased expendable countermeasures. In past work, we have noted performance problems with many of these systems. In addition, the Air Force is currently adding towed decoys to further enhance the survivability of its F-16s. Also, the Marine Corps plans to (1) add a missile warning system to its AV-8B and AH-1W aircraft to alert aircraft crews of a missile attack and (2) install the combined interrogator transponder on its F-18C/D aircraft to enable crews to identify other aircraft beyond visual range as either friendly or hostile. This identification capability is expected to reduce the incidence of fratricide. During the Gulf War, only the Air Force F-15 had this capability. Equipping aircraft with the subsystems needed to employ advanced munitions is a critical force enhancement that DOD considers necessary to successfully execute its military strategy. DOD is making a sizable investment in such weapons. For example, it estimates it will spend over $15 billion on five major precision-guided munitions (PGM) for its combat aircraft—the joint stand-off weapon (JSOW), the joint direct attack munition (JDAM), the Longbow Hellfire missile, the sensor fused weapon, and the joint air-to-surface standoff missile. Additionally, other PGMs for aircraft valued at nearly $4 billion entered the inventory from 1992 through 1996. More than nine times as many F-16s and, with the growth in F-15E inventory, one-and-a-half times as many F-15Es can employ PGMs in 1996 than could do so in 1991. Overall, DOD estimates it has about twice as many aircraft capable of employing these types of weapons as it did during the Gulf War. The Hellfire missile has given more Army and Marine Corps helicopters a PGM capability. Future PGM development will concentrate on developing standoff weapons. Although some PGM capability is being lost through retirement of the Air Force F-111F and Navy A-6E, DOD expects to retain roughly the current level of capability into the next century. In response to the growing threat of theater ballistic missiles that are used in regional conflicts and can be armed with weapons of mass destruction, DOD is increasing funding to upgrade existing and planned air defense systems—a critical component of U.S. air superiority forces—and plans more advanced developments as the threat evolves. The Army’s Patriot PAC-3 and upgrades to the Navy’s area defense system will provide the near-term response to this threat. Upgrades to the Air Force E-3 and Navy E-2C surveillance and reconnaissance aircraft should also enhance capabilities to counter the long-range cruise missile threat through improved detection of cruise missiles en route to their targets. The Space-Based Infrared System is also being developed to aid in missile warning and missile defense. DOD plans to spend over $6 billion during the next 5 years to develop future theater missile defense systems, including the theater high-altitude air defense system. Since the Gulf War, the Navy has improved its Tomahawk missile’s operational responsiveness, target penetration, range, and accuracy. It has added global positioning system guidance and redesigned the warhead and engine in the missile’s block III configuration that entered service in 1993. The Navy will upgrade or remanufacture existing Tomahawk missiles with (1) jam-resistant global positioning system receivers and an inertial navigation system to guide the missile throughout the mission and (2) a forward-looking terminal sensor to autonomously attack targets. These missiles are expected to enter service around 2000. The ATACMS block IA, scheduled for delivery in fiscal year 1998, is an upgrade that will nearly double the range of the missile and increase its accuracy. More advanced versions of the ATACMS—block II and IIA—will use the brilliant anti-armor submunition, which is scheduled to enter service after the turn of the century. This submunition will give the missile the ability to acquire, track, and home on operating armored vehicles deep into enemy territory. The services are also selectively upgrading their specialized aviation assets for surveillance and reconnaissance, SEADs, and air refueling. Coupled with force restructuring, DOD expects these upgrades to enhance combat operations and expand opportunities to perform joint operations and provide cross-service support. DOD has identified battlefield surveillance as a critical force enhancement needed to improve the capabilities, flexibility, and lethality of general purpose forces and ensure the successful execution of the National Military Strategy. The Air Force and Navy have improved existing sensors that enhance the capability of current surveillance and reconnaissance aircraft—the U-2R, RC-135V/W, and EP-3E—to provide intelligence support to combat forces. Heading the list of battlefield surveillance improvements, as shown in the Secretary of Defense’s annual report, is the E-8C Joint Surveillance Target Attack Radar System. With its synthetic aperture radar and moving target indicator, this system is designed to provide wide area, real-time information on the movement of enemy forces to air and ground units. Also, DOD has invested hundreds of millions of dollars, and plans to invest about $1.5 billion more over the next 5 years, to develop and procure unmanned aerial vehicles. DOD expects that these vehicles will provide complementary battlefield reconnaissance and reduce the need for manned reconnaissance aircraft to penetrate enemy airspace. The Air Force is improving its E-3 and the Navy its Hawkeye E-2C aerial surveillance and control aircraft in their roles as early warning and airborne command and control platforms. For the E-3, $220 million was appropriated for fiscal year 1996 to improve the aircraft’s capabilities. Annual modification expenditures for the E-2C more than doubled in 1995 from those in 1991, despite a shrinking inventory. The Air Force RC-135 and Navy EP-3E signals intelligence aircraft are also being upgraded to improve the collection and dissemination of intelligence data. SEAD—the synergistic use of radar and communications jamming and of destruction through the use of antiradiation missiles—is recognized to be a critical component of air operations, as it improves the survivability of other U.S. aircraft in combat areas. In establishing funding priorities, DOD has decided to retire certain Air Force SEAD aircraft—the F-4G and EF-111A jammer—and replace them with a new Air Force system, the high speed anti-radiation missile (HARM) targeting system on the F-16C, and an existing Navy electronic warfare aircraft, the EA-6B. We expressed serious concerns about the prudence of these decisions in an April 1996 report, as the decisions were made without an assessment of how the cumulative changes in SEAD capabilities would affect overall warfighting capability.Although DOD recognizes that it must adjust tactics and operations to account for performance differences between current and replacement systems, it believes that it can meet the Air Force’s SEAD needs into the next century by selectively upgrading the EA-6B and the HARM targeting system. When the Air Force completes the retirement of its most capable lethal SEAD aircraft, the F-4G, at the end of fiscal year 1996, it will primarily rely on 72 F-16C aircraft equipped with the HARM targeting system. However, the EA-6B, which will replace the EF-111 in the Air Force’s nonlethal SEAD role, can also target and fire HARM missiles. It also has a communications-jamming capability that will allow it to supplement the Air Force’s heavily burdened communications jammer, the EC-130H Compass Call. The Air Force has also decided to upgrade its EC-130H fleet to meet new threats. Recognizing that too few EA-6B aircraft may be available to meet both Air Force and Navy needs, DOD plans to retain 12 EF-111s in the active inventory through the end of 1998, when additional upgraded EA-6Bs should be available. Though the performance of the two platforms is not the same, and the multiservice use of the same platform will entail some logistics support challenges, the Chairman of the Joint Chiefs of Staff believes that retiring the EF-111 represents a “prudent risk” that DOD can take to more fully fund higher priority needs. DOD believes the SEAD mission is important and will retain about 140 radar and communications jamming aircraft and over 800 aircraft able to fire antiradiation missiles in its force structure. From the end of 1991 through 1996, the Air Force will have replaced the engines on 126 KC-135 tankers at a cost of over $20 million per aircraft. These reengined aircraft offer up to 50 percent greater fuel off-load capacity and quieter, cleaner, and more fuel-efficient performance with lower maintenance requirements. The Air Force is considering the same upgrades to about 140 more KC-135s. Funding has been programmed to field a multi-point refueling capability that is expected to enhance cross-service operations. About $100 million has been appropriated to modify 20 KC-10 and 45 KC-135R tankers to carry wing pods that will enable these Air Force aircraft to refuel Navy and Marine Corps aircraft. About $160 million is needed to complete the KC-135 modifications. In 1991, no operational KC-10 or KC-135 tankers had this capability. There has been debate as to whether the success of the coalition air forces during the Gulf War was an evolutionary or revolutionary advancement in the conduct of air warfare. While many combat technologies—stealth, night fighting, and PGMs—proved valuable, delays in the processing of intelligence and targeting information, and difficulty in communicating that information to the forces that could use it, minimized the full impact of advanced combat technologies. The Chairman of the Joint Chiefs of Staff has stated that the development of a “system of systems”—the integration of intelligence, surveillance, and reconnaissance with precision force through the more rapid processing and transfer of targeting and other information—offers the greatest enhancement in joint warfighting capability. The Defense Science Board reported in 1993 that improvements in the effectiveness of combat aircraft would be fastest and most significant not through the purchase of new aircraft but through improvements to the interoperability and integration of existing assets. DOD believes the ability of sensor platforms to transfer target information quickly to air, ground, and naval units armed with PGMs will act as a force multiplier, resulting in greater lethality and possibly a reduction in force structure and munitions requirements. The $2 billion Joint Tactical Information Distribution System, for example, will net together command and control centers, sensor platforms, fighter aircraft, and surface air defense units to improve performance in the high density air combat environment, providing near real-time secure data and voice communications from sensor to shooter platforms. The Defense Airborne Reconnaissance Office is developing imagery processing standards to enable the processing of imagery from multiple sensors. Satellite communications systems being fielded provide secure communications for command authorities to command and control tactical and strategic forces of all services at all levels of conflict. The Navy’s cooperative engagement capability is being developed to integrate surface and air defenses, across service lines, over land and sea. The goal is to link all air defense forces to provide the faster transfer of targeting information. Advanced munitions will also offer benefits across mission lines. By reducing sortie requirements and allowing for weapons delivery beyond the range of enemy air defenses, advanced munitions could possibly reduce the need for air refueling as well as dedicated SEAD. The Defense Science Board noted in its 1993 report that during the Gulf War, a ton of PGMs typically replaced 12 to 20 tons of unguided munitions for many types of targets on a tonnage-per-target-kill basis, thereby reducing tactical aircraft sorties and airlift requirements. Also, for each ton of PGMs, the Board estimated that as much as 35 to 40 tons of fuel could be saved due to the decrease in overall air operations. The downsizing of U.S. forces in recent years has not necessarily translated into a loss of combat air power. While the number of combat aircraft has been reduced, these reductions have been largely offset by an expanded group of assets and capabilities available to the combatant commands. Capabilities have improved because (1) a larger percentage of the combat aircraft force is now able to perform multiple missions; (2) key performance capabilities of combat aircraft, such as night fighting, are being significantly enhanced; and (3) the growth in inventories of advanced long-range missiles and PGMs is adding to the arsenal of weapons and to the options available to attack targets. Moreover, the continuing integration of service capabilities in such areas as battlefield surveillance; command, control, and communications; and targeting should enable force commanders to further capitalize on the aggregate capabilities of the services and maintain extensive air power capabilities despite force-level reductions. Potential adversaries possess two types of capabilities that constitute a threat to U.S. air power accomplishing its objectives: a defensive (air defense) capability using aircraft and surface-based air defense forces and an offensive attack capability employing aircraft and cruise and ballistic missiles. The current air defense capabilities of potential adversaries, in terms of both aircraft and air defense systems, are unlikely to prevent U.S. air power from achieving its military objectives. The conventional offensive threat is judged to be low until at least early in the next century. Furthermore, efforts by potential adversaries to modernize their forces will likely continue to be inhibited by declines in the post-Cold War arms market, national and international efforts to limit proliferation of conventional arms, and the high cost of advanced weapons. These adversaries are also experiencing shortfalls in training, maintenance, and logistics, and many of them have weaknesses in their military doctrine. Potential regional adversaries currently possess defensive and offensive weapons considered technologically inferior to U.S. forces. Improvements in these capabilities is dependent on the acquisition of weapons and technology from outside sources. The current air defense capabilities of potential adversaries have limitations. Regarding aircraft, these nations have only small quantities of modern fighters for air defense. The bulk of their air forces are older and less capable, and their fleets are not expected to be bolstered by many modern aircraft. Similarly, for their surface-to-air defense forces, these nations tend to rely on older systems for high-altitude long-range defense and to use the more modern and effective systems, when available, at low altitudes and short ranges. The most prevalent threats are assessed to be overcome by U.S. aircraft with the use of tactics and countermeasures. Furthermore, the location of the most threatening assets tends to be known. For offensive operations, like defense forces, the bulk of potential adversaries’ aviation forces, which may comprise significant numbers, are older and less capable aircraft. The same assessment applies to long-range missile capabilities. Some potential adversaries possess significant quantities of ballistic missiles, but they tend to be of low technology and of limited military use. The potential land-attack cruise missile capabilities of these nations are low and are not expected to increase in sophistication until the middle of the next decade, if at all. Though the threat to military forces from conventionally armed missiles is low, the possibility that such weapons could be used for political purposes—and possibly armed with nuclear, biological, or chemical warheads—may affect the employment of U.S. forces. Air defense is a high priority of potential adversaries, and it is believed most potential adversaries are trying to improve their effectiveness and survivability by upgrading existing systems, purchasing more modern weapons, and using camouflage and decoys. These improvements, if achieved, could delay U.S. combat air power from achieving air superiority quickly and cause higher U.S. and allied casualties. These nations would also like to improve their aviation and ballistic and cruise missile capabilities. However, they currently lack the capability to develop and produce the advanced systems that would allow them to significantly enhance air defense and long-range offensive capabilities. Therefore, advances will likely be confined to upgrades of existing equipment and the possible acquisition of advanced air defense systems from outside sources. Several factors, however, make that prospect less likely. Among these are (1) the modern arms market, which has changed since the end of the Cold War; (2) the high cost of modern weapons, given potential adversaries’ economic capability; and (3) a growing global conventional arms control environment. In technical comments on this report, DOD noted that important advances are being made in potential threats, in particular in advanced surface-to-air missile systems such as the SA-10. DOD said these threats, which are either in development by potential adversaries or available for sale on the international market, are expected to significantly affect U.S. capabilities to employ air power in the future. We do not discount these potential threats. However, DOD’s projections of the ability of potential adversaries to employ such systems, known weaknesses of future threat systems, the acquisition of advanced standoff weapons for U.S. aircraft, and planned improvements to existing U.S. forces, when taken together, suggest that this threat is manageable. Furthermore, in subsequent discussions, DOD clarified that it did not intend for its comment to suggest that U.S. electronic warfare systems could not defeat future threats but that DOD prefers to continue to maintain a variety of capabilities, including additional stealth aircraft, to meet its objectives. The volume of arms transfers has fallen significantly in recent years and is not expected to reach its former levels any time soon. The principal nations selling and buying arms are the United States and its allies. Since potential adversaries depend on foreign technology to improve their capabilities, changes in the arms market could have a substantial effect on their ability to modernize their forces. The value of the cross-border transfer of conventional arms fell by more than two-thirds from 1987 to 1994—from almost $79 billion to $22 billion in 1994 dollars worldwide, according to the latest available data from the U.S. Arms Control and Disarmament Agency (ACDA). The share of the international arms market held by the former Soviet Union, now shown as Russia, and China has fallen from a combined 40 percent to about 10 percent over the same period. At the same time, the share of the arms market held by the United States and several close allies has grown from 43 percent to 79 percent of all transfers (See fig. 3.1). During the Cold War, the Soviet Union was a primary supplier of arms to the Third World, often providing weapons without charging for them. Now Russia generally requires payment, often in hard currency, for the weapons it transfers. The latest available ACDA data show worldwide Soviet Union/Russian transfers fell from $23.1 billion in 1987 to $1.3 billion in 1994. China also reduced its arms exports over that period. Agreements for future deliveries also fell for Russia and China from the levels of the 1980s. However, Russia has increased the value of its agreements for future weapons deliveries since 1992. While overall arms transfers have fallen, those who have been buying have shown a preference for American and Western European equipment. Buyers prefer proven high quality weapons that are accompanied by good logistics support. For the most recent 3-year period available, 1992 to 1994, the arms market in terms of actual arms transfers has been dominated on the seller side by the United States and a few of its North Atlantic Treaty Organization (NATO) allies, and on the buyer side by allies of the United States in Europe, the Middle East, and East Asia. Transfers to the Middle East by supplier are shown in figure 3.2. As figure 3.2 shows, 86 percent of the value of actual deliveries of conventional arms to the Middle East for the period shown originated from the United States and four close allies—the United Kingdom, France, Canada, and Germany—and were primarily to members of the Gulf War coalition. Only about 14 percent came from Russia, China, and other sources, and some of that total also went to U.S. Gulf War allies in the Middle East. The pattern for arms sales agreements for future deliveries is similar; that is, the United States and its NATO allies are the dominant suppliers (see fig. 3.3). From 1992 to 1994, almost 92 percent of the value of sales agreements for future conventional arms deliveries to the Middle East were made by the United States, the United Kingdom, France, and Germany. Only 8 percent of agreements for future Middle East deliveries originated from Russia, China, or the rest of the world. The decline in transfers has been accompanied by the contraction of the arms industries of many weapons exporters in terms of both production and development. Arms manufacturing nations have tended to reduce the size of their own armed forces and their arms production capabilities since the Cold War ended. Development programs have been slowed in many cases, and major weapon production programs have been subject to delay, reduction, or cancellation. Although arms producers want to continue exports to protect domestic jobs and reduce the cost of modernizing their own forces, they are presently finding few large buyers. Arms deliveries to India have fallen substantially and transfers to Pakistan have fallen since 1990. The buying spree of America’s Persian Gulf allies has also slowed. At the same time, potential adversaries that may desire advanced weapons have not been obtaining them or placing orders with producers, in part because of economic constraints and internationally imposed limits on arms transfers. While the development of more capable weapons is likely to continue, the ability of potential adversaries to obtain these weapons in large numbers is not assured. The cost of modern high technology weapons continues to grow, while the ability of these countries to afford such systems is constrained. Additionally, international efforts to restrict arms and technology proliferation have been increasing in terms of both the types of technology targeted and the number of exporting nations agreeing to restrictions. The high technology weapons that could seriously threaten U.S. air power are expensive, no matter what the source. For example, each aircraft that is part of the original Eurofighter 2000 tactical aircraft contract is projected to cost about $75 million. An advanced surface-to-air system like the Patriot PAC-3 costs over $100 million per battery. Nations that depend on export sales of selected commodities to finance their militaries or that have closed economies could find it much harder to afford high technology systems. The more likely course for these nations is to upgrade their existing equipment, either by mixing new components with their old systems or through other upgrade programs from arms suppliers. Although such attempts could offer new challenges to the United States and its allies, they would be less threatening than more modern equipment. Part of the National Military Strategy entails increasing cooperation with regional allies while containing regional powers not friendly to the United States and its allies. Conventional arms control is part of this strategy. Some international agreements/collaborations and domestic weapons export policies are designed to limit the opportunities for regional powers to acquire advanced weapons. For example, the United Nations imposed sanctions on more than one nation in the 1990s, prohibiting transfers of weapons or commercial technology to these nations that could be used for military purposes. ACDA data show no measurable arms transfers to nations under U.N. sanctions since sanctions were imposed. A key collaboration, the Wassenaar Arrangement, took effect in December 1995. This arrangement—the goal of which is complete disclosure of arms transfers—has 28 member nations. This cooperative effort replaces the Coordinating Committee for Multilateral Export Controls (COCOM), the Cold War regime that limited arms and technology transfers to Soviet bloc nations. The Wassenaar Arrangement has identified several nations that are to be excluded from arms exports or exports of potential dual-use technology—that is, technology with military as well as commercial applications. It is hoped that this agreement will allow major weapons producers to target volatile regions for restraint in the transfer of arms. Although Wassenaar does not constitute a formal treaty, major arms manufacturing countries have agreed to its arms transfer restrictions as part of their country’s domestic arms transfer policies. A third major arms control agreement, the Missile Technology Control Regime, was created in 1987 and is designed to specifically limit the transfer of missiles—including cruise and ballistic—and missile-related and dual-use technology. Original members were major NATO partners and Japan, but the Regime has been expanded to include more than 20 nations. The combination of U.N. sanctions, the Wassenaar Arrangement, and the Missile Technology Control Regime represent an obstacle to potential adversaries that seek to acquire highly capable weapons and advanced technology. Again, ACDA data indicate sharply reduced transfers to these nations in recent years, and there are no indications these agreements will be relaxed significantly in the near future. In fact, according to the State Department, the United States intends to strengthen the Wassenaar Arrangement. Given that Wassenaar members are the major arms producers and that potential adversaries generally lack an indigenous advanced weapon development and production capability, the potential for significantly inhibiting potential adversaries from improvements in capability is, to a great extent, in these member nations’ hands. Potential adversaries have not demonstrated the commitment to logistics support and training that the U.S. military considers necessary to achieve the best performance possible from the equipment available. The advanced age of the equipment currently in the inventories of these nations increases support requirements, and chronic shortages of spare parts lower their expected effectiveness. Many of the more modern systems are likely to be highly complex and difficult to maintain. Generally, the sophistication and intensity of training that potential adversaries provide their operators is considered well below U.S. standards. Furthermore, most of these countries have no experience training against an opponent like the United States. Another factor affecting the capabilities of potential adversaries is their military doctrine. No matter how effective their weapons may be, the centralized command and control that most potential adversaries exercise over the operations of their military forces further affects the effective and efficient use of the forces. Although potential adversaries possess capabilities that constitute a threat to the ability of U.S. air power to accomplish its objectives, the severity of these threats, particularly in relation to the formidable capability of U.S. forces to counter them, appears to be limited. Efforts by these countries to modernize their forces will likely be inhibited by declines in the post-Cold War arms market, national and international efforts to limit the proliferation of conventional arms, and the high cost of advanced weapons. Additionally, shortfalls in training, maintenance, logistics, and military doctrine further constrain the capabilities of potential adversaries. DOD’s plans for modernizing its air power forces call for spending several hundred billion dollars on new air power programs to further enhance U.S capabilities that are already formidable. These programs, which are likely to be a significant challenge to pay for, are proceeding even though DOD has not sufficiently assessed joint mission requirements. Without such assessments, the Secretary of Defense does not have the information needed to accurately assess the need for and priority of planned modernization programs. A definitive answer as to the necessity of planned investments is not possible without knowing how aggregate service capabilities meet joint war-fighting requirements. However, our past GAO work and information developed on our mission reviews suggest that some planned investments may not be worth the costs. For some programs, the payoff in added mission capability—considering the investment required and the limited needed capability added—is not clearly substantial, as required by the National Military Strategy. For others, the security environment and/or assumptions under which the programs were justified have changed. In other cases, there are viable and less costly alternatives to planned investments. Each military service has major acquisition programs to modernize its combat air power forces. Many of them were initiated to counter a global Soviet threat. These programs include not only combat aircraft but also programs to acquire long-range missiles to strike land targets; advanced weapons combat aircraft can use; theater missile defense forces; surveillance and reconnaissance assets; and command, control, and communications systems. Appendix III summarizes the costs of DOD’s major combat air power acquisition programs. If these programs proceed as planned, their total program costs, including allowances for inflation, are estimated to exceed $300 billion, about $60 billion of which has already been spent. Not included in these totals is the cost of the Joint Strike Fighter, the program that is likely to be the most costly of all. DOD has only published initial research, development, test and evaluation cost data on this program, which is projected to provide about 2,978 advanced joint strike-fighter aircraft for the Navy, Air Force, and Marine Corps beginning in the next decade. The Congressional Budget Office (CBO) estimates a total acquisition cost, based on DOD’s goals for the program, of $165 billion in 1997 dollars. The largest segment of DOD’s planned air power investments reflects the plan to replace aging fighter and attack aircraft. With the large defense buildup of the 1980s and the changed national security environment of the 1990s, in recent years DOD has significantly cut back on the procurement of such aircraft. These aircraft, which include the F-15s, F-16s, and F/A-18C/Ds for which production lines remain open, are highly capable aircraft. Nevertheless, DOD plans to replace them with more advanced and costly systems, but not necessarily on a one-for-one basis. The costs to replace the older model aircraft with new ones are projected to be quite substantial in the next decade. In fact, DOD estimates that it will spend about as much to procure combat aircraft in the next decade as it spent during the 1980s force buildup, even with the figures adjusted for inflation. DOD’s force modernization plans are based on several assumptions. First, DOD assumes that the defense budget top line will stop its decline in fiscal year 1997 and begin to rise and that funding for procurement will increase to $60.1 billion in fiscal year 2001. Second, DOD assumes it will achieve significant savings through base closures and other infrastructure reductions and “outsourcing” many support activities. Additionally, DOD assumes that savings will be realized from overhauling the defense acquisition system. There are reasons to be skeptical about the practicality of modernizing U.S. air power under these assumptions. An annual $60 billion procurement appropriation in fiscal year 2001 would be over 40 percent higher than that in the fiscal year 1997 budget. In each of its last three future years defense programs, DOD has postponed planned increases in its procurement budget request. As for infrastructure savings, our review of DOD’s 1996-2001 Future Years Defense Program identified only negligible net savings accruing over the program’s 6 years. Acquisition reform savings may also prove to be elusive. For example, although DOD expects to accrue substantial savings by reforming contract management and oversight requirements, we reported in April 1996 that initial results of such reforms indicate such savings may be minimal. In testimony before Congress in June 1996, senior DOD officials reported that military service and OSD officials reviewed the affordability of the three largest combat aircraft programs—the F-18E/F, F-22, and Joint Strike Fighter. According to the testimony, these officials determined that the overall planned investment in these programs was within historical norms and affordable within service priorities. Neither the Chairman of the Joint Chiefs of Staff nor CBO is as optimistic. The Chairman, in October 1995, said DOD’s tactical aircraft procurement plans call for much greater than expected resources in the out-years. CBO, in testimony before the Congress in June 1996, said its analysis of DOD’s fighter procurement plans suggest that they may not be affordable and that the programs will probably need to be scaled back. Using DOD goals for the three programs, CBO estimated that the Air Force and the Navy would need about $9.6 billion annually over the 2002-2020 period to buy fighter and attack aircraft, but may only have about $6.6 billion available to spend. The agency also described the aging of the fighter fleet as “worrisome,” suggesting that future leaders could have less flexibility in dealing with funding cuts. DOD makes decisions on the affordability of its modernization plans in an environment that encourages the “selling” of programs, along with undue optimism, parochialism, and other compromises of good judgment. Once DOD initiates major acquisition programs, such as the F-22, F/A-18E/F, and the Joint Strike Fighter, it has historically made a nearly irrevocable commitment to the program, unless the program experiences a catastrophe. Once begun, programs develop constituencies in the services, OSD, industry, the user community, and Congress—constituencies that give a momentum to programs and make their termination an option rarely considered by DOD. DOD has done little analysis to establish joint mission area requirements for some specific combat air power missions or to plan the aggregate capabilities needed by each of the services to meet those requirements. Studies that may provide such information on several key air power missions have been initiated but were not completed at the end of our review. Without such analyses, decisions on the need for new weapon systems, major modifications, and added capabilities evolve from a requirements generation process that encourages each service to maintain its own view of how its own capabilities should be enhanced to meet warfighting needs. In its May 1995 report, the Commission on Roles and Missions of the Armed Forces substantiated what our reviews of defense programs have found, that “each Service is fully engaged in trying to deliver to the CINCs what the Service views as the best possible set of its specific capabilities—without taking into account the similar capabilities provided by the other Services.” The analyses used to generate weapon system requirements for new acquisition programs are most often narrowly focused. They do not fully consider whether the capabilities of the other services to perform a given mission mitigate the need for a new acquisition or major modification. Significant limitations in study methodologies and the use of questionable assumptions that can result in overstated requirements are apparent in three DOD studies examining requirements for bombers in conventional conflicts. None of the studies, for example, assessed whether fighters or long-range missiles could accomplish the mission more cost-effectively than bombers. One of the studies, done by the Air Force and used by it to estimate and justify bomber requirements, assumed that only bombers would be available to strike time-critical targets during the first 5 days of a major regional conflict. This assumption seems to conflict with DOD planning guidance, which assumes that Air Force and Navy combat aircraft would arrive early enough in theater to attack targets at the outset of a major regional conflict. Under DOD’s requirements generation system, DOD components (principally the military services) are responsible for documenting deficiencies in current capabilities and opportunities to provide new capabilities in mission needs statements. If the potential material solution could result in a major defense acquisition program, the JROC is responsible for review and validation of the need. Validated needs statements are to be reviewed by the Defense Acquisition Board, which is responsible for identifying possible material alternatives and authorizing concept studies, if necessary. OSD’s Director of Program Analysis and Evaluation is responsible for reviewing any analyses of alternatives for meeting the validated need. While DOD has decision support systems, such as the requirements generation system and the planning, programming, and budgeting system, to assist the senior officials in making critical decisions, reviews like those done by the JROC and by OSD staff do not have the benefit of information on joint mission requirements and the aggregate capabilities of the services to meet those requirements. Therefore, such reviews can provide little assurance that there is a valid mission need, that force capabilities are being properly sized to meet requirements, and that the more cost-effective alternative has been identified. Additionally, because many weapon system modernization programs fall outside the major defense acquisition program definition, many service modernization initiatives are not validated by the JROC. DOD has defended its requirements generation system, saying the services have valid complementary requirements in many of the mission areas. In its opinion, the overlapping capabilities acquired add to the options available to U.S. leadership in a crisis and allow combatant commanders to tailor a military response to any contingency. We acknowledge that flexibility is important to respond to contingencies and that a certain amount of overlapping capability is needed. The question is whether, in the post-Cold War era, the United States needs or can afford to sustain current levels of redundancy. Advanced combat systems are not only costly to acquire, they are also expensive to operate and maintain. For example, DOD data indicates that the annual direct cost to operate and support an F-14 in the active inventory is about $2.2 million, an F-18 about $1.7 million, an F-15 about $3.2 million, and an F-16 about $2.2 million. These figures include the cost of the aircrews. The lack of information on joint mission needs and aggregate capabilities to meet those needs prevents a definitive answer as to whether DOD’s air power investment programs are justified. Based on our past reviews of individual air power systems and available information we collected on our six mission reviews, we believe that DOD is proceeding with some major investments without clear evidence that the programs are justified. When information is viewed more broadly, some programs appear to add only marginally to already formidable capabilities in some areas. Also, the changed security environment has lessened the need for some programs, and for others, viable, less costly alternatives appear to exist. Whether DOD’s planned investments represent the most cost-effective mix of air power assets to accomplish combat air power missions is unclear because past DOD assessments have largely skirted the question of sufficiency. However, available information suggests that existing capabilities in mission areas like interdiction, air-to-air combat, and close support are quite substantial even without further enhancements. In the interdiction mission area—the diverting, disrupting, delaying, or destroying of enemy forces before they can be used against U.S. forces—both current capabilities and those expected to be in place in 2002 are sufficient to hit all identified ground targets for the two major regional conflicts with considerable margin for error. Based on service data on current and planned interdiction capabilities and Defense Intelligence Agency and service threat assessments that identified enemy targets, the services already have at least 10 ways to hit 65 percent of the thousands of expected ground targets in two major regional conflicts. Some targets can be hit by 25 or more combinations of aircraft and weapons. In addition, service interdiction assets can provide 140 to 160 percent coverage for many types of targets. Despite this level of capability, the services are modifying current platforms and developing new weapon systems that will provide new and enhanced interdiction capabilities over the next 15 to 20 years at a total estimated cost of over $200 billion. These enhancements include the F/A-18E/F attack fighter, the ATACMS, major modifications to the B-1B bomber, more PGMs and improvements to aircraft and weapons, and acquisition of the Comanche armed reconnaissance helicopter. The Joint Strike Fighter, which is not included in the $200 billion estimate, will also provide interdiction capabilities. In the area of air-to-air combat—a critical mission to achieve and retain air superiority—over 600 combat-designated F-14 and F-15 fighter aircraft are dedicated to this mission. This number far exceeds the quantity and quality of fighter aircraft potential adversaries are projected to have. In addition, about 1,900 other combat designated multirole fighter aircraft, such as F-16s and F/A-18C/Ds, while not dedicated to air superiority missions, are very capable air superiority fighters. These aircraft could assist F-14s and F-15s to defeat enemy fighters before being used for other missions such as interdiction and close support. The capabilities of these fighter aircraft have also been enhanced extensively with the procurement of advanced weapons—particularly over 7,400 advanced medium range air-to-air missiles—and through continuing improvements to these weapons and to support platforms, such as airborne warning and control system aircraft, that help the fighters locate, identify, track, and attack enemy aircraft at great distances. Despite the unparalleled U.S. air-to-air capabilities, the Air Force plans to begin to replace its F-15s with 438 F-22 fighters in 2004, at an estimated average unit procurement cost of about $111 million. Release of long-lead production funding for the first lot of four F-22s is scheduled for fiscal year 1998. DOD expects that the F/A-18E/F and the Joint Strike Fighter will further add to U.S. air superiority capabilities. In the area of close support, the military services collectively possess a substantial inventory of weapon systems. These assets include five types of artillery, four types of attack helicopters, five types of fixed-wing aircraft, and 5-inch naval guns on cruisers and destroyers. DOD data indicates that in the year 2001, the U.S. military will have about 3,680 artillery systems, 1,850 attack helicopters, and 2,380 multirole fixed-wing aircraft that can provide close support as well as an unspecified number of naval 5-inch guns. The services plan to spend over $10.6 billion to further improve these capabilities between fiscal years 1996 and 2001, including major improvements to the Marine’s AV-8B close support aircraft and the Army’s Apache attack helicopter. Additional major acquisition programs that could further enhance close support capabilities include the F/A-18E/F strike fighter, the Joint Strike Fighter, and advanced munitions to attack ground targets. Given the current security environment, the extensive aggregate capabilities U.S. forces now possess may lessen the need to proceed with several key modernization programs as currently planned, since the capabilities being acquired are not urgently needed. The two most prominent examples are the planned production of F-22 air superiority fighters and modifications to the B-1 bombers. The Air Force is proceeding with plans to begin to acquire F-22 air superiority fighter aircraft in fiscal year 1999 and rapidly accelerate the pace of production to 48 aircraft per year. This is being done despite the services’ unmatched capabilities in air-to-air combat. The Air Force initiated the F-22 (advanced tactical fighter) program in 1981 to meet the projected threat of the mid-1990s. Since the F-22 entered engineering and manufacturing development, the severity of the projected threat in terms of quantities and capabilities has declined. Instead of confronting thousands of modern Soviet fighters, U.S. air forces now expect to confront potential adversaries that have few fighters with the capability to challenge the F-15, the current U.S. frontline fighter. Further, our analysis, reported in March 1994, indicated that the current inventory of F-15s can be economically maintained in a structurally sound condition until 2015 or later. Thus, the planned rapid increase in the rate of production to achieve initial operational capability in 2004 may be premature. Further, because F-22s are expected to be substantially more effective than F-15A-Ds, replacing the F-15A-Ds on a one-for-one basis, as currently planned, may be unnecessary. DOD estimates the average procurement cost of an F-22 will be about $111 million. In technical comments on a draft of this report, DOD said that several current or soon-to-be-fielded fighters are at parity with the F-15, but provided no further details. Although we recognize that several foreign aircraft being developed will be at rough parity with the F-15C, it is uncertain how quickly the aircraft will be produced. It is also unlikely that large quantities will be available and affordable by potential adversaries. In the case of the B-1B bomber, DOD needs to reexamine the need to keep this aircraft in the inventory and make several billion dollars of modifications to it. With the Cold War over and a reduction in the requirement for a large fleet of manned penetrating bombers that can deliver nuclear warheads in a global nuclear war, the B-1B will no longer be part of the U.S. nuclear force. The Air Force plans to modify its fleet of 95 B-1Bs to increase their conventional capability and sustainability. The B1Bs can currently carry only the 500-pound unguided, general-purpose bomb and cluster munitions; but after the modification, the B-1Bs will be able to carry more types of conventional ordnance. Several factors make the continued need for B-1Bs questionable. First, DOD considers its current capability sufficient to meet its requirement to interdict enemy targets identified in two major regional conflicts. Second, our analysis of Air Force targeting data indicates the modified B-1B would strike a very small percentage of the Air Force’s designated targets. Third, combatant command officials stated they would use far fewer B-1Bs than DOD cites as necessary. Fourth, other Air Force and Navy aircraft can launch the same munitions as the modified B-1B and others. Retiring the B-1B would increase U.S. forces’ dependence on other capabilities and the risk that some targets might not be hit as quickly. However, it is reasonable to expect that the targets assigned to the B-1 could be hit by other assets, including missiles such as ATACMS and Tomahawk. If DOD retired the Air Force’s 95 B-1Bs immediately, it could save almost $5.9 billion in budget authority over the next 5 years. These issues surrounding the B-1 are discussed in our report on the bomber force, which we expect to issue shortly. Analysis suggests that viable, less costly program alternatives may be available for some mission areas. The Navy’s planned purchase of 1,000 F/A-18E/F fighter aircraft at an estimated cost (as of Dec. 1995) of $81 billion is a case in point. The F/A-18E/F is intended to replace F/A-18C/D aircraft and to perform Navy and Marine Corps fighter escort, interdiction, fleet air defense, and close support missions. The aircraft’s origins are traceable to a 1988 study that identified upgrade options to the F/A-18C/D in performing these missions. However, the operational deficiencies in the F/A-18C/Ds that the Navy cited in justifying the F/A-18E/F either have not materialized as projected or can be corrected with nonstructural changes to the F/A-18C/D. Furthermore, the F/A-18E/F’s operational capabilities will only be marginally improved over the F/A-18C/D. In addition, while the F/A-18E/F will have increased range over the F/A-18C/D, the F/A-18C/D range will exceed the range required by the F/A-18E/F’s system specifications, and the F/A-18E/F’s range increase is achieved at the expense of its combat performance. Also, modifications to increase the F/A-18E/F’s payload have created a problem when weapons are released from the aircraft that may reduce the F/A-18E/F’s potential payload capability. Over the years, the Navy has improved the operational capabilities of the F/A-18C/D so that procuring more of them, rather than the new model F/A-18E/F aircraft, could be the most cost-effective approach to modernizing the Navy’s combat aircraft fleet in the mid-term. In this regard, additional upgrades, should they be needed, could be made to the F/A-18C/D, which would further improve its capabilities. These upgrades include a larger fuel tank for more range and strengthened landing gear to increase carrier recovery payload. Then, for the long term, the Joint Strike Fighter could be an alternative to the F/A-18E/F. The Joint Strike Fighter’s operational capabilities are projected by DOD to be equal or superior to the F/A-18E/F at a lower unit cost. The Army’s Comanche helicopter program provides a second example. In initiating the program, the Army sought a family of lightweight, multipurpose helicopters whose justification centered on practicality rather than the threat. The program was expected to inexpensively replace a fleet of Vietnam-era helicopters with new helicopters that would be up to 50 percent cheaper to operate and support. Within these economical confines, the new helicopters were to offer as good a technical performance as possible. Subsequently, however, specific requirements were developed, and the program emerged as it is today—a threat-based program to yield the next generation high-performance helicopter armed with 14 Hellfire missiles at a cost significantly higher than that of the Apache, the Army’s most advanced and costly helicopter. At least three alternative helicopters are available that we believe could, if upgraded, perform many of the Comanche’s missions. The Super Cobra, for example, is a twin-engine aircraft that the Marine Corps intends to equip with a four-blade rotor. It could perform armed reconnaissance and attack missions, and the new rotor will substantially improve its flight performance. A second alternative, the Longbow Apache, performs many of the missions that the Comanche is being developed to perform, and it was ranked higher for operational effectiveness than the basic Comanche in a 1990 DOD comparison of the aircraft. Finally, the Army’s Kiowa Warrior is a much improved version of the early model Kiowa, which can perform armed reconnaissance missions. Many users believe the lethality, low observability, deployability, and speed of the Kiowa Warrior, when combined with certain upgrades or doctrinal changes, would resolve many of the deficiencies the Comanche is expected to resolve. DOD continues to support both the F/A-18E/F and the Comanche programs. It said it is convinced that the fundamental reasons to develop the F/A-18E/F remain valid, but provided us no new data or information to support this. Regarding the Comanche, DOD believes it considered a wide range of alternatives before deciding on the Comanche. DOD’s positions are discussed in our reports on the F/A-18E/F and Army aviation modernization. DOD faces considerable funding challenges in modernizing its forces for the next century under its current plans. This is particularly so with fighter and attack aircraft, where the replacement of many aircraft scheduled for retirement in the next decade with costly new aircraft would require substantial resources. To ensure a viable combat-ready force in the future, DOD needs to deliberately consider the need for and priority of major investments in relation to joint requirements and aggregate service capabilities. Each represents a major long-term commitment and therefore requires close and continual examination to ensure a substantial payoff in added capability. The absence of joint mission area analyses makes it difficult to assess whether planned investments in air power modernization are warranted. Without a full understanding of joint requirements and aggregate service capabilities in each mission area, the Secretary of Defense does not have the information needed to make decisions about whether existing capabilities are sufficient to meet anticipated challenges or whether additional investments are justified. The fact that DOD is proceeding with modernization programs whose justifications do not, on the surface, appear to be compelling illustrates the need for continuing comprehensive mission area assessments. No program—regardless of the investment already made—should be considered irrevocable—but should be continually examined as circumstances and capabilities change. Although we have limited our illustrations in this chapter to major modernization programs, smaller programs would also benefit from mission area assessments. These assessments would help DOD determine the validity of the need for all types of new weapons investments as well as procurement quantities and also decide whether to reduce or retire existing assets. Through key legislation, Congress has sought to better integrate the capabilities of the military forces, provide for improved military advice to the Secretary of Defense apart from that provided by the military services, and strengthen the joint orientation of DOD. Although DOD has improved its joint orientation in many respects, the individual services continue to heavily influence defense decisions, particularly those related to investments in weapons. Stronger military advice from a joint perspective is needed if the Secretary is to objectively weigh the merits not only of combat air power but also of other defense programs. Although DOD has begun to assess selected warfighting capabilities from a joint perspective, this process is still evolving and has not yet led to any identifiable reductions in overlap and duplication among deployed air power forces. Nor has it led to specific platform proposals to deal with the high cost of recapitalizing DOD’s combat air power or specific proposals to transfer resources among services to meet higher priority needs. Better analytical tools and data are needed to improve joint warfighting assessments, and certain other obstacles must be overcome to reduce overlaps and achieve a stronger joint orientation. Collectively, the National Security Act of 1947 and the Goldwater-Nichols Department of Defense Reorganization Act of 1986 sought to better integrate the military forces, provide a channel for military advice to the Secretary of Defense apart from that of the individual services, and strengthen the joint orientation of the Department. Although DOD officials believe that the Department has improved its joint orientation in many respects, some of the underlying conditions that led to this legislation continue to surface. In many respects, the circumstances leading Congress to enact the National Security Act of 1947 parallel those surrounding the current debate over defense spending and modernization priorities. The military services’ lack of unified policy and planning during World War II, when the Army and Navy existed as separate military organizations reporting to the President, led to this major piece of defense legislation. This act created a National Military Establishment (later renamed the Department of Defense) to provide policy direction over the individual services and formally established the Joint Chiefs of Staff. In enacting this legislation, Congress sought to better integrate the distinct military capabilities of the services. The services subsequently agreed in 1948 on their respective functions. This agreement—termed the Key West Agreement—delineated services functions and was aimed at preventing unnecessary duplication. During this period, intense interservice competition for drastically shrinking defense resources erupted. The primary debate centered on whether both the newly created Air Force and the Navy should have roles in strategic bombing. Although the Air Force was assigned this role in 1948, the Navy soon initiated a major effort to build a super aircraft carrier to launch strategic bombers from its decks. Service control over combat aviation, airlift, guided missiles, and air defense weapons also generated much debate. The question of whether the nation needed or could afford all of the weapons the services proposed when defense resources were declining was central to these debates. Almost 40 years after the National Security Act sought to better integrate military capabilities, concerns over the need for a stronger joint orientation in the Department of Defense arose. Concerns about a perceived imbalance between service and joint advice ultimately led to the Goldwater-Nichols Department of Defense Reorganization Act of 1986 (Goldwater-Nichols). A major Senate Armed Services Committee report leading to the legislation pointed out that (1) the military services were not articulating DOD’s strategic goals or establishing priorities; (2) the military services dominated the force planning, programming, and budgeting process; (3) the Joint Chiefs of Staff system was not yielding meaningful recommendations on issues affecting more than one service, and the services retained an effective veto over nearly every Joint Chiefs action; and (4) DOD’s excessive functional orientation was inhibiting the integration of service capabilities along missions lines. This report concluded that inadequate integration could lead to unwarranted duplication, gaps in warfighting capability, and unrealistic plans. Various provisions of the Goldwater-Nichols legislation were directed at correcting these lingering problems. For example, it designated the Chairman of the Joint Chiefs of Staff as principal military adviser to the President, National Security Council, and Secretary of Defense. This provided a channel for military advice apart from the military services. The Chairman was also given new responsibilities designed to improve resource decision-making, including advising the Secretary on program recommendations and budget proposals developed by the military departments and other DOD components. Although DOD officials believe that progress has been made toward a stronger joint orientation within DOD, some of the key provisions of Goldwater-Nichols aimed at preventing unnecessary overlap and duplication have not had the intended effect. For example, to ensure reexamination of opportunities to reduce overlap and duplication, Goldwater-Nichols directed the Chairman, Joint Chiefs of Staff, to periodically report to the Secretary of Defense his recommendations on how the assigned functions of the armed services should be changed to avoid undue redundancy. The Defense Authorization Act for Fiscal Year 1993 added additional matters for the Chairman to consider in his report, including the extent to which the armed forces’ efficiency would be enhanced by the elimination or reduction of duplication in capabilities of DOD components. The Chairman completed two reviews—the most recent in 1993—but neither has led to significant changes in service roles, missions, and functions involving combat air power. Congressional dissatisfaction with the results of the Chairman’s reviews was one factor leading it to direct DOD to establish an independent commission to review the allocation of roles, missions, and functions among the armed forces and to recommend how they should be changed. The ensuing Commission on Roles and Missions of the Armed Forces reported its findings in May 1995. Once again, some of the same problems that had led to the Goldwater-Nichols legislation nearly 10 years before surfaced. For example, the Commission observed that the primary problems in weapon system acquisitions were traceable to inadequacies in the early phase of the requirements determination process. In the Commission’s view, the lack of a unified concept and analysis of warfighting needs was the critical underlying problem. The Commission concluded in its report that joint thought and action needed to become a compelling reality throughout DOD if the objectives of Goldwater-Nichols were to be realized. It recommended various actions to improve the management structures and decision support processes related to DOD’s requirements development and budgeting. A key conclusion in this regard was that the JROC and OSD staff needed to have a greater ability and willingness to address DOD needs in the aggregate. Accordingly, the Commission recommended that the JROC’s charter over joint requirements formulation be strengthened. It also recommended that DOD increase the technical and analytic capacity of the Joint Staff to better assist the Chairman and Vice Chairman. The Secretary of Defense requested more study of several key Commission proposals. Many of these studies were still underway or the results were under consideration within DOD at the completion of our review. Since the spring of 1994, the Chairman and Vice Chairman of the Joint Chiefs of Staff have taken steps to implement a process to assess U.S. warfighting needs and capabilities from a joint perspective. This process, which has centered around the JROC, is intended to provide the Chairman, and ultimately the Secretary of Defense and the Congress, with a joint view on program and budget issues. Both the Chairman and Vice Chairman recognized that the requirements generation and resource allocation processes depended heavily on each service’s assessment of its individual needs and priorities and that requirements had not been sufficiently reviewed from a joint perspective. In response to these concerns, the JROC’s role was expanded and a new process to assess warfighting capabilities from a joint mission perspective was established to support the JROC’s deliberations. While this process has contributed to changes that should improve joint warfighting, its role is still evolving, and its impact on air power programs and budgets has been limited. Between 1986 and 1994, the JROC served as the principal forum for senior military leaders to review and validate mission need statements for major defense acquisition programs. Approved mission statements are reviewed by the Defense Acquisition Board, which decides whether concept studies of solutions should be performed. In early 1994, the Chairman of the Joint Chiefs of Staff directed the Vice Chairman to expand the JROC charter to more fully support the Chairman in executing his statutory responsibilities. In addition to validating mission needs statements for major defense acquisition programs, Council responsibilities now include assisting the Chairman in (1) assessing joint warfighting capabilities, (2) assigning a joint priority among major weapons meeting valid requirements, and (3) assessing the extent to which the military departments’ program recommendations and budget proposals conform with established priorities. Under the Fiscal Year 1996 Defense Authorization Act, title 10 of U.S. Code was amended to include the JROC and its functions. The function of assigning priorities was revised and expanded through this legislation to include assisting the Chairman in identifying and assessing the priority of joint military requirements (including existing systems and equipment), ensuring that the assignment of priorities conforms to and reflects resource levels projected by the Secretary of Defense. Additionally, the JROC’s responsibilities were further expanded to include assisting the Chairman in considering the relative costs and benefits of alternatives to acquisition programs aimed at meeting identified military requirements. Figure 5.1 shows the JROC’s expanded responsibilities. The Fiscal Year 1996 Defense Authorization Act also designated the Chairman of the Joint Chiefs of Staff as the Chairman of the JROC. Other Council members include an Army, Air Force, and Marine Corps officer in the grade of general and a Navy admiral. The Chairman can delegate his functions only to the Vice Chairman of the Joint Chiefs of Staff, who for years has chaired the Council. In executing its responsibilities, JROC does not vote, but rather develops a consensus, or unanimity, in the positions it takes. To assist the JROC in advising the Chairman on joint warfighting capabilities, the joint warfighting capability assessment (JWCA) process was established in April 1994. Under this process, 10 assessment teams have been established in selected mission areas (see fig. 5.2). As sponsors of the JWCA teams, Joint Staff directorates coordinate the assessments with representatives from the Joint Staff, services, OSD, combatant commands (CINCs), and others as necessary. The teams are organized separate and apart from the Joint Staff and report to the JROC, which decides which issues they will assess. The intent is for the JWCA teams to continuously assess available information on their respective joint capability areas to identify opportunities to improve warfighting effectiveness. A key word is “assess.” The teams do not conduct analytical studies to develop new information to support the JROC. Rather, they assess available information and then develop and present briefings to the JROC. The JWCA teams produce only briefings, not reports or papers that lay out in detail the pros and cons of any options identified to address the issue(s) at hand. The Chairman uses the information from the JWCA team assessments to develop two key documents—the Chairman’s Program Recommendations, which contains his recommendations to the Secretary of Defense for consideration in developing the Defense Planning Guidance, and the Chairman’s Program Assessment, which contains alternative program recommendations and budget proposals for the Secretary’s consideration in refining the defense program and budget. In expanding the JROC process, including the establishment of the JWCA teams, it was envisioned that the JROC would be more than simply another military committee on which members participate strictly as representatives of their services. Recommendations coming from the JROC would not simply reflect the sum of each service’s requirements. Rather, the JROC, with the support of the JWCA process, would produce joint information the Chairman needs to meet his program review and assessment responsibilities and to resolve cross-service requirements issues, eliminate duplicative programs, and pursue opportunities to enhance the interoperability of weapon systems. The JWCA process has been in existence over 2 years and is still evolving. Representatives of both the Joint Staff and OSD believe that the process has led to more systematic and extensive discussions of joint issues among the top military leadership. They also believe that JWCA briefings have led to more informed and extensive discussions of joint issues within the JROC. Progress has been made on some interoperability issues as a result of the process. For example, in response to a JROC tasking, a JWCA team combined with Joint Staff elements to assess the interoperability of intelligence sensors and processors, fusion, and communication systems. According to the Chairman of the Joint Chiefs of Staff, the team’s recommendations will improve the interoperability among the individual services’ platforms so that data can be provided in a more timely manner to the battlefield. JWCA teams have also, on at least one occasion, been used in conjunction with other DOD elements to study key issues for the Secretary of Defense. In 1994, in response to a request of the Deputy Secretary of Defense, the JROC chairman formed a study group using representatives of three JWCA teams and several offices within OSD to examine issues related to precision strikes on targets and required intelligence support. The study group briefed the JROC on its findings and recommendations concerning databases, battlespace coverage, joint targeting doctrine, battle damage assessment, and other areas. A key recommendation was that intelligence, surveillance, and reconnaissance and command, control, and communications considerations be fully integrated early into the weapon system acquisition process. To implement this recommendation, the group devised revisions to DOD acquisition regulations that have been adopted. While the new JWCA process has raised the level of attention and sensitivity to joint issues, we found little evidence that the process is identifying unnecessary or overly redundant air power capabilities, confronting the challenge of modernizing the military’s air power, or helping establish priorities among competing programs. According to representatives from several JWCA teams, the teams have not been identifying tradeoffs among combat air power forces or programs to reduce redundancies. We were told that, unless specifically directed by the JROC, the JWCA teams are not empowered to develop such proposals. The primary example cited to us of an impact the JWCA teams had on reducing overlap among the services was DOD’s decision to retire the Air Force’s EF-111 radar jamming aircraft and consolidate the services’ airborne radar jamming capabilities into one platform—the Navy’s EA-6B. Documentation provided us, however, only indicates that the JWCA process became involved subsequent to the approval of the consolidation, when the Deputy Secretary of Defense asked the Vice Chairman of the Joint Chiefs of Staff to study the associated operational issues. The air superiority JWCA team performed the study, which included evaluating the performance of the EA-6B, developing an integrated operational concept for the consolidation, proposing a transition schedule, and assessing the requirement for upgrades to the EA-6B. Joint Staff officials told us JWCA teams have not examined the affordability of individual weapon systems in their assessments. Moreover, according to one Joint Staff official, attempts to raise these larger, more controversial issues have not led to specific JWCA assessment mandates from the JROC. For example, the JWCA teams elevated recapitalization and affordability issues to the JROC in December 1995. At these meetings, the issue of the affordability of acquiring high-priced aircraft, particularly after the turn of the century under projected budgets, was raised. According to Joint Staff officials, the top 20 most expensive acquisition programs—half of them aircraft—were presented to the JROC during these meetings. Although the JROC and the services conceptually agreed on the need to scrutinize the cost of tactical aircraft, the JROC has not taken any concrete actions or directed the JWCA teams to further study the affordability issue. Additionally, we found little evidence that the JROC, with the support of the JWCA process, has developed specific proposals to transfer resources from one service to another to meet higher priority needs. A review of Future Years Defense Program data also indicates no notable shifts in acquisition funding among the services between fiscal years 1994 and 2001. A key goal of the JROC, according to the Office of the Vice Chairman of the Joint Chiefs of Staff, is to enhance force capability by assisting the Chairman in proposing cross-service transfers of resources. Additionally, Joint Staff officials told us the JWCA teams have not developed proposals to shift funding among programs to reflect higher priorities from a joint perspective. In assessing the impact of the JROC and the JWCA process on combat air power, we examined two important ultimate outputs of the process—the Chairman’s Program Assessment and Program Recommendations to the Secretary of Defense. Under its broadened mandate, the JROC has been made a focal point for addressing joint warfighting needs. It is expected to support the Chairman in advising the Secretary by making specific programmatic recommendations that will, among other things, lead to increased joint warfighting capability and reduce unnecessary redundancies and marginally effective systems, within existing budget levels. However, in reviewing the Chairman’s 1994 and 1995 program assessments and 1995 program recommendations, we found little to suggest that this type of advice is being provided. The documents did not offer specific substantive proposals to reduce or eliminate duplication among existing service systems or otherwise aid in addressing the problem of funding recapitalization. In fact, the Chairman’s 1995 Program Assessment indicates an inability on the Chairman’s part, at least at that point, to propose changes in service programs and budgets. While the Chairman expressed serious concerns in his assessment about the need for and cost of recapitalizing warfighting capabilities and said that the power of joint operations allows for the identification of programs to be canceled or reduced, his advice was to defer to the services to make such choices. DOD must overcome several obstacles that have inhibited JWCA teams and others that try to assess joint mission requirements and the services’ aggregate capabilities to fulfill combat missions. In addition to scarce information on joint mission requirements and aggregate service capabilities discussed in chapter 4, impediments include (1) weak analytical tools and databases to assist in-depth joint mission area analyses, (2) weaknesses in DOD’s decision making support processes, and (3) the services’ resistance to changes affecting their programs. DOD officials acknowledge that current analytical tools, such as computer models and war games used in warfighting analyses, should be improved if they are to be effectively used to analyze joint warfighting. They told us these tools often do not accurately represent all aspects of a truly joint force, frequently focus on either land or naval aspects, and often do not consider the contribution of surveillance and reconnaissance and command and control assets to the warfighter. Some models are grounded in Cold War theory and must be augmented with other evaluations to minimize their inherent deficiencies. DOD representatives and analysts from the military operations research community also observe that there are serious limitations in the data to support analyses of joint capabilities and requirements. Presently, anytime DOD wants to study joint requirements, a database must be developed. Concerns then arise over whether the databases developed and used are consistent, valid, and accurate. Efforts have been made in the past to collect joint data and develop appropriate models for analyzing joint warfare. These efforts, however, fell short, as there was not a consistent, compelling need across enough of the analytic community to do the job adequately. A current major initiative aimed at improving analytical support is the design and development of a new model—JWARS—that will simulate joint warfare. JWARS will seek to overcome past shortcomings and will include the contributions of surveillance and reconnaissance and command, control, and communication assets to the warfighter. This initiative was developed as part of DOD’s joint analytic model improvement program because of the Secretary of Defense’s concern that current models used for warfare analysis are no longer adequate to deal with the complex issues confronting senior decisionmakers. Under this program, DOD will upgrade and refine current warfighting models to keep them usable until a new generation of models to address joint warfare issues can be developed. The new models are intended to help decisionmakers assess the value of various force structure mixes. As part of this broad initiative, DOD also intends to develop a central database for use in mission area studies and analyses. In addition to problems with models and data, the Roles and Missions Commission identified a need to improve analytical capabilities in both the Office of the Secretary of Defense and the Joint Staff. Commission staff said that there has been too much reliance on the services for analytical support and that the Joint Staff should improve its abilities to look broadly across systems and services in conducting analyses. Recognizing the need for more information and analytical support, the Joint Staff has contracted for studies to support the JWCA assessments. According to Joint Staff data, by the end of fiscal year 1996, DOD will have awarded about $24 million in contracts to support the teams. In its May 1995 report, the Roles and Missions Commission faulted the decision support processes DOD uses to develop requirements and make resource allocation decisions. It cited a need for the JROC and OSD staff to have a greater ability to address DOD needs in the aggregate. The Commission also presented ideas and recommendations to improve DOD’s decision-making processes to enable management to better develop requirements from a joint perspective. These included (1) changes to the information support network that would enable DOD to assess forces and capabilities by mission area and (2) changes to the weapons acquisition process that would enable joint warfighting concerns to be considered when requirements for new weapons are first being established. These and many other Commission proposals were still under assessment within DOD at the completion of our review. DOD, in its comments on a draft of our report, indicated that it believes the OSD and Organization of the Joint Chiefs of Staff oversight of service programs and budgets is quite rigorous. Several OSD program analysts we interviewed did not share this view. They described the oversight as very limited and the JWCA process as contributing very little to programming and budgeting decisions. Roles and Missions Commission staff also stressed to us that, based on their years of experience in OSD, the Secretary needs stronger independent advisory support from the OSD staff. DOD has reduced its force structure and terminated some weapon programs to reflect changes in the National Military Strategy and reduced defense budgets. But further attempts to cancel weapon programs and reduce unnecessary overlaps and duplications among forces are likely to generate considerable debate and resistance within DOD. Because such initiatives can threaten service plans and budgets, the tendency has been to avoid debates involving tradeoffs among the services’ systems. The potential effects of program reductions or cancellations on careers, the distribution of funds to localities, jobs, and the industrial base also serve as disincentives for comprehensive assessments and dialogue on program alternatives. The Chairman’s 1995 Program Assessment indicates the difficulty the Chairman has had in identifying programs and capabilities to cancel or reduce. While the Chairman recognized that the increasing jointness of military operations should permit additional program cancellations or reductions, he noted that the Joint Chiefs—despite the added support of the JROC and the JWCA process—had been unable to define with sufficient detail what should not be funded. The Chairman recommended that the Secretary of Defense look to the military services to identify programs that can be slowed or terminated. He said for this to happen, however, the services would have to be provided incentives. The Chairman recommended that the Secretary return to the services any savings they identify for application toward priority recapitalization or readiness and personnel programs. Joint Staff officials indicated that the Chairman’s reluctance to propose changes to major service programs may be attributable to the need for the Chairman to be a team builder and not be at odds with the service chiefs over their modernization programs. Adoption of the Chairman’s proposal could lead the services to reduce or eliminate programs and otherwise more efficiently operate their agencies, including reducing infrastructure costs. However, it is difficult to appreciate how these unilateral decisions by the services will provide for the most efficient and effective use of defense resources to meet the needs of the combatant commanders. It should be remembered that studies and hearings leading up to the Goldwater-Nichols legislation observed that the need for the Joint Chiefs of Staff to reach consensus before making decisions clearly inhibited decisions that could integrate service capabilities along mission lines. The need to address this problem was one of the primary motivations behind Goldwater-Nichols. While DOD acknowledges the need to consider joint requirements and the services’ aggregate capabilities in defense planning, programming, and budgeting, its decision support systems have not yielded the information needed from a joint perspective to help the Secretary make some very difficult decisions. Measures intended to improve the advice provided by the Chairman of the Joint Chiefs of Staff have met with limited success. The Secretary does not have enough comprehensive information on joint mission requirements and aggregate capabilities to help him establish recapitalization priorities and reduce duplications and overlaps in existing capabilities without unacceptable effects on force capabilities. The Chairman would be in a better position to provide such advice if joint warfighting assessments examined such issues. Efforts are underway that could provide the Secretary of Defense, the Chairman of the Joint Chiefs of Staff, and other decisionmakers with improved information to make the difficult force structure and modernization choices needed. However, the desire to reach consensus with the service chiefs—or in the case of the JROC the practice of reaching consensus among its members—could present a formidable obstacle to efforts by DOD officials to make significant changes to major modernization programs and to identify and eliminate unnecessary or overly redundant capabilities. The Secretary of Defense and the Chairman of the Joint Chiefs of Staff need to be more willing to take decisive actions on modernization programs that do not provide a clearly substantial payoff in force capability. During the Cold War, the military services invested hundreds of billions of dollars to develop largely autonomous combat air power capabilities, primarily to prepare for a global war with the Soviet Union. The Air Force acquired bombers to deliver massive nuclear strikes against the Soviets and fighter and attack aircraft for conventional and theater-nuclear missions in the major land theaters, principally Europe. The Navy built an extensive carrier-based aviation force focused on controlling the seas and projecting power into the maritime flanks of the Soviet Union. The Army developed attack helicopters to provide air support to its ground troops. The Marine Corps acquired fighter and attack aircraft and attack helicopters to support its ground forces in their areas of operation. While the United States ended up with four essentially autonomous air forces with many similar capabilities, each also largely operated within its own warfighting domains. Today, there is no longer a clear division of labor among aviation forces based on where they operate or what functions they carry out. Although many of the long-range bombers can still be used to deliver nuclear weapons, the air power components of the four services are now focused on joint conventional operations in regional conflicts and contingency operations. Most of the likely theaters of operation are small enough that, with available refueling support, all types of aircraft can reach most targets. And while the number of combat aircraft has been reduced, the reductions have been largely offset by an expansion in the types of assets and capabilities available to the combatant commanders. For example, (1) a larger percentage of the combat aircraft force can now perform multiple missions; (2) key performance capabilities of combat aircraft, such as night fighting, are being significantly enhanced; and (3) the inventories of advanced long-range missiles and PGMs are growing and improving, adding to the arsenal of weapons and options available to attack targets. Moreover, the continuing integration of service capabilities in such areas as battlefield surveillance; command, control, and communications; and targeting should enable force commanders to further capitalize on the aggregate capabilities of the services. DOD has not been adequately examining its combat air power force structure and its modernization plans and programs from a joint perspective. The forces of the services are increasingly operating jointly and in concert with allies in a regional versus a global environment. However, DOD’s decision support systems do not provide sufficient information from a joint perspective to enable the Secretary of Defense, the Chairman of the Joint Chiefs of Staff, and other decisionmakers to prioritize programs, objectively weigh the merits of new air power investments, and decide whether current programs should continue to receive funding. It is true that the overlapping and often redundant air power capabilities of the current force structure provide combatant commanders with operational flexibility to respond to any circumstance. The question is whether, in the post-Cold War era, the United States needs, or can afford, the current levels of overlap and redundancy. This is not easily answered because DOD has not fully examined the joint requirements for key warfighting missions areas or the aggregate capabilities of the services to meet those requirements. From our reviews of interdiction, air-to-air combat, and close support of ground forces, it is evident that U.S. capabilities are quite substantial even without further enhancement. For the interdiction mission, our analysis and the analysis of others showed that the services have more than enough capability to hit identified ground targets for the two major regional conflicts used in force planning. Planned investments in some cases may be adding little needed military capability at a very high cost. While it may be desirable for DOD to scale back its air power modernization plans and reduce overlapping capabilities, the challenging question is, how. Such courses of action require tough choices, particularly when the military strategy is to win quickly and decisively in two nearly simultaneous major regional conflicts. Even with a more comprehensive understanding of joint requirements and the capabilities of the services to meet those requirements, the Secretary will likely continue to find it difficult to make decisions that could increase warfighting risks and affect programs, careers, jobs, and the industrial base. But without such an understanding, there may be little hope that these tough decisions will be made. The need for improved joint warfighting information is recognized in DOD and provided much of the stimulus for the establishment of the joint warfighting capability assessment teams. A critical underlying need of these teams, or any assessment process, is objective comprehensive cross-service and cross-mission studies and analyses of joint requirements for doing key warfighting missions and the aggregate capabilities of the services to meet those requirements. Such analyses are very demanding and may require a considerable amount of military judgment. Nonetheless, they are vital input for better understanding how much capability is needed to fulfill air power missions and what is the most cost-effective mix of air power assets to meet the needs of the combatant commanders within DOD’s budgets. DOD has initiated several broad studies that should provide added information. These include a deep attack/weapons mix study that includes interdiction and close support operations, a reconnaissance force mix study, and an electronic warfare mission area analysis. DOD has not routinely reviewed the justification for weapon modernization programs based on their contribution to the aggregate capabilities of the military to meet mission requirements. In our May 1996 report on DOD interdiction capabilities and modernization plans, we recommended that the Secretary of Defense do such reviews. DOD agreed with our recommendation. Based on our review of other missions, such reviews are needed for other key mission areas as well. Because many assets contribute to more than one mission area, cross-mission analyses will need to be part of the process. The urgent need for such assessments is underscored by the reality that significant outlays will be required in the next decade to finance DOD’s combat air power modernization programs as currently planned. Over the past few years, we have reviewed the Department’s major air power modernization programs—the F/A-18E/F, the F-22, the Comanche, and the B-1B bomber modification programs—within the context of the post-Cold War security environment. Our work leading to this culminating report has served to reinforce the theme of these earlier assessments—namely, that DOD should revisit the program justifications for these programs because the circumstances and assumptions upon which they were based have changed. Although extensive resources have already been invested in these programs, past investment decisions should not be considered irreversible but rather should be considered in the light of new information. The extensive long-term financial commitment needed to fund all of these programs makes it imperative that these key programs—and possibly others—be reconsidered since the future viability of U.S. combat air power could be at risk if it is not smartly modernized within likely budgets. To ensure a viable, combat ready force in the future, the Secretary of Defense will need to make decisions in at least two critical areas—how best to reduce unneeded duplication and overlap in existing capabilities and how to recapitalize the force in the most cost-effective manner. To make such decisions, the Secretary must have better information coming from a joint perspective. Accordingly, we recommend that the Secretary of Defense, along with the Chairman of the Joint Chiefs of Staff, develop an assessment process that yields more comprehensive information in key mission areas. This can be done by broadening the current joint warfare capabilities assessment process or developing an alternative mechanism. To be of most value, such assessments should be done on a continuing basis and should, at a minimum, (1) assess total joint war-fighting requirements in each mission area; (2) inventory aggregate service capabilities, including the full range of assets available to carry out each mission; (3) compare aggregate capabilities to joint requirements to identify shortages or excesses, taking into consideration existing and projected capabilities of potential adversaries and the adequacy of existing capabilities to meet joint requirements; (4) determine the most cost-effective means to satisfy any shortages; and (5) where excesses exist, assess the relative merits of retiring alternative assets, reducing procurement quantities, or canceling acquisition programs. The assessments also need to examine the projected impact of investments, retirements, and cancellations on other mission areas since some assets contribute to multiple mission areas. Because the Chairman is to advise the Secretary on joint military requirements and provide programmatic advice on how best to provide joint warfighting capabilities within projected resource levels, the assessment process needs to help the Chairman determine program priorities across mission lines. To enhance the effectiveness of the assessments, we also recommend that the Secretary of Defense and the Chairman decide how best to provide analytical support to the assessment teams, ensure staff continuity, and allow the teams latitude to examine the full range of air power issues. DOD partially concurred with our recommendations, and while it said it disagreed with many of our findings, most of that disagreement centered on two principal points: (1) the Secretary of Defense is not receiving adequate advice, particularly from a joint perspective, to support decision-making on combat air power programs, and (2) ongoing major combat aircraft acquisition programs lack sufficient analysis of needs and capabilities. DOD said many steps had been taken in recent years to improve the extent and quality of joint military advice and cited the JWCA process as an example. It said the Secretary and Deputy Secretary receive comprehensive advice on combat air power programs through DOD’s planning, programming, and budgeting system and systems acquisition process. The Department’s response noted that both OSD and the Organization of the Joint Chiefs of Staff carefully scrutinize major acquisition programs and that joint military force assessments and recommendations are provided. DOD acknowledged that the quality of analytical support can be improved but believes that the extent of support available has not been insufficient for decision-making. We agree that steps have been taken to provide improved joint advice to the Secretary. We also recognize that DOD decision support systems provide information for making planning, programming, and budgeting decisions on major acquisition programs. We do not, however, believe the information is sufficiently comprehensive to support resource allocation decisions across service and mission lines. Much of the information is developed by the individual services and limited in scope. Only a very limited amount of information is available on joint requirements for performing missions, such as interdiction and close support, and on the aggregate capabilities available to meet those requirements. DOD’s initiation of the deep attack weapons mix study and, more recently, a study to assess close support capabilities, suggest that it is, in fact, seeking more comprehensive information about cross-service needs and capabilities as our recommendation suggests. While joint warfighting capability assessment teams have been established, DOD has not been using these teams to identify unnecessary or overly redundant combat air power capabilities among the services; nor has the Department used the teams to help develop specific proposals or strategies for recapitalizing U.S. air power forces, a major combat air power issue identified by the Chairman of the Joint Chiefs of Staff. Information on issues such as redundancies in capabilities and on recapitalization alternatives, developed from a joint warfighting perspective, would be invaluable to decisionmakers in allocating defense resources among competing needs to achieve maximum force effectiveness. With regard to the analyses of needs and capabilities behind combat air power weapons acquisition programs, we recognize that the services conduct considerable analyses to identify mission needs and justify new weapons program proposals. These analyses, however, are not based on assessments of the aggregate capabilities of the services to perform warfighting missions, nor does DOD routinely review service modernization proposals and programs from such a perspective. The Commission on Roles and Missions of the Armed Forces made similar observations. More typically service analyses tend to justify specific modernization programs by showing the additional capabilities they could provide rather than assess the cost-effectiveness of alternative means of meeting an identified need. A 1995 study done at the request of the Chairman of the JROC, also identified this as a problem. The study team found that analyses done to support JROC decisions frequently concentrate only on the capability of the DOD component’s proposed system to fill stated gaps in warfighter needs. Potential alternatives are given little consideration. Additionally, as pointed out in Chapter 4 of this report, under DOD’s requirements generation process, only program proposals that meet DOD’s major defense acquisition program criteria are reviewed and validated by the JROC. Many service modernization proposals and programs are not reviewed as they do not meet this criteria. | GAO reviewed the Department of Defense's (DOD) plans to modernize its combat air capabilities, focusing on whether DOD has sufficient information from a joint perspective to: (1) prioritize its air power programs; (2) objectively weigh the merits of new program investments; and (3) decide whether existing programs should receive continued funding. GAO found that: (1) although DOD believes that its modernization plans are affordable, it faces a major challenge in attempting to fund the services' air modernization programs; (2) DOD has not sufficiently assessed joint mission requirements or compared these requirements to the services' aggregate capabilities; (3) DOD is proceeding with some major air modernization programs without clear evidence that the programs are justified; (4) the services plan to acquire numerous advanced weapons systems over the next 15 to 20 years to enhance their interdiction capabilities despite the availability of viable, less costly alternatives; (5) reductions in combat aircraft inventories have been largely offset by improvements in night-fighting and targeting capabilities and increases in advanced long-range missile inventories; (6) although potential adversaries possess capabilities that could threaten U.S. air power, the severity of these threats appears to be limited; and (7) DOD has taken steps to enhance information on joint combat requirements, but these efforts have had little impact in identifying duplication in existing air combat capabilities. |
Commerce is responsible for licensing exports of U.S. dual-use items—items with both military and commercial applications—and helps enforce controls over them. Depending on the item involved and the country of destination, an exporter may be required to submit a license application to Commerce to obtain government approval for the export. The U.S. government controls the export of sophisticated machine tools for national security and nuclear nonproliferation reasons. Commerce, in consultation with other agencies such as the Department of Defense (DOD), reviews license applications and makes licensing decisions. Complex or sensitive export cases can be escalated to interagency export licensing review committees for discussion and resolution. Commerce’s Office of Export Enforcement, along with the U.S. Customs Service, is responsible for ensuring adherence to license provisions by investigating suspected export control violations and pursuing criminal and administrative sanctions. McDonnell Douglas and CATIC entered into an agreement in 1992 to co-produce 40 MD-80 and MD-90 aircraft in China for the country’s domestic “trunk” routes. A contract revision signed in November 1994 reduced the number of aircraft to be built in China to 20 and called for the direct purchase of 20 U.S.-built aircraft. The four Chinese factories involved in the Trunkliner program include the Shanghai Aviation Industrial Corporation, Xian Aircraft Company, Chengdu Aircraft Company, and Shenyang Aircraft Company. The Shanghai facility is responsible for final assembly of the aircraft. All of these factories are under the direction of Aviation Industries Corporation of China (AVIC) and CATIC. CATIC is the principal purchasing arm of China’s military as well as many commercial aviation entities. In May 1994, McDonnell Douglas submitted license applications for exporting machine tools to China. The machine tools were to be wholly dedicated to the production of 40 Trunkliner aircraft and related work. Under the Trunkliner program, the Chinese factories were responsible for fabricating and assembling about 75 percent of the airframe structure and the tools were required to produce parts to support the planned 10 aircraft per year production rate. The machine tools were to be exported to the CATIC Machining Center. At the time the license applications were being considered, the Machining Center did not yet exist. McDonnell Douglas informed the U.S. government that the Machining Center would be located in Beijing and construction would begin in October 1994. Aircraft parts production would start 14 months later. McDonnell Douglas requested Commerce to approve these applications quickly so that it could export the machine tools to China, where they could be stored at CATIC’s expense until the new facility in Beijing was ready. Appendix I contains a chronology of key events associated with the machine tools McDonnell Douglas exported to China. Advanced machine tools have military and civilian applications and are sought by China for industrial modernization efforts. The McDonnell Douglas export license applications included 10 five-axis machines and 2 coordinate measuring machines. (See table 1 for a list of the equipment licensed for export.) The United States controls all these machines for national security or nuclear nonproliferation reasons. China has limited indigenous capability to produce comparable machine tools and, therefore, relies primarily on foreign imports. The machine tools McDonnell Douglas exported to China had been used at a U.S. government-owned plant to produce parts for the B-1 bomber, C-17 military transport aircraft, and the Peacekeeper missile. The more advanced machine tools manufactured such items as military aircraft wing structures, fuselage components, and landing gear and engine parts. For example, five-axis machine tools simultaneously cut and form metal in five different directions producing parts with minimal weight and maximum strength, which improves aircraft performance (see fig.1). McDonnell Douglas sold machine tools to China to manufacture parts for commercial aircraft. All of these machine tools can manufacture components for commercial aircraft and other products. For example, a stretch press, which forms sheet metal around a three dimensional mold, can form relatively large parts for aircraft fuselage sections and other aircraft structures. Five-axis machine tools can also be used to make tools and dies for auto body panels, medical and industrial equipment, and molds for consumer products. According to DOD, the Chinese government wants to buy five-axis machine tools and related equipment to upgrade its military aerospace production facilities as well as its commercial aviation industry. China’s modernization program has emphasized joint military-civilian production and self-sufficiency through the acquisition of key Western dual-use technologies. China has had difficulty acquiring advanced machine tools because of multilateral export controls. Until 1994, the United States and other member countries of the Coordinating Committee for Multilateral Export Controls tightly controlled the export of five-axis machine tools to China and other countries. Such sales required prior notification and unanimous consent from the other members. In March 1994, the Committee disbanded, but former members agreed to continue controlling the export of five-axis machine tools, but eliminated prior notification requirements. Industry officials said that China has the capability to manufacture less sophisticated machine tools, but cannot currently mass produce four- and five-axis machine tools that meet Western standards. However, they noted that Japan, Germany, and other countries are marketing advanced machine tools in China. Commerce approved the export applications with conditions after about 3 months of interagency discussions and review. During this review process, DOD officials raised several questions about the justification for the export. Their concerns primarily focused on (1) whether the stated end-use on the license applications justified the export; (2) the legitimacy of the CATIC Machining Center, the stated end user of the equipment; and (3) the quantity and capabilities of the machine tools. Prior to approving the licenses, the reviewing agencies added numerous conditions to mitigate the risks identified. Commerce, State, Energy, DOD, and the Arms Control and Disarmament Agency officials recognized the risk of diversion, considered it in their deliberations, and added conditions to the licenses to minimize this risk. The export applications were discussed, debated, and ultimately agreed upon at senior levels at these agencies. Because of the significance and complexity of the export, the case was immediately escalated to the Advisory Committee on Export Policy (ACEP). ACEP is chaired by Commerce and is composed of senior officials from Commerce, State, Energy, DOD, and the Arms Control and Disarmament Agency. It provides a forum for senior-level debate on significant export licensing issues. McDonnell Douglas export applications were discussed and debated at several ACEP meetings in the summer of 1994. Commerce and DOD were the primary agencies in the debate about these license applications. Many of the questions raised at these meetings were subsequently addressed by staff at Commerce, DOD, State, or Energy, often after requesting additional information from McDonnell Douglas. To assist in the interagency deliberations, the Central Intelligence Agency and Defense Intelligence Agency were asked to provide additional information on Chinese acquisition of machine tools and Chinese aviation facilities. The economic impact on McDonnell Douglas of delaying or denying this export was also considered during deliberations. DOD’s Defense Technology Security Administration distributed the applications for comment to groups within the agency and throughout DOD. Initially, the Navy, Air Force, Joint Chiefs of Staff, and Defense Intelligence Agency raised strong objections or recommended denial of these export applications. Senior officials in the agencies that initially recommended denial eventually agreed to approve these licenses once conditions were added. Several DOD officials noted that approving the licenses with conditions was the best strategy for DOD since the licenses would likely be approved at the ACEP. DOD began to consider what conditions could mitigate the apparent risks almost immediately after receiving the applications from Commerce in June 1994. During the interagency discussions, Commerce officials argued the export of the machine tools involved a low risk of diversion since McDonnell Douglas officials were to be located at the CATIC Machining Center for at least 4 years. They also believed that the machine tools were needed to produce parts for Trunkliner aircraft in China. They noted that, according to McDonnell Douglas officials, the machine tools were between 9 and 26 years old, were not state-of-the-art equipment, and similar or more capable machine tools could be purchased from foreign sources. Commerce initially recommended that the applications be approved with conditions restricting the end use to commercial aircraft production and that McDonnell Douglas be required to provide a semi-annual certification that this condition was being met. Commerce urged the other reviewing agencies to act quickly on these licenses. McDonnell Douglas claimed that the Air Force was requiring it to vacate the plant in Ohio by July 5, 1994, and it would be forced to pay high storage fees for the machine tools after that date. During the interagency review of the export applications, various DOD officials commented that there was little justification supporting the need for the export. Officials noted that the machine tools would provide substantial excess production capacity to the Chinese aircraft industry that could be directed toward satisfying military requirements. The Defense Intelligence Agency reported that the machine tools represented production capacity above and beyond the requirements necessary for exclusive production of 40 Trunkliner aircraft. DOD also obtained limited documentation indicating that CATIC asked other aircraft facilities in China if they needed any of the machine tools from the Ohio facility. DOD concerns were heightened in July 1994 when press reports noted that the production of Trunkliner aircraft in China was to be reduced from 40 to 20 aircraft. During the summer of 1994, in response to questions from DOD, McDonnell Douglas officials stated that they were discussing a reduction to the Trunkliner program with CATIC. In August, however, McDonnell Douglas assured DOD that it had “a firm binding contract for the coproduction of 40 aircraft with CATIC that was agreed to and signed in March 1992.” In other correspondence, McDonnell Douglas noted that in many cases the machines, including the five-axis machine tools, were necessary to supply specific parts whether 1 or 100 aircraft were built. Subsequent events indicated that not all of the exported equipment was needed to support Trunkliner aircraft production. After some of the machine tools were diverted to a Chinese military facility not involved in the Trunkliner program, McDonnell Douglas submitted license applications to Commerce to maintain the equipment at this facility to manufacture parts for trainer aircraft and motorcycles. Although all the equipment was eventually transferred to a facility involved in the Trunkliner program, Chinese officials acknowledged they did not need the stretch press. DOD officials questioned the credibility of the end user of the machine tools—the CATIC Machining Center. This facility had not been built at the time the license applications were deliberated. Some officials cautioned that the tools could be used at the CATIC Machining Center to manufacture sophisticated parts for military-related systems. Officials also questioned how these machine tools would be used after the Trunkliner program ended. Commerce officials told us that they had previously approved other exports of machine tools for installation at factories not yet built. Commerce officials said that they had done so because machine tools are very large and are easier to install in a new building as construction progresses. However, they could not readily provide us any specific examples where this had been done. Commerce did not perform a prelicense check on the CATIC Machining Center because it would not have been useful since the facility had not yet been built. Some DOD officials raised concern that the five-axis machine tools being exported were highly capable and that the export of 10 five-axis machines was a significant increase in capability over earlier exports. They noted that the exported machine tools, though old, have long useful lives and that an older machine tool may perform as well as a new one, even though it may lack certain capabilities found in newer models. U.S. government machine tool experts confirmed that machine tools have long useful lives and can be easily upgraded with new electronics and software and that many U.S. aerospace facilities use machine tools about the same age as those exported to China. Shanghai aviation facility officials said they are considering refurbishing and upgrading some of the machine tools acquired from McDonnell Douglas. U.S. and foreign companies offer refurbishing and upgrading services in China. The reviewing agencies added conditions to the licenses to address national security concerns. (See app. II for a detailed list of these conditions.) These conditions were designed to reduce or mitigate the risk that the equipment would be diverted to an unauthorized location or be used to manufacture parts with military applications. Specifically, the license conditions required that the machine tools be stored in one location until the CATIC Machining Center was constructed; restricted the use of the equipment to Trunkliner-related production; required assurances from CATIC that the equipment would be used as required metering devices to record equipment usage and the installation of password protection on some equipment; and included various reporting requirements, such as quarterly inspection reports by McDonnell Douglas, that were designed to monitor the equipment and detect unauthorized use. Commerce, DOD, State, Energy, and the Arms Control and Disarmament Agency agreed to these conditions, and then Commerce obtained concurrence from McDonnell Douglas before approving the licenses. Many of these conditions were copied from prior export licenses for similar equipment, while others were added to address concerns specific to this export. One of the conditions was that CATIC provide written assurance that the Machining Center would not use the machine tools for military applications and would use the equipment for Trunkliner-related production. On September 13, 1994, one day before the licenses were approved, U.S. Embassy officials sent Commerce and State a cable reporting that they had met with and obtained the requested written assurance from a senior CATIC official. However, the Embassy cable noted that CATIC had not determined where it would build the Machining Center. CATIC indicated that it may locate the Machining Center near Beijing at a site to be determined or at the Hongxing aircraft company, which is located in another city. Commerce officials could not provide documentation on how this issue was addressed but said they discussed it with McDonnell Douglas before approving the licenses. McDonnell Douglas stated that it is aware of no evidence that Commerce officials discussed this issue with its personnel. DOD officials stated that they did not receive this cable. U.S. government officials stated that the conditions placed on the licenses were effective in preventing the misuse of the machine tools. Commerce and DOD officials noted that McDonnell Douglas’s inspection promptly detected the diversion of the equipment. A senior Commerce official also noted that the end-use assurances obtained as part of one condition provided the U.S. government with the leverage needed to insist that the diverted equipment be relocated to an acceptable facility before any misuse of the equipment could occur. During the licensing review process, some officials had questioned the value of some conditions. For example, one condition called for McDonnell Douglas personnel to report on the use of the equipment and another condition called for metering devices to be installed on the machine tools. One official had noted that McDonnell Douglas personnel would only be able to determine that non-Trunkliner parts were being produced, not whether these parts were for a military application or simply another commercial product. Others had commented that metering devices measuring usage may provide information on how long a machine has been running but not what it is making. The machine tools were shipped to three locations contrary to the license conditions and CATIC’s assurances regarding end use. McDonnell Douglas officials reported the diversion to the U.S. government after the company had inventoried the equipment on March 24, 1995, in accordance with license conditions. Six machine tools were diverted to the Nanchang Aircraft Company, and the rest were stored in two locations in the port city of Tianjin, near Beijing. (See fig. 2.) McDonnell Douglas officials later visited Nanchang and reported that the stretch press had been installed in a new building designed specifically for this machine. The press, however, was not operational. In a letter to McDonnell Douglas, Commerce indicated that the movement of the equipment to Nanchang and partial installation of the stretch press was a “direct violation of the conditions under which the equipment was originally authorized for export to China.” Under the terms of the export licenses and CATIC’s written assurance, the machine tools were only to be used to manufacture commercial parts for the Trunkliner and other McDonnell Douglas commercial aircraft. However, the Nanchang Aircraft Company, which produces military and commercial products, was not associated with these programs. Six weeks after learning about the diversion, Commerce notified McDonnell Douglas that the machine tools should be consolidated in a single storage facility in Tianjin. Commerce also suspended four licenses for the equipment that had not yet been shipped to China. This equipment included four gantry profilers that CATIC bought from McDonnell Douglas but temporarily leased to a supplier in New York. On August 1, 1995, McDonnell Douglas submitted four license applications requesting that the six machine tools at the Nanchang Aircraft Company be authorized for use at that facility. Commerce subsequently denied three of these license applications covering the five-axis and three-axis machine tools and coordinate measuring machine. They were denied because (1) the transfer of equipment to Nanchang and installation of one item violated conditions placed on the original export license applications and (2) U.S. officials were concerned that the equipment installed at the Nanchang facility could be diverted to military programs. Commerce returned the fourth Nanchang license application for the stretch press to the company without action. Commerce officials said that they should have denied this license application along with the other three. Officials explained that the license application for the stretch press was processed separately because the stretch press was controlled for different reasons. As a result, different technical staff reviewed these applications. In October 1995, McDonnell Douglas submitted 12 export license amendments requesting that all the exported equipment, now located in Tianjin and Nanchang, be transferred to the Shanghai aviation facility. Commerce officials urged quick approval of the amendments so that the equipment could be moved to a single location to manufacture parts for the Trunkliner program. The amended license applications were discussed over several months at interagency government meetings. According to senior Commerce officials, it took time to process the amended licenses partly because they wanted to ensure that the Shanghai facility was an acceptable location to transfer the equipment. In response to officials’ questions, McDonnell Douglas indicated the facility had a very small inventory of advanced machine tools and needed the exported equipment to complete its requirements for the Trunkliner program. McDonnell Douglas officials also assured government officials that they had 14 U.S. personnel on site at the Shanghai facility and could monitor the equipment. The reviewing agencies agreed in February 1996 that the 12 export license amendments, permitting transfer of all the exported equipment to the Shanghai facility, should be approved with certain conditions. The conditions were similar to those incorporated in the original export licenses. A new condition was added specifying that all equipment must be placed or stored at the Shanghai facility within 120 days after license approval and that McDonnell Douglas would report on the location of the machine tools until they were made operational. McDonnell Douglas and U.S. Embassy officials reported that the diverted machine tools were now at the Shanghai aviation facility. On January 31, 1996, McDonnell Douglas advised Commerce that all of the equipment except the stretch press had been moved from Nanchang to Shanghai. In April 1996, about 1 year after the diversion was first reported, a U.S. Embassy official confirmed that all the machine tools except the stretch press were in Shanghai. On August 9, 1996, we toured the Shanghai aviation facility and saw the stretch press, which plant officials said had arrived from Nanchang several days earlier. Shanghai officials informed us that they already had two presses and had no plans to use this newly acquired stretch press. Commerce and McDonnell Douglas discussed the possibility of finding an alternate end user for the stretch press when the press was located in Nanchang, but DOD objected, insisting that the press be moved to Shanghai before considering another end user. A number of the amended license conditions will only apply after the equipment is installed at the facility. For example, metering devices, which measure operating time, must be read and logged daily once the equipment is installed. Shanghai aviation officials said that most of the tools will remain crated until a new machining center is completed at the Shanghai facility. During our visit, Shanghai officials showed us a new building they were constructing specifically to house the exported machine tools. (See fig. 3.) The building was planned for completion in September 1996. Shanghai officials said that the first MD-90 aircraft for the Trunkliner program is scheduled for delivery in April 1998. Commerce’s Office of Export Enforcement, which is responsible for investigating export control violations, did not formally investigate the machine tool diversion until 6 months after McDonnell Douglas reported the incident. McDonnell Douglas first briefed Commerce and other government officials on the status of the equipment in the spring and then again in the fall of 1995. In response to questions raised in a September 1995 interagency discussion about the diversion, a Commerce official indicated that the enforcement office was investigating the matter. However, the enforcement office initiated its investigation only after DOD formally requested such action in October 1995. The enforcement office referred the investigation to its Los Angeles Field Office in November 1995. A senior official said that they did not investigate sooner primarily because corrective action could be taken through the licensing approval process by suspending the licenses or modifying them to request assurances or movement of the equipment. Based on its preliminary investigation, the Los Angeles Field Office wrote a report recommending that Commerce issue a temporary denial order against CATIC and its subsidiaries. A temporary denial order would have denied CATIC all U.S. export privileges. The Office of Export Enforcement headquarters rejected this recommendation because it concluded that the evidence in the report did not meet standards necessary to issue such an order as set forth in the Export Administration Act. Officials explained that a temporary denial order is used to prevent an imminent violation of export control law rather than punish a past violation. The Los Angeles Field Office subsequently referred the case to the Department of Justice for consideration. The U.S. Customs Service and the Office of Export Enforcement are now conducting an investigation under the direction of the Department of Justice. In commenting on the draft of this report, DOD and the Departments of Commerce and State generally agreed with our findings. (See apps. III, IV, and V, respectively.) Each of these agencies also provided technical comments, which we have incorporated in the text where appropriate. McDonnell Douglas also provided comments on the report. McDonnell Douglas stated that it would consent to public release of information on export licenses protected by section 12(c) of the Export Administration Act if their comments were printed in the report. McDonnell Douglas commented that (1) the U.S. government knew that the Trunkliner program might be reduced, (2) all of the machine tools were needed for the Trunkliner program, and (3) McDonnell Douglas was under pressure to vacate the Columbus, Ohio, plant in the summer of 1994. After carefully reviewing their comments, as well as evidence we obtained from other sources, we have determined that no change was needed in our report. McDonnell Douglas’s comments are reprinted in their entirety in appendix VI, along with our evaluation of them. To assess the civil and military capabilities of the machine tools, we met with and reviewed analyses performed by officials at the Defense Intelligence Agency, Central Intelligence Agency, Defense Technology Security Administration, the Air Force’s National Air Intelligence Center, and the Department of Commerce. We also visited the Defense Logistics Agency’s refurbishing center for machine tools in Pennsylvania and McDonnell Douglas’s Long Beach, California, facility. Our report only contains limited information on the military significance of this equipment because much of the information is classified. To assess the export licensing process and compliance with license conditions, we developed a detailed case history covering what information was available to decisionmakers, the accuracy of this information, the reasoning behind the decisions that were made, and the actions taken by parties involved in this export. We interviewed officials at all levels at DOD, the Departments of Commerce and State, and the Central Intelligence Agency who had provided information and analyses or participated in the decision-making process of the original and amended licenses. These included officials at Commerce’s Bureau of Export Administration, the Defense Technology Security Administration, the Air Force, the Navy, the Office of the Joint Chief of Staff, the Defense Intelligence Agency, and the National Photographic Interpretation Center. We reviewed memorandums, correspondence, e-mail communication, and studies that pertained to these licenses as well as the case files themselves. We also met with State Department, Foreign Commercial Service, and Defense Attache officials at the U.S. Embassy, Beijing and visited the Shanghai Aviation Industrial Corporation in Shanghai. We attempted to ensure the accuracy of information by corroborating it with multiple sources. Because of the ongoing Department of Justice investigation, we did not interview McDonnell Douglas officials who were directly involved in the sale of the equipment, the licensing process, or the performance of inspections in China. Moreover, our request to meet with the Office of Export Enforcement investigator on this case was not approved. Our contact with McDonnell Douglas was limited to meetings with legal and technical staff in Long Beach on the capabilities of the machine tools. A McDonnell Douglas official was also present during our discussion with Shanghai Aviation officials. McDonnell Douglas did provide us with a written chronology covering its contacts with the U.S. government. This information was supplemented with information on the Trunkliner program and other related subjects. We did not attempt to meet with CATIC officials. We performed our review from March to October 1996 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 of this report until 10 days after its issue date. At that time, we will send copies of this report to other interested congressional committees; the Secretaries of Commerce, Defense, and State; and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please contact me at (202) 512-4383 if you have any questions concerning this report. Major contributors to this report are listed in appendix VII. McDonnell Douglas met with the Department of Commerce to discuss the possible sale and export of surplus equipment and machinery located at the plant in Columbus, Ohio. China National Aero-Technology Import and Export Corporation (CATIC) sent a letter to McDonnell Douglas stating that whether the procurement of equipment from Columbus “is successful shall have a big influence on the trunk liner programme and long term cooperation” between the Aviation Industries Corporation of China, a Chinese government defense industrial corporation, and McDonnell Douglas. CATIC agreed to purchase some of the surplus equipment from the Columbus, Ohio, facility. Agreement for sale of equipment in the Columbus facility to CATIC was executed. McDonnell Douglas and CATIC agreed in principle to amend the Trunkliner agreement. McDonnell Douglas submitted 24 export license applications for export to China of the equipment purchased from the Columbus, Ohio, facility. News article reported the shifting of the production of 20 Trunkliner aircraft from China to the United States. The Secretary of Commerce sent a letter to the Chinese Vice Premier of the State Council regarding the amendment to the Trunkliner program. Commerce issued formal notices that eight of McDonnell Douglas’s applications were being returned without action because the equipment did not require an individual validated license for export to China. Embassy officials in China sent a cable indicating receipt of written assurance from CATIC and noted that CATIC had not yet decided whether to locate the Machining Center near Beijing at a site to be determined or at the Hongxing Aircraft Company. Commerce issued 16 export licenses for export of the Columbus, Ohio, equipment to China. One license condition required the equipment be stored in one location until it was installed at the CATIC Machining Center. McDonnell Douglas and CATIC reached initial agreement to amend the contract to produce 20 aircraft in Long Beach, California, and 20 aircraft in China. McDonnell Douglas and CATIC reached a final agreement to modify the original Trunkliner agreement so that the first 20 aircraft would be produced in Long Beach, California with the remaining 20 aircraft to be produced in China. The equipment covered by 12 of the 16 export licenses was shipped to China. McDonnell Douglas officials investigated the location of the equipment in China and discovered that six pieces were stored at the Nanchang Aircraft Company and that the remainder was stored in Tianjin, China. McDonnell Douglas submitted a written report to Commerce and the Department of Defense (DOD) informing them of the results of its March 24, 1995, investigation. McDonnell Douglas briefed a U.S. government interagency group on the location of the equipment in China, advising Commerce that CATIC’s plans to build a new factory in Beijing had not materialized. McDonnell Douglas submitted export license applications requesting permission to allow the equipment diverted to Nanchang to remain at the Nanchang Aircraft Company. McDonnell Douglas reported to Commerce by telephone that it had discovered after visiting the Nanchang facility that the stretch press at Nanchang had been uncrated and placed inside a building, but the press was not operational and the building had no electricity. (continued) McDonnell Douglas was told that Commerce would not permit transfer of the equipment at Nanchang to the Nanchang Aircraft Company. McDonnell Douglas submitted 12 export license amendment requests to permit all the equipment in Tianjin and Nanchang to be transferred to the Shanghai Aviation Industrial Corporation in Shanghai. DOD sent a memorandum to Commerce asking for the diversion to be investigated. Commerce’s Office of Export Enforcement initiated official investigation. Commerce’s Los Angeles Field Office sent its investigative report to Commerce and recommended a temporary denial order against CATIC, suspending its export privileges. Commerce’s Office of Export Enforcement returned the recommendation, citing insufficient evidence. McDonnell Douglas advised the Department of Commerce that five of the six machines at Nanchang Aircraft Company had been moved from Nanchang to the facility in Shanghai. Commerce denied three of the four export license applications filed by McDonnell Douglas on August 1, 1995, requesting approval to transfer the equipment in Nanchang to Nanchang Aircraft Company; the fourth, pertaining to the stretch press, was returned to the applicant without action. Commerce approved with conditions the 12 export license amendment requests filed by McDonnell Douglas in October 1995, permitting transfer of all the equipment to the Shanghai Aviation Industrial Corporation in Shanghai. McDonnell Douglas inspected the one piece of equipment, the stretch press, remaining in Nanchang and observed that, although it was partially assembled, it was not connected to either electrical or hydraulic power sources and was not operational. Commerce contacted a U.S. aircraft company about the use of the stretch press for commercial helicopter component manufacturing in China. A U.S. Embassy official visited the Shanghai aviation facility and inspected the crated machine tools. A McDonnell Douglas letter sent to Commerce reported that the machines at the Shanghai aviation facility were in their original crates or were being removed and installed. Commerce granted McDonnell Douglas’s request to extend the time authorized to move the stretch press from 120 to 180 days. A McDonnell Douglas letter confirmed that two pieces of the stretch press had arrived in Shanghai. The remaining pieces of the stretch press arrived at the Shanghai aviation facility. GAO toured the Shanghai aviation facility and observed the stretch press and a new building being constructed reportedly to house the machine tools. Commerce placed 14 conditions on the export of McDonnell Douglas machine tools to CATIC. Later, it subsequently approved relocating the equipment to the Shanghai aviation facility with similar conditions. 1. The only parts programs authorized to be loaded and run in the numerical control device are those authorized for “Trunkline” aircraft and “offset” from McDonnell Douglas project as negotiated with McDonnell Douglas Corporation. 2. Where applicable, the numerical control device (machine control unit) must be modified to provide password protection. Password access is granted to authorized personnel only for authorized parts. 3. The machine tools approved for export must be installed at the CATIC Machining Center. McDonnell Douglas must provide written certification of delivery and installation to Commerce. Should the CATIC facility not be ready when the equipment arrives, the equipment will be stored in one facility. That facility will be subject to the inspection requirements stated in condition no. 5. McDonnell Douglas will notify the U.S. government of the location of the machine tools and notify it if the equipment is moved before the plant is completed. 4. The machines must have a metering device that measures operating time (e.g., a Hobbs Meter). The elapsed operating time will be read and logged into a production logbook on a daily basis. The logbook will be furnished to DOD and the Office of Export Enforcement on a quarterly basis. 5. After installation of the machines, McDonnell Douglas must submit quarterly reports for the next 2 years to the Office of Export Enforcement and DOD. The reports must include information as to whether the equipment is still being used for the purposes approved under the conditions of the licenses, and any discrepancies must be noted in the use of the timing device, password, or other security requirements. A McDonnell Douglas representative will have the right of access to inspect the equipment at any time, wherever located, during normal working hours and whenever the equipment is in operation. Should McDonnell Douglas wish to withdraw its personnel, it must notify the U.S. government well in advance. As agreed with arrangements with the Chinese government, a U.S. government representative will conduct a post-shipment verification visit to the facility after the equipment is installed. 6. None of the equipment may be resold, transferred, or reexported without prior written approval from the U.S. government. 7. This equipment is licensed exclusively for the civilian use of implementing the MD80/90 series McDonnell Douglas design for the development of the Chinese Trunkline and offset from McDonnell Douglas. 8. The equipment will not be used by or for military or nuclear end users or uses. 10. McDonnell Douglas must inform the end user of all conditions. 11. The licenses will be approved only after senior CATIC officials provide assurance that these machines will be used only by the end user for the end uses specified in these licenses. 12. Employees of or contractors to McDonnell Douglas who visit the CATIC facility will report on the use of the equipment as observed during their visits. Such reports will be available to Commerce. Those who observe unauthorized use of the equipment must report these discrepancies immediately to Commerce. 13. No parts produced by this equipment that are on the U.S. commodity control list for national security or nuclear nonproliferation reasons can be exported by CATIC to Libya, Cuba, or North Korea (country groups S or Z). 14. McDonnell Douglas must advise the U.S. government of any changes in the negotiated contract for 40 Trunkline aircraft. Notification must include any increase or reduction in aircraft or offset production requirements. If the McDonnell Douglas Trunkline contract is renegotiated below 40 aircraft, these machine tools could still only be used to produce parts for the Trunkline aircraft and McDonnell Douglas offsets. Any machining capacity freed up by a reduction in the production requirements will be viewed as excess capacity by the U.S. government and considered in any future Chinese machine tool licensing actions. The following are GAO’s comments on the Department of Commerce’s letter dated October 11, 1996. 1. The report accurately notes that the equipment was relocated before it was misused. The diversion of the machine tools to Nanchang, a facility engaged in military production, does not support Commerce’s statement that concerns over the military utility of this equipment was overstated. The Chinese were only able to partially install the stretch press and did not uncrate the other equipment because the diversion was discovered. 2. We have modified the text of the report to address this comment. 3. We agree that a court of law may ultimately examine whether a legal violation occurred and who was responsible and have modified the report accordingly. However, Commerce, in a letter to McDonnell Douglas, indicated that the movement of the equipment to Nanchang and the partial installation of the stretch press was a “direct violation of the conditions under which the equipment was originally authorized for export to China.” 4. Commerce stated that its top priority was to quickly relocate the equipment to an acceptable facility. As discussed in our report, all the equipment was relocated to an approved facility about 17 months after the diversion was first reported. Commerce also noted in its comments that it needed to continue the investigation in a way that did not adversely affect cooperation from McDonnell Douglas. As discussed in our report, Commerce’s enforcement office did not begin an official investigation until 6 months after the reported diversion and only after requested by DOD. During this time, Commerce’s licensing group worked with McDonnell Douglas on export license amendments to transfer the equipment to an acceptable facility. 5. This report is not restricted by section 12(c) of the Export Administration Act. McDonnell Douglas consented to waive its confidentiality rights under section 12(c) with respect to the information contained in this report. The following are GAO’s comments on the Department of State’s letter dated October 21, 1996. 1. We made changes to the report to clarify that five-axis machine tools were controlled by the Coordinating Committee for Multilateral Export Controls to other countries in addition to China. 2. We made changes to the report to reflect State’s comments. The following are GAO’s comments on McDonnell Douglas’s letter dated November 12, 1996. 1. McDonnell Douglas makes this generalized statement several times in its letter. However, we have carefully reviewed its specific comments as well as the evidence we obtained from multiple sources and continue to believe that the presentation in the report is accurate. 2. Although the amendment to the Trunkliner agreement was signed in November 1994, Commerce documents clearly indicate that an agreement in principle to amend the contract had been reached as early as May 1994. DOD licensing officials first learned of the possible reduction in the Trunkliner program in July 1994 from press reports, not McDonnell Douglas. However, McDonnell Douglas in an August letter to DOD, assured DOD that it had a firm binding contract for the coproduction of 40 aircraft. 3. The reduction in the number of aircraft to be built in China is relevant to CATIC’s need for the machine tools. The amendment to the Trunkliner agreement calling for the direct purchase of 20 U.S.-built aircraft meant that most of the parts for these aircraft would come from existing McDonnell Douglas suppliers, not from new production facilities to be built in China. According to a government official, one of the reasons for the contract amendment was to speed up deliveries of aircraft to Chinese airlines rather than wait until the Chinese Trunkliner factories were able to produce complete aircraft. By August 1996, deliveries of the 20 U.S.-built aircraft had already begun under this amended contract even though none of the exported machine tools were yet operational. The report acknowledges that McDonnell Douglas noted in its export applications that the machine tools would also be used by CATIC to perform related offset work (i.e., production of parts for U.S.-built McDonnell Douglas aircraft). However, during the licensing review process, neither McDonnell Douglas nor the reviewing agencies took the position that offset work was the major justification for approval of these export license applications. 4. The observation that not all of the equipment was needed to support Trunkliner aircraft production is supported by more than just the observation that existing Trunkliner factories had stretch presses with sufficient capacity to perform Trunkliner work. As noted in the report, CATIC, McDonnell Douglas’ partner in producing Trunkliner aircraft in China, diverted not only the stretch press but also one five-axis machine tool, three three-axis machine tools, and one coordinate measuring machine to the Nanchang Aircraft Company—a factory not involved in Trunkliner production. McDonnell Douglas then asked the Commerce Department to allow these machine tools to remain at Nanchang for production unrelated to the Trunkliner program. The diversion of the tools to Nanchang and the submission of license amendments to permit the tools to remain in a non-Trunkliner factory do not support the statement that all of these tools were required for Trunkliner production as McDonnell Douglas indicated during the export application process. 5. We agree that McDonnell Douglas was to vacate the Ohio plant in the summer of 1994. However, as noted in the report, McDonnell Douglas told the reviewing agencies that the Air Force, not McDonnell Douglas, was requiring it to leave the plant in Ohio by July 5, 1994, and it would be forced to pay high storage fees for the machine tools after that date. Further, in August 1994, McDonnell Douglas told DOD that “storage is running at $45,000 per month” and urged action on the licenses so that “mounting storage costs can be curtailed.” As noted in the report and acknowledged by McDonnell Douglas in its comments, McDonnell Douglas, not the Air Force, set the dates it had to leave the plant in Ohio. Further, as noted in our report, beginning in September 1994, the Air Force actually charged the company about $7,500 per month for storage fees. Karen S. Zuckerstein David C. Trimble Anne-Marie Lasowski John Neumann 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 circumstances surrounding the export of machine tools by the McDonnell Douglas Corporation to the China National Aero-Technology Import and Export Corporation (CATIC), focusing on: (1) the military and civil applications of the equipment and whether these military applications are important to China's military modernization plans; (2) the process for approving the licenses and how the process addressed the risks associated with this export; and (3) whether export control license conditions were violated and, if so, how the U.S. government responded. GAO found that: (1) the machine tools exported by McDonnell Douglas to China have military and commercial applications; (2) these machine tools had been used in the United States to produce parts for military systems but were exported to manufacture parts for commercial passenger aircraft; (3) China needs machine tools to upgrade both its military and commercial aircraft production capabilities; (4) after a lengthy interagency review, the Department of Commerce approved the license applications with numerous conditions designed to mitigate the risk of diversion; (5) during the review period, concerns were raised about the need for the equipment to support Chinese aircraft production, the reliability of the end user, and the capabilities of the equipment being exported; (6) senior officials at Commerce, the Departments of State, Energy, and Defense, and the Arms Control and Disarmament Agency agreed on the final decision to approve these applications; (7) some of these U.S. exported machine tools were subsequently diverted to a Chinese facility engaged in military production; (8) this diversion was contrary to key conditions in the licenses that required equipment to be used for the Trunkliner program and be stored in one location until the CATIC Machining Center was built; (9) six weeks after the reported diversion, Commerce suspended licenses for four machine tools not yet shipped to China; (10) Commerce subsequently denied McDonnell Douglas's request to allow the diverted machine tools to remain in the unauthorized location for use in civilian production; (11) Commerce approved the transfer of the machine tools to the Shanghai aviation facility, which is responsible for final assembly of Trunkliner aircraft; (12) the diverted equipment was relocated to Shanghai before it could be misused; (13) some of the amended license conditions apply only after the equipment is installed, which has not yet occurred; (14) Commerce's enforcement office did not formally investigate the export control violations until 6 months after they were first reported; and (15) the U.S. Customs Service and Commerce's enforcement office are now conducting a criminal investigation under the direction of the Department of Justice. |
All six projects serve adults who are economically disadvantaged, with a range of reasons why they have been unable to get and keep a job that would allow them to become self-sufficient. Many participants lack a high school diploma or have limited basic skills or English proficiency; have few, if any, marketable job skills; have a history of substance abuse; or have been victims of domestic violence. The projects we visited had impressive results. Three of the sites had placement rates above 90 percent—two placed virtually all those who completed their training. The other three projects placed two-thirds or more of those who completed the program. The sites differ in their funding sources, skills training approaches, and client focus. For example: We visited two sites that are primarily federally funded and target clients eligible under the Job Training Partnership Act (JTPA) and Job Opportunities and Basic Skills (JOBS) program. These sites are Arapahoe County Employment and Training in Aurora, Colorado, which is a suburb of Denver, and The Private Industry Council (TPIC) in Portland, Oregon. Both of these sites assess clients and then follow a case management approach, linking clients with vocational training available through community colleges or vocational-technical schools. The Encore! program in Port Charlotte, Florida, serves single parents, displaced homemakers, and single pregnant women. Encore!’s 6-week workshop and year-round support prepare participants for skill training. It is primarily funded by a federal grant under the Perkins Act and is strongly linked with the Charlotte Vocational Technical Center (Vo-Tech). The Center for Employment Training (CET) in Reno, Nevada, focuses on three specific service-related occupations and serves mainly Hispanic farmworkers. Participants may receive subsidized training from sources such as Pell grants, JTPA state funds, and the JTPA Farmworker Program, as well as grants from the city of Reno. Focus: HOPE, in Detroit, Michigan, also serves inner-city minorities but emphasizes development of manufacturing-related skills. Its primary funding source in 1994 was a state economic development grant. STRIVE (Support and Training Results in Valuable Employment), in New York City’s East Harlem, primarily serves inner-city minorities and focuses on developing in clients a proper work attitude needed for successful employment rather than on providing occupational skills training. STRIVE is privately funded through a grant from the Clark Foundation, which requires a two-for-one dollar match from other sources, such as local employers. Projects also differ in other ways, such as the way project staff interact with clients—customizing their approach to what they believe to be the needs of their participants. For example, STRIVE’s approach is strict, confrontational, and “no-nonsense” with the East Harlem men and women in their program. In contrast, Encore! takes a more nurturing approach, attempting to build the self-esteem of the women, many of them victims of mental or physical abuse, who participate in the program in rural Florida. One important feature of these projects’ common strategy is ensuring that clients are committed to participating in training and getting a job. Each project tries to secure client commitment before enrollment and continues to encourage that commitment throughout training. Project staff at several sites believed that the voluntary nature of their projects is an important factor in fostering strong client commitment. Just walking through the door, however, does not mean that a client is committed to the program. Further measures to encourage, develop, and require this commitment are essential. All the projects use some of these measures. Some of the things that projects do to ensure commitment are (1) making sure clients know what to expect, so they are making an informed choice when they enter; (2) creating opportunities for clients to screen themselves out if they are not fully committed; and (3) requiring clients to actively demonstrate the seriousness of their commitment. To give clients detailed information about project expectations, projects use orientation sessions, assessment workshops, and one-on-one interviews with project staff. Project officials say that they do this to minimize any misunderstandings that could lead to client attrition. Officials at both STRIVE and Arapahoe told us that they do not want to spend scarce dollars on individuals who are not committed to completing their program and moving toward full-time employment; they believe that it is important to target their efforts to those most willing to take full advantage of the project’s help. For example, at STRIVE’s preprogram orientation session, staff members give potential clients a realistic program preview. STRIVE staff explain their strict requirements for staying in the program: attending every day—on time, displaying an attitude open to change and criticism, and completing all homework assignments. At the end of the session, STRIVE staff tell potential clients to take the weekend to think about whether they are serious about obtaining employment and, if so, to return on Monday to begin training. STRIVE staff told us that typically 10 percent of those who attend the orientation do not return on Monday. Both CET and Focus: HOPE provide specific opportunities for clients to screen themselves out. They both allow potential clients to try out their training program at no charge to ensure the program is suitable for them. Focus: HOPE reserves the right not to accept potential clients on the basis of their attitude, but it does not routinely do this. Instead, staff will provisionally accept the client into one of the training programs, but put that client on notice that his or her attitude will be monitored. All six projects require clients to actively demonstrate the seriousness of their commitment to both training and employment. For example, all projects require clients to sign an agreement of commitment outlining the client’s responsibilities while in training and all projects monitor attendance throughout a client’s enrollment. In addition, some project officials believed that requiring clients to contribute to training is important to encouraging commitment. Focus: HOPE requires participants—even those receiving cash subsidies—to pay a small weekly fee for their training, typically $10 a week. A Focus: HOPE administrator explained that project officials believe that students are more committed when they are “paying customers,” and that this small payment discourages potential participants who are not seriously committed to training. All the projects emphasize removing employment barriers as a key to successful outcomes. They define a barrier as anything that precludes a client from participating in and completing training, as well as anything that could potentially limit a client’s ability to obtain and maintain a job. For example, if a client lacks appropriate basic skills, then providing basic skills training can allow him or her to build those skills and enter an occupational training program. Similarly, if a client does not have adequate transportation, she or he will not be able to get to the training program. Because all the projects have attendance requirements, a lack of adequate child care would likely affect the ability of a client who is a parent to successfully complete training. Moreover, if a client is living in a domestic abuse situation, it may be difficult for that client to focus on learning a new skill or search for a job. The projects use a comprehensive assessment process to identify the particular barriers each client faces. This assessment can take many forms, including orientation sessions, workshops, one-on-one interviews, interactions with project staff, or a combination of these. For example, at TPIC’s assessment workshop, clients complete a five-page barrier/needs checklist on a wide variety of issues, including food, housing, clothing, transportation, financial matters, health, and social/support issues. At the end of this workshop, clients must develop a personal statement and a self-sufficiency plan that the client and case manager use as a guide for addressing barriers and for helping the client throughout training. Encore! and Arapahoe have similar processes for identifying and addressing barriers that clients face. Rather than relying on a formal workshop or orientation process, CET identifies clients’ needs through one-on-one interviews with program staff when a client enters the program. Throughout the training period, instructors, the job developer, and other project staff work to provide support services and address the client’s ongoing needs. All the projects arrange for clients to get the services they need to address barriers, but—because of the wide range of individual client needs—none provides all possible services on-site. For example, although all six projects recognize the importance of basic skills training, they arrange for this training in different ways. Arapahoe contracts out for basic skills training for clients, while CET, Encore!, and Focus: HOPE provide this service on-site and TPIC and STRIVE refer clients out to community resources. Only Focus: HOPE provides on-site child care; however, all five other projects help clients obtain financial assistance to pay for child care services or refer clients to other resources. Because some of the projects attract many clients who have similar needs, these projects provide certain services on-site to better tailor their services to that specific population. For example, because it serves Hispanic migrant farmworkers with limited English proficiency, CET provides an on-site English-as-a-second-language program. Likewise, because a major barrier for many of Encore!’s clients is low self-esteem resulting from mental and/or physical abuse, Encore! designed its 6-week workshop to build self-esteem and address the barriers that these women face so that they are then ready to enter occupational training. Each project we visited emphasizes employability skills training. Because so many of their clients have not had successful work experiences, they often do not have the basic knowledge others might take for granted about how to function in the workplace. They need to learn what behaviors are important and how to demonstrate them successfully. These include getting to work regularly and on time; dressing appropriately; working well with others; accepting constructive feedback; resolving conflicts appropriately; and, in general, being a reliable, responsible, self-disciplined employee. Each project coaches students in employability skills through on-site workshops or one-on-one sessions. For example, CET provides a human development program that addresses such issues as life skills, communication strategies, and good work habits. Similarly, Arapahoe helps each client develop employment readiness competencies through a workshop or one-on-one with client case managers. Some of the projects also develop employability skills within the context of occupational skills training, with specific rules about punctuality, attendance, and, in some cases, appropriate clothing consistent with the occupation for which clients are training. STRIVE concentrates almost exclusively on employability skills and, in particular, attitudinal training. This project has a very low tolerance for behaviors such as being even a few minutes late for class, not completing homework assignments, not dressing appropriately for the business world, and not exhibiting the appropriate attitude. We observed staff dismissing clients from the program for a violation of any of these elements, telling them they may enroll in another offering of the program when they are ready to change their behavior. Program staff work hard to rid clients of their attitude problems and “victim mentality”—that is, believing that things are beyond their control—and instill in them a responsibility for themselves, as well as make them understand the consequences of their actions in the workplace. All the projects have strong links with the local labor market. Five of the six projects provide occupational skills training, using information from the local labor market to guide their selection of training options to offer clients. These projects focus on occupations that the local labor market will support. Project staff strive to ensure that the training they provide will lead to self-sufficiency—jobs with good earnings potential as well as benefits. In addition, all but one of the six projects use their links to local employers to assist clients with job placement. While their approaches to occupational training and job placement differ, the common thread among the projects is their ability to interpret the needs of local employers and provide them with workers who fit their requirements. All five projects that provide occupational training are selective in the training options that they offer clients, focusing on occupational areas that are in demand locally. For example, CET and Focus: HOPE have chosen to limit their training to one or a few very specific occupational areas that they know the local labor market can support. Focus: HOPE takes advantage of the strong automotive manufacturing base in the Detroit area by offering training in a single occupation serving the automotive industry—machining. With this single occupational focus, Focus: HOPE concentrates primarily on meeting the needs of the automotive industry and the local firms that supply automotive parts. Students are instructed by skilled craftspeople; many senior instructors at Focus: HOPE are retirees who are passing on the knowledge they acquired during their careers. The machines used in training are carefully chosen to represent those that are available in local machine shops—both state-of-the-art and older, less technically sophisticated equipment. Job developers sometimes visit potential work sites, paying close attention to the equipment in use. This information is then used to ensure a good match between client and employer. While offering a wide range of training options, Vo-Tech, which trains Encore! participants, is linked to the local labor market, in part by its craft advisory committees. These committees involve 160 businesses in determining course offerings and curricula. Vo-Tech recently discontinued its bank teller program shortly after a series of local bank mergers decreased demand for this skill. It began offering an electronics program when that industry started expansion in the Port Charlotte area. Vo-Tech also annually surveys local employers for feedback on its graduates’ skills and abilities, using the feedback to make changes to its programs. When feedback from local employers in one occupation indicated that Vo-Tech graduates were unable to pass state licensing exams, the school terminated the instructors and hired new staff. All the projects assist clients in their job search. Five of the six projects had job developers or placement personnel who work to understand the needs of local employers and provide them with workers who fit their requirements. For example, at Focus: HOPE the job developers sometimes visit local employers to discuss their required skill needs. Virtually all graduates of Focus: HOPE are hired into machinist jobs in local firms. The placement staff that works with Encore! graduates noted that there are more positions to fill than clients to fill them. They believe that because of their close ties with the community and the relevance of their training program they have established a reputation of producing well-trained graduates. This reputation leads employers to trust their referrals. Mr. Chairman, that concludes my prepared statement. At this time I will be happy to answer any questions you or other members of the Subcommittee may have. For information on this testimony, please call Sigurd R. Nilsen, Assistant Director, at (202) 512-7003; Sarah L. Glavin, Senior Economist, at (202) 512-7180; Denise D. Hunter, Senior Evaluator, at (617) 565-7536; or Betty S. Clark, Senior Evaluator, at (617) 565-7524. Other major contributors included Benjamin Jordan and Dianne Murphy Blank. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the merits of 6 highly successful employment training programs for economically disadvantaged adults. GAO found that the programs: (1) serve adults with little high school education, limited basic skills and English language proficiency, few marketable job skills, and past histories of substance abuse and domestic violence; (2) have a fairly successful placement rate, with three of the programs placing 90 percent of their clientele; (3) ensure that the clients are committed to training and getting a good job, and as a result, require them to sign an agreement of commitment outlining their responsibilities; (4) provide child care, transportation, and basic skills training to enable clients to complete program training and acquire employment; (5) improve their clients employability through on-site workshops and one-on-one sessions; (6) have strong links with the local labor market and use information from the local market to guide training options; and (7) aim to provide their clients with training that will lead to higher earnings, good benefits, and overall self-sufficiency. |
Under the Clean Water Act, EPA is responsible for publishing water quality criteria that establish thresholds at which contamination— including waterborne pathogens—may threaten human health. States are required to develop standards, or legal limits, for these pathogens by either adopting EPA’s recommended water quality criteria or other criteria that EPA determines are equally protective of human health. The states then use these pathogen standards to assess water quality at their recreational beaches. The BEACH Act amended the Clean Water Act to require the 35 eligible states and territories to update their recreational water quality standards using EPA’s 1986 criteria for pathogen indicators. In addition, the BEACH Act required EPA to (1) complete studies on pathogens in coastal recreational waters and how they affect human health, including developing rapid methods of detecting pathogens by October 2003, and (2) publish new or revised water quality criteria by October 2005, to be reviewed and revised as necessary every 5 years thereafter. The BEACH Act also authorized EPA to award grants to states, localities, and tribes to develop comprehensive beach monitoring and public notification programs for their recreational beaches. To be eligible for BEACH Act grants, states are required to (1) identify their recreational beaches, (2) prioritize their recreational beaches for monitoring based on their use by the public and the risk to human health, and (3) establish a public notification program. EPA grant criteria give states some flexibility on the frequency of monitoring, methods of monitoring, and processes for notifying the public when pathogen indicators exceed state standards, including whether to issue health advisories or close beaches. Although the BEACH Act authorized EPA to provide $30 million in grants annually for fiscal years 2001 through 2005, since fiscal year 2001, congressional conference reports accompanying EPA’s appropriations acts have directed about $10 million annually for BEACH Act grants and EPA has followed this congressional direction when allocating funds to the program. EPA has made progress implementing the BEACH Act’s provisions but has missed statutory deadlines for two critical requirements. Of the nine actions required by the BEACH Act, EPA has taken action on the following seven: Propose water quality standards and criteria—The BEACH Act required each state with coastal recreation waters to incorporate EPA’s published criteria for pathogens or pathogen indicators, or criteria EPA considers equally protective of human health, into their state water quality standards by April 10, 2004. The BEACH Act also required EPA to propose regulations setting forth federal water quality standards for those states that did not meet the deadline. On November 16, 2004, EPA published in the Federal Register a final rule promulgating its 1986 water quality standards for E. coli and enterococci for the 21 states and territories that had not adopted water quality criteria that were as protective of human health as EPA’s approved water quality criteria. According to EPA, all 35 states with coastal recreational waters are now using EPA’s 1986 criteria, compared with the 11 states that were using these criteria in 2000. Provide BEACH Act grants—The BEACH Act authorized EPA to distribute annual grants to states, territories, tribes and, in certain situations, local governments to develop and implement beach monitoring and notification programs. Since 2001, EPA has awarded approximately $51 million in development and implementation grants for beach monitoring and notification programs to all 35 states. Alaska is the only eligible state that has not yet received a BEACH Act implementation grant because it is still in the process of developing a monitoring and public notification program consistent with EPA’s grant performance criteria. EPA expects to distribute approximately $10 million for the 2007 beach season subject to the availability of funds. Publish beach monitoring guidance and performance criteria for grants—The BEACH Act required EPA to develop guidance and performance criteria for beach monitoring and assessment for states receiving BEACH Act grants by April 2002. After a year of consultations with coastal states and organizations, EPA responded to this requirement in 2002 by issuing its National Beach Guidance and Required Performance Criteria for Grants. To be eligible for BEACH Act grants, EPA requires recipients to develop (1) a list of beaches evaluated and ranked according to risk, (2) methods for monitoring water quality at their beaches, such as when and where to conduct sampling, and (3) plans for notifying the public of the risk from pathogen contamination at beaches, among other requirements. Develop a list of coastal recreational waters—The BEACH Act required EPA to identify and maintain a publicly available list of coastal recreational waters adjacent to beaches or other publicly accessible areas, with information on whether or not each is subject to monitoring and public notification. In March 2004, EPA published its first comprehensive National List of Beaches based on information that the states had provided as a condition for receiving BEACH Act grants. The list identified 6,099 coastal recreational beaches, of which 3,472, or 57 percent, were being monitored. The BEACH Act also requires EPA to periodically update its initial list and publish revisions in the Federal Register. However, EPA has not yet published a revised list, in part because some states have not provided updated information. Develop a water pollution database—The BEACH Act required EPA to establish, maintain, and make available to the public an electronic national water pollution database. In May 2005, EPA unveiled “eBeaches,” a collection of data pulled from multiple databases on the location of beaches, water quality monitoring, and public notifications of beach closures and advisories. This information has been made available to the public through an online tool called BEACON (Beach Advisory and Closing Online Notification). EPA officials acknowledge that eBeaches has had some implementation problems, including periods of downtime when states were unable to submit their data, and states have had difficulty compiling the data and getting it into EPA’s desired format. EPA is working to centralize its databases so that states can more easily submit information and expects the data reporting will become easier for states as they further develop their system. Provide technical assistance on floatable materials—The BEACH Act required EPA to provide technical assistance to help states, tribes, and localities develop their own assessment and monitoring procedures for floatable debris in coastal recreational waters. EPA responded by publishing guidance titled Assessing and Monitoring Floatable Debris in August 2002. The guidance provided examples of monitoring and assessment programs that have addressed the impact of floatable debris and examples of mitigation activities to address floatable debris. Provide a report to Congress on status of BEACH Act implementation— The BEACH Act required EPA to report to Congress 4 years after enactment of the act and every 4 years thereafter on the status of implementation. EPA completed its first report for Congress, Implementing the BEACH Act of 2000: Report to Congress in October 2006, which was 2 years after the October 2004 deadline. EPA officials noted that they missed the deadline because they needed additional time to include updates on current research and states’ BEACH Act implementation activities and to complete both internal and external reviews. EPA has not yet completed the following two BEACH Act requirements: Conduct epidemiological studies—The BEACH Act required EPA to publish new epidemiological studies concerning pathogens and the protection of human health for marine and freshwater by April 10, 2002, and to complete the studies by October 10, 2003. The studies were to: (1) assess potential human health risks resulting from exposure to pathogens in coastal waters; (2) identify appropriate and effective pathogen indicator(s) to improve the timely detection of pathogens in coastal waters; (3) identify appropriate, accurate, expeditious, and cost-effective methods for detecting the presence of pathogens; and (4) provide guidance for state application of the criteria. EPA initiated its multiyear National Epidemiological and Environmental Assessment of Recreational Water Study in 2001 in collaboration with the Centers for Disease Control and Prevention. The first component of this study was to develop faster pathogen indicator testing procedures. The second component was to further clarify the health risk of swimming in contaminated water, as measured by these faster pathogen indicator testing procedures. While EPA completed these studies for freshwater––showing a promising relationship between a faster pathogen indicator and possible adverse health effects from bacterial contamination––it has not completed the studies for marine water. EPA initiated marine studies in Biloxi, Mississippi, in the summer of 2005, 3 years past the statutory deadline for beginning this work, but the work was interrupted by Hurricane Katrina. EPA initiated two additional marine water studies in the summer of 2007. Publish new pathogen criteria—The BEACH Act required EPA to use the results of its epidemiological studies to identify new pathogen indicators with associated criteria, as well as new pathogen testing measures by October 2005. However, since EPA has not completed the studies on which these criteria were to be based, this task has been delayed. In the absence of new criteria for pathogens and pathogen indicators, states continue to use EPA’s 1986 criteria to monitor their beaches. An EPA official told us that EPA has not established a time line for completing these two remaining provisions of the BEACH Act but estimates it may take an additional 4-5 years. One EPA official told us that the initial time frames in the act may not have been realistic. EPA’s failure to complete studies on the health effects of pathogens for marine waters and failure to publish revised water quality criteria for pathogens and pathogen indicators prompted the Natural Resources Defense Council to file suit against EPA on August 2, 2006, for failing to comply with the statutory obligations of the BEACH Act. To ensure that EPA complies with the requirements laid out in the BEACH Act, we recommended that it establish a definitive time line for completing the studies on pathogens and their effects on human health, and for publishing new or revised water quality criteria for pathogens and pathogen indicators. While EPA distributed approximately $51 million in BEACH Act grants between 2001 and 2006 to the 35 eligible states and territories, its grant distribution formula does not adequately account for states’ widely varied beach monitoring needs. When Congress passed the BEACH Act in 2000, it authorized $30 million in grants annually, but the act did not specify how EPA should distribute grants to eligible states. EPA determined that initially $2 million would be distributed equally to all eligible states to cover the base cost of developing water quality monitoring and notification programs. EPA then developed a distribution formula for future annual grants that reflected the BEACH Act’s emphasis on beach use and risk to human health. EPA’s funding formula includes the following three factors: Length of beach season—EPA selected beach season length as a factor because states with longer beach seasons would require more monitoring. Beach use—EPA selected beach use as a factor because more heavily used beaches would expose a larger number of people to pathogens, increasing the public health risk and thus requiring more monitoring. EPA used coastal population as a proxy for beach use because information on the number of beach visitors was not consistently available across all the states. Beach miles—EPA selected beach miles because states with longer shorelines would require more monitoring. EPA used shoreline miles, which may include industrial and other nonpublicly accessible areas, as a proxy for beach miles because verifiable data for beach miles was not available. Once EPA determined which funding formula factors to use, EPA officials weighted the factors. EPA intended that the beach season factor would provide the base funding and would be augmented by the beach use and beach mile factors. EPA established a series of fixed amounts that correspond to states’ varying lengths of beach seasons to cover the general expenses associated with a beach monitoring program. For example, EPA estimated that a beach season of 3 or fewer months would require approximately two full-time employees costing $150,000, while states with beach seasons greater than 6 months would require $300,000. Once the allotments for beach season length were distributed, EPA determined that 50 percent of the remaining funds would be distributed according to states’ beach use, and the other 50 percent would be distributed according to states’ beach miles, as shown in table 1. EPA officials told us that, using the distribution formula above and assuming a $30 million authorization, the factors were to have received relatively equal weight in calculating states’ grants and would have resulted in the following allocation: beach season—27 percent (about $8 million); beach use—37 percent (about $11 million); and beach miles—37 percent (about $11 million). However, because funding levels for BEACH Act grants have been about $10 million each year, once the approximately $8 million, of the total available for grants, was allotted for beach season length, this left only $2 million, instead of nearly $22 million, to be distributed equally between the beach use and beach miles factors. This resulted in the following allocation: beach season—82 percent (about $8 million); beach use—9 percent (about $1 million); and beach miles—9 percent (about $1 million). Because beach use and beach miles vary widely among the states, but account for a much smaller portion of the distribution formula, BEACH Act grant amounts may vary little between states that have significantly different shorelines or coastal populations. For example, across the Great Lakes, there is significant variation in coastal populations and in miles of shoreline, but current BEACH Act grant allocations are relatively flat. As a result, Indiana, which has 45 miles of shoreline and a coastal population of 741,468, received about $205,800 in 2006, while Michigan, which has 3,224 miles of shoreline and a coastal population of 4,842,023, received about $278,450 in 2006. Similarly, the current formula gives localities that have a longer beach season and significantly smaller coastal populations an advantage over localities that have a shorter beach season but significantly greater population. For example, Guam and American Samoa with 12 month beach seasons and coastal populations of less than 200,000 each receive larger grants than Maryland and Virginia, with 4 month beach seasons and coastal populations of 3.6 and 4.4 million, respectively. If EPA reweighted the factors so that they were still roughly equal given the $10 million allocation, we believe that BEACH Act grants to the states would better reflect their needs. Consequently, we recommended that if current funding levels remain the same, that the agency should revise the formula for distributing BEACH Act grants to better reflect the states’ varied monitoring needs by reevaluating the formula factors to determine if the weight of the beach season factor should be reduced and if the weight of the other factors, such as beach use and beach miles should be increased. States’ use of BEACH Act grants to develop and implement beach monitoring and public notification programs has increased the number of beaches being monitored and the frequency of monitoring. However, states vary considerably in the frequency in which they monitor beaches, the monitoring methods used, and the means by which they notify the public of health risks. Specifically, 34 of the 35 eligible states have used BEACH Act grants to develop beach monitoring and public notification programs; and the remaining state, Alaska, is in the process of setting up its program. However, these programs have been implemented somewhat inconsistently by the states which could lead to inconsistent levels of public health protection at beaches in the United States. In addition, while the Great Lakes and other eligible states have been able to increase their understanding of the scope of contamination as a result of BEACH Act grants, the underlying causes of this contamination usually remain unresolved, primarily due to a lack of funding. For example, EPA reports that nationwide when beaches are found to have high levels of contamination, the most frequent source of contamination listed as the cause is “unknown”. BEACH Act officials from six of the eight Great Lakes states that we reviewed—Illinois, Michigan, Minnesota, New York, Ohio, and Wisconsin—reported that the number of beaches being monitored in their state has increased since the passage of the BEACH Act in 2000. For example, in Minnesota, state officials reported that only one beach was being monitored prior to the BEACH Act, and there are now 39 beaches being monitored in three counties. In addition, EPA data show that, in 1999, the number of beaches identified in the Great Lakes was about 330, with about 250 being monitored. In 2005, the most recent year for which data are available, the Great Lakes states identified almost 900 beaches of which about 550 were being monitored. In addition to an increase in the number of beaches being monitored, the frequency of monitoring at many of the beaches in the Great Lakes has increased. We estimated that 45 percent of Great Lakes beaches increased the frequency of their monitoring since the passage of the BEACH Act. For example, Indiana officials told us that prior to the BEACH Act, monitoring was done a few times per week at their beaches but now monitoring is done 5-7 days per week. Similarly, local officials in one Ohio county reported that they used to test some beaches along Lake Erie twice a month prior to the BEACH Act but now they test these beaches once a week. States outside of the Great Lakes region have reported similar benefits of receiving BEACH Act grants. For example, state officials from Connecticut, Florida, and Washington reported increases in the number of beaches they are now able to monitor or the frequency of the monitoring they are now able to conduct. Because of the information available from BEACH Act monitoring activities, state and local beach officials are now better able to determine which of their beaches are more likely to be contaminated, which are relatively clean, and which may require additional monitoring resources to help them better understand the levels of contamination that may be present. For example, state BEACH Act officials reported that they now know which beaches are regularly contaminated or are being regularly tested for elevated levels of contamination. We determined that officials at 54 percent of Great Lakes beaches we surveyed believe that their ability to make advisory and closure decisions has increased or greatly increased since they initiated BEACH Act water quality monitoring programs. However, because EPA’s grant criteria and the BEACH Act give states and localities some flexibility in implementing their programs we also identified significant variability among the Great Lakes states beach monitoring and notification programs. We believe that this variability is most likely also occurring in other states as well because of the lack of specificity in EPA’s guidance. Specifically, we identified the following differences in how the Great Lake states have implemented their programs. Frequency of monitoring. Some Great Lakes states are monitoring their high-priority beaches almost daily, while other states monitor their high- priority beaches as little as one to two times per week. The variation in monitoring frequency in the Great Lakes states is due in part to the availability of funding. For example, state officials in Michigan and Wisconsin reported insufficient funding for monitoring. Methods of sampling. Most of the Great Lakes states and localities use similar sampling methods to monitor water quality at local beaches. For example, officials at 79 percent of the beaches we surveyed reported that they collected water samples during the morning, and 78 percent reported that they always collected water samples from the same location. Collecting data at the same time of day and from the same site ensures more consistent water quality data. However, we found significant variations in the depth at which local officials in the Great Lakes states were taking water samples. According to EPA, depth is a key determinant of microbial indicator levels. EPA’s guidance recommends that beach officials sample at the same depth—knee depth, or approximately 3-feet deep—for all beaches to ensure consistency and comparability among samples. Great Lakes states varied considerably in the depths at which they sampled water, with some sampling occurring at 1-6 inches and other sampling at 37-48 inches. Public notification. Local officials in the Great Lakes differ in the information they use to decide whether to issue health advisories or close beaches when water contamination exceeds EPA criteria and in how to notify the public of their decision. These differences reflect states’ varied standards for triggering an advisory, closure, or both. Also, we found that states’ and localities’ means of notifying the public of health advisories or beach closures vary across the Great Lakes. Some states post water quality monitoring results on signs at beaches; some provide results on the Internet or on telephone hotlines; and some distribute the information to local media. To address this variability in how the states are implementing their BEACH Act grant funded monitoring and notification programs, we recommended that EPA provide states and localities with specific guidance on monitoring frequency and methods and public notification. Further, even though BEACH Act funds have increased the level of monitoring being undertaken by the states, the specific sources of contamination at most beaches are not known. For example, we determined that local officials at 67 percent of Great Lakes’ beaches did not know the sources of bacterial contamination causing water quality standards to be exceeded during the 2006 beach season and EPA officials confirmed that the primary source of contamination at beaches nationwide is reported by state officials as “unknown.” For example, because state and local officials in the Great Lakes states do not have enough information on the specific sources of contamination and generally lack funds for remediation, most of the sources of contamination at beaches have not been addressed. Local officials from these states indicated that they had taken actions to address the sources of contamination at an estimated 14 percent of the monitored beaches. EPA has concluded that BEACH Act grant funds generally may be used only for monitoring and notification purposes. While none of the eight Great Lakes state officials suggested that the BEACH Act was intended to help remediate the sources of contamination, several state officials believe that it may be more beneficial to use BEACH Act grants to identify and remediate sources of contamination rather than just continue to monitor water quality at beaches and notify the public when contamination occurs. Local officials also reported a need for funding to identify and address sources of contamination. Furthermore, at EPA’s National Beaches Conference in October 2006, a panel of federal and academic researches recommended that EPA provide the states with more freedom on how they spend their BEACH Act funding. To address this issue, we recommended that as the Congress considers reauthorization of the BEACH Act, that it should consider providing EPA some flexibility in awarding BEACH Act grants to allow states to undertake limited research to identify specific sources of contamination at monitored beaches and certain actions to mitigate these problems, as specified by EPA. _ _ _ _ _ In conclusion, Mr. Chairman, EPA has made progress in implementing many of the BEACH Act’s requirements but it may still be several years before EPA completes the pathogen studies and develops the new water quality criteria required by the act. Until these actions are completed, states will have to continue to use existing outdated methods. In addition, the formula EPA developed to distribute BEACH Act grants to the states was based on the assumption that the program would receive its fully authorized allocation of $30 million. Because the program has not received full funding and EPA has not adjusted the formula to reflect reduced funding levels, the current distribution of grants fails to adequately take into account the varied monitoring needs of the states. Finally, as evidenced by the experience of the Great Lakes states, the BEACH Act has helped states increase their level of monitoring and their knowledge about the scope of contamination at area beaches. However, the variability in how the states are conducting their monitoring, how they are notifying the public, and their lack of funding to address the source of contamination continues to raise concerns about the adequacy of protection that is being provided to beachgoers. This concludes our prepared statement, we would be happy to respond to any questions you may have. If you have any questions about this statement, please contact Anu K. Mittal @ (202) 512-3841 or mittala@gao.gov. Other key contributors to this statement include Ed Zadjura (Assistant Director), Eric Bachhuber, Omari Norman, and Alison O'Neill. 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. | Waterborne pathogens can contaminate water and sand at beaches and threaten human health. Under the Beaches Environmental Assessment and Coastal Health (BEACH) Act, the Environmental Protection Agency (EPA) provides grants to states to develop water quality monitoring and public notification programs. This statement summarizes the key findings of GAO's May 2007 report, Great Lakes: EPA and the States Have Made Progress in Implementing the BEACH Act, but Additional Actions Could Improve Public Health Protection. In this report GAO assessed (1) the extent to which EPA has implemented the Act's provisions, (2) concerns about EPA's BEACH Act grant allocation formula, and (3) described the experiences of the Great Lakes states in developing and implementing beach monitoring and notification programs using their grant funds. EPA has taken steps to implement most BEACH Act provisions but has missed statutory deadlines for two critical requirements. While EPA has developed a national list of beaches and improved the uniformity of state water quality standards, it has not (1) completed the pathogen and human health studies required by 2003 or (2) published the new or revised water quality criteria for pathogens required by 2005. EPA stated that the required studies are ongoing, some studies were initiated in the summer of 2005, but the work was interrupted by Hurricane Katrina. EPA subsequently initiated two additional water studies in the summer of 2007. According to EPA, completion of the studies and development of the new criteria may take an additional 4 to 5 years. Further, although EPA has distributed approximately $51 million in BEACH Act grants from 2001-2006, the formula EPA uses to make the grants does not accurately reflect the monitoring needs of the states. This occurs because the formula emphasizes the length of the beach season more than the other factors in the formula--beach miles and beach use. These other factors vary widely among the states, can greatly influence the amount of monitoring a state needs to undertake, and can increase the public health risk. Thirty-four of the 35 eligible states have used BEACH Act grants to develop beach monitoring and public notification programs. Alaska is still in the process of developing its program. However, because state programs vary they may not provide consistent levels of public health protection nationwide. GAO found that the states' monitoring and notification programs varied considerably in the frequency with which beaches were monitored, the monitoring methods used, and how the public was notified of potential health risks. For example, some Great Lakes states monitor their high-priority beaches as little as one or two times per week, while others monitor their high-priority beaches daily. In addition, when local officials review similar water quality results, some may choose to only issue a health advisory while others may choose to close the beach. According to state and local officials, these inconsistencies are in part due to the lack of adequate funding for their beach monitoring and notification programs. The frequency of water quality monitoring has increased nationwide since passage of the Act, helping states and localities to identify the scope of contamination. However, in most cases, the underlying causes of contamination remain unknown. Some localities report that they do not have the funds to investigate the source of the contamination or take actions to mitigate the problem, and EPA has concluded that BEACH Act grants generally may not be used for these purposes. For example, local officials at 67 percent of Great Lakes beaches reported that, when results of water quality testing indicated contamination at levels exceeding the applicable standards during the 2006 beach season, they did not know the source of the contamination, and only 14 percent reported that they had taken actions to address the sources of contamination. |
Experts agree that chemical facilities are among the most attractive targets for terrorists intent on causing massive damage. Despite the risk these facilities pose, no one has yet comprehensively assessed security at the nation’s chemical facilities. EPA regulates about 15,000 facilities under the 1990 amendments to the Clean Air Act because they produce, use, or store more than certain threshold amounts of specific chemicals that would pose the greatest risk to human health and the environment if they were accidentally released into the air. These facilities must take a number of steps, including preparing a risk management plan (RMP), to prevent and prepare for an accidental release and, therefore, are referred to as RMP facilities. These facilities fall within a variety of industries and produce, use, or store a variety of products, including basic chemicals; specialty chemicals, such as solvents; life science chemicals, such as pharmaceuticals and pesticides; and consumer products, such as cosmetics. Some of these facilities are part of critical infrastructure sectors other than the chemical sector. For example, about 2,000 of these facilities are community water systems that are part of the water infrastructure sector. In addition, other facilities that house hazardous chemicals that are listed under the RMP regulations are not subject to RMP requirements because the quantities stored or used are below threshold amounts. Through the RMP program, EPA has gained extensive expertise with chemical facilities and processes that could be useful in helping DHS assess security issues. Federal requirements currently address security at some U.S. chemical facilities. For example, a small number of chemical facilities must comply with the Maritime Transportation Security Act of 2002 and its implementing regulations, which require maritime facility owners and operators to conduct assessments, develop security plans, and implement security measures. In addition, certain community water systems—while not specifically considered chemical facilities but which use and store large volumes of chemicals—are required by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 to conduct and submit a vulnerability assessment to EPA and prepare an emergency response plan that incorporates the results of the assessment. According to EPA, 1,928 drinking water facilities that are also subject to EPA’s RMP program must comply with this act. Some states and localities have also created security requirements at chemical facilities. In addition, the federal government imposes safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and consequences of terrorist attacks. For example, Section 112(r) of the Clean Air Act includes a general duty clause directing owners and operators of facilities to identify hazards, design and maintain a safe facility to prevent releases, and minimize the consequences of any accidental releases that occur. Under Section 112(r), RMP facilities must also implement a program to prevent accidental releases that includes safety precautions and maintenance, and monitoring and training measures, and they must have an emergency response plan. The Department of Labor’s Occupational Safety and Health Administration’s process safety management standard also requires facilities to conduct analyses of their chemical processes which must address hazards of the process, engineering and administrative controls applicable to the hazards, facilities siting, and evaluation of the possible health and safety effects of failures of controls on employees. DHS is developing a plan for protecting the chemical sector that will establish a framework for reducing the overall vulnerability of the sector in partnership with the industry and state and local authorities. At the time of our review, DHS did not provide a specific date for completion of the Chemical Sector-Specific Plan. DHS completed a draft of the plan in July 2004 and has been working to revise it to accommodate changes to DHS’s risk management strategy and comments from stakeholders. DHS officials told us that the final plan—which they now expect to complete and release in the fall of 2006—will reflect the basic principles and content described in the draft plan. On the basis of our review of the draft plan and discussions with DHS officials, the final plan will, among other things, (1) present background information on the sector; (2) describe the process DHS will use to develop an inventory of chemical sector assets; (3) describe DHS’s efforts to identify and assess chemical facilities’ vulnerabilities and plans to prioritize these efforts on the basis of the vulnerability assessments; (4) outline the protective programs that will be created to prevent, deter, mitigate, and recover from attacks on chemical facilities, and describe how DHS will work with private sector and government entities to implement these programs; (5) explain the performance metrics DHS will use to measure the effectiveness of DHS and industry security efforts; and (6) outline the department’s challenges in coordinating the efforts of the chemical sector. DHS has also initiated actions to identify the chemical sector’s critical assets, prioritize facilities, develop and implement protective programs, exchange information with the private sector, and coordinate efforts with EPA and other federal agencies. DHS is focusing its efforts for the chemical sector by identifying high-priority facilities. As a starting point, DHS has adapted EPA’s RMP database of facilities with more than threshold amounts of certain chemicals to develop an interim inventory of 3,400 chemical facilities that pose the greatest hazard to human life and health in the event of a terrorist attack. These are facilities where a worst- case scenario release potentially could affect over 1,000 people. According to DHS, 272 of these facilities could potentially affect more than 50,000 people. DHS is also developing a new risk assessment methodology to compare and prioritize all critical infrastructure assets according to their level of threat, their vulnerability to attack, and the consequences of an attack on the facility. According to DHS, Risk Analysis Management for Critical Asset Protection (RAMCAP) will provide a common methodology, terminology, and framework for homeland security risk analysis and decision making that is intended to allow consistent risk management across all sectors. The RAMCAP process entails chemical facility owners/operators voluntarily completing a screening tool to identify the consequences of an attack. On the basis of the results of the screening tool, DHS will identify facilities of highest concern and ask them to voluntarily complete a security vulnerability assessment. Finally, DHS has implemented a number of programs to assist the private sector and local communities in reducing vulnerabilities. For example, DHS works with local law enforcement officials and facility owners through the Buffer Zone Protection Program to improve the security of the area surrounding a facility. To assess and identify vulnerabilities at chemical facilities, DHS deploys teams of experts from both government and industry to conduct a site assistance visit. DHS had conducted 38 site assistance visits at chemical facilities as of June 15, 2005, and planned to conduct additional visits in fiscal year 2006 on the basis of need. DHS has also installed cameras at some high-consequence facilities, providing local law enforcement authorities with the ability to conduct remote surveillance and allowing state homeland security offices and DHS to monitor the facilities. In addition, DHS distributes threat information to the industry through various means and coordinates sector activities with the Chemical Sector Coordinating Council, an industry-led working group formed voluntarily by trade associations that acts as a liaison for the chemical sector. DHS also coordinates with EPA and other federal agencies through a government coordinating council. EPA officials believe that the agency could further assist DHS by providing analytical support in identifying high-risk facilities that should be targeted in DHS’ chemical sector efforts, among other activities. With few federal security requirements, industry associations have been active in promoting security among member companies. Some industry associations, including the American Chemistry Council (ACC), the Synthetic Organic Chemical Manufacturers Association, and the National Association of Chemical Distributors, require member companies to assess their facilities’ vulnerabilities and make security enhancements, requiring as a condition of membership that they conduct security activities and verify that these actions have been taken. ACC, representing 135 chemical manufacturing companies with approximately 2,000 facilities, has led the industry’s efforts to improve security at their facilities. ACC requires its members to adhere to a set of security management principles that include performing physical security vulnerability assessments using an approved methodology, developing plans to mitigate vulnerabilities, taking actions to implement the plans, and having an independent party such as insurance representatives or local law enforcement officials verify that the facilities implemented the identified physical security enhancements. These reviewers do not verify that a vulnerability assessment was conducted appropriately or that actions taken by a facility adequately address security risks. However, ACC requires member companies to periodically conduct independent third-party audits that include an assessment of their security programs and processes and their implementation of corrective actions. In addition, ACC members must take steps to secure cyber assets, such as computer systems that control chemical facility operations, and the distribution chain from suppliers to customers, including transportation. Other industry associations have encouraged their members to address security by a variety of means. Most of the 16 associations we spoke to have developed security guidelines and best practices. For example, the International Institute of Ammonia Refrigeration, representing facilities such as food storage warehouses, developed site security guidelines tailored to ammonia refrigeration facilities and provides information about security resources to members. Several industry associations have also developed vulnerability assessment methodologies to assist their member companies in evaluating security needs. For example, the National Petrochemical and Refiners Association, in partnership with the American Petroleum Institute, developed a vulnerability assessment methodology tailored to refiners and petrochemical facilities. Despite industry associations’ efforts to encourage or require members to voluntarily address security, the extent of participation in the industry’s voluntary initiatives is unclear. Chemical industry officials told us they face a number of challenges in preparing facilities against a terrorist attack. Most of the chemical associations we contacted stated that the cost of security improvements is a challenge for some chemical companies. For example, ACC reports that its members have spent an estimated $2 billion on security improvements since September 11, 2001. Representatives of the American Forest & Paper Association and the National Paint and Coatings Association told us that small companies, in particular, may struggle with the cost of security improvements or the cost of complying with any potential government security programs because they may lack the resources larger companies have to devote to security. Industry stakeholders also cited the need for guidance on what level of security is adequate. While DHS has issued guidance to state Homeland Security Offices and the Chemical Sector Coordinating Council on vulnerabilities and protective measures that are common to most chemical facilities, several stakeholders expressed a desire for guidance on specific security improvements. For example, representatives of the National Petrochemical and Refiners Association stated that one reason the association holds workshops and best practices sessions is to meet the challenge of determining the types of security measures that constitute a reasonable amount of security. In addition, industry officials told us that the lack of threat information makes it difficult for companies to know how to protect facilities. A few industry officials also mentioned limited guidance on conducting vulnerability assessments and difficulty in conducting employee background checks as challenges. One industry association stated that it would like its members to receive guidance from DHS on how to conduct vulnerability assessments. Another association expressed frustration because none of the current vulnerability assessment tools address issues specific to their member facilities, which package and distribute chemicals, and it would like DHS to help develop or approve a methodology for this type of facility. Finally, a number of stakeholders we contacted told us that emergency response preparedness is a challenge for chemical companies. An official with an industry-affiliated research center asserted that emergency responders and communities in the United States are prepared to respond to a toxic release. However, other stakeholders we spoke with stated that many facilities have conducted security vulnerability assessments but may not have done enough emergency response planning and outreach to the responders and communities that would be involved in a release. A 2004 survey by a chemical workers union of workers at 189 RMP facilities found that only 38 percent of respondents indicated that their companies’ actions in preparing to respond to a terrorist attack were effective, and 28 percent reported that no employees at their facilities had received training about responding to a terrorist attack since September 11, 2001. While environmental laws require emergency response planning for accidental chemical releases, several stakeholders told us facilities need to consider very different scenarios with consequences on different orders of magnitude when planning the emergency response for a terrorist incident. Existing laws give DHS limited authority to address chemical sector security, but DHS currently lacks specific authority to require all high-risk facilities to assess their vulnerabilities and take corrective actions, where needed. A number of existing laws outline DHS’s responsibilities for coordinating with the private sector and obtaining information on and protecting critical infrastructure, but these laws provide DHS with only limited authority to address security concerns at U.S. chemical facilities. For example, under the Homeland Security Act, the Secretary of DHS is responsible for coordinating homeland security issues with the private sector to ensure adequate planning, equipment, training, and exercise activities. Furthermore, the Act gives DHS’s Under Secretary for Information Analysis and Infrastructure Protection (IAIP) responsibilities related to protecting critical infrastructure, including accessing, receiving, analyzing, and integrating information from federal, state, and local governments and private sector entities to identify, detect, and assess the nature and scope of terrorist threats to the United States; carrying out comprehensive assessments of the vulnerabilities of the nation’s key resources and critical infrastructure; developing a comprehensive national plan for securing the nation’s key resources and critical infrastructure; and recommending the necessary measures to protect these key resources and critical infrastructure. DHS does not currently have the authority to require all chemical facilities to conduct vulnerability assessments or to enter chemical facilities without their permission to assess security or to require and enforce security improvements. There is also no legislation requiring chemical facilities to provide information about their security and vulnerabilities. Furthermore, except with respect to certain chemical facilities covered under federal security requirements for other critical infrastructures, existing laws do not give DHS the right to enter a chemical facility to assess its vulnerability to a terrorist attack or the authority to require and enforce the implementation of any needed security improvements at these facilities. The Homeland Security Act, with some limited exceptions, does not provide any new regulatory authority to DHS and only transferred the existing regulatory authority of any agency, program, or function transferred to DHS, thereby limiting actions DHS might otherwise be able to take under the Homeland Security Act. Therefore, DHS has relied solely on the voluntary participation of the private sector to address facility security. As a result, DHS cannot ensure that all high-risk facilities are assessing their vulnerability to terrorist attacks and taking corrective action, where necessary. DHS has concluded that its existing patchwork of authorities does not permit it to regulate the chemical industry effectively, and that the Congress should enact federal requirements for chemical facilities. Echoing public statements by the Secretary of Homeland Security and the Administrator of EPA in 2002 that voluntary efforts alone are not sufficient to assure the public of the industry’s preparedness, in June 2005, both DHS and EPA called for legislation to give the federal government greater authority over chemical facility security. Similarly, we concluded in 2003, and continue to believe, that additional federal legislation is needed because of the significant risks posed by thousands of chemical facilities across the country to millions of Americans and because the extent of security preparedness at these facilities is unknown. In testimony before the Congress in June 2005, the Acting Undersecretary for IAIP stated that any proposed regulatory structure (1) must recognize that not all facilities within the chemical sector present the same level of risk, and that the most scrutiny should be focused on those facilities that, if attacked, could endanger the greatest number of lives, have the greatest impact on the economy, or present other significant risks; (2) should be based on reasonable, clear, equitable, and measurable performance standards; and (3) should recognize the progress that responsible companies have made to date. He also stated that the performance standards should be enforceable and based on the types and severity of potential risks posed by terrorists, and that facilities should have the flexibility to select among appropriate site-specific security measures that will effectively address those risks. In addition, he said that DHS would need the ability to audit vulnerability assessment activities and a mechanism to ensure compliance with requirements. While many stakeholders—including representatives from industry, research centers, and government—agreed on the need for additional legislation that would place federal security requirements on chemical facilities, they expressed divergent views on whether such legislation should require the use of inherently safer technologies. Implementing inherently safer technologies could potentially lessen the consequences of an attack by reducing the chemical risks present at facilities. The Department of Justice, in introducing a methodology to assess chemical facilities’ vulnerabilities, recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. Furthermore, DHS’s July 2004 draft Chemical Sector-Specific Plan states that inherently safer chemistry and engineering practices can prevent or delay a terrorist incident, noting that it is important to make sure that facility owners/operators consider alternate ways to reduce risk, such as using inherently safer design, implementing just-in-time manufacturing, or replacing high-risk chemicals with safer alternatives. However, DHS told us that the use of inherently safer technologies tends to shift risks rather than eliminate risks, often with unintended consequences. Some previous chemical security legislative proposals have included a requirement that facility security plans include safer design and maintenance actions, or that facility security plans include “consideration” of alternative approaches regarding safer design. Representatives from three environmental groups told us that facilities have defined security too narrowly, without focusing on reducing facility risks through safer technologies. Noting that no existing laws require facilities to analyze inherently safer options, these representatives believe legislation should require such an analysis and give DHS or EPA the authority to require the implementation of technologies if high-risk facilities are not doing so. Process safety experts at one research organization recognized that reducing facility hazards and the potential consequences of chemical releases makes facilities less vulnerable to attack. However, these experts also explained that inherently safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. For example, reducing the amount of chemicals stored at a facility may increase reliance on rail or truck shipments of chemicals. However, the substitution of chemicals such as liquid bleach for chlorine gas at drinking water facilities reduces overall risks. These experts support legislative provisions requiring analysis or consideration of technology options but do not support giving the federal government the authority to require specific technology changes because of the complexity of these decisions. Representatives of two research centers affiliated with the industry told us that while facilities should look at inherently safer technologies when assessing their vulnerability to terrorist attack, safer technologies are not a substitute for security. Industry associations and company officials were strongly opposed to any requirements to use inherently safer technologies. The majority of the industry officials we contacted opposed an inherently safer technologies requirement, with many stating that inherently safer technologies involve a safety issue that is unrelated to facility security. Industry officials voiced concerns about the federal government’s second-guessing complex safety decisions made by facility process safety engineers. Representatives from four associations and two companies told us that, in many cases, it is not feasible to substitute safer chemicals or change to safer processes. Certain hazardous chemicals may be essential to necessary chemical processes, while changing chemical processes may require new chemicals that carry different risks. In July 2005 testimony before the Congress, a Synthetic Organic Chemical Manufacturers Association representative explained that while inherently safer technologies are intended to reduce the overall risks at a facility, they could do so only if a chemical hazard was not displaced to another time or location or did not magnify another hazard. Furthermore, process safety experts and representatives from associations and companies report that some safer alternatives are extremely expensive. For example, reducing facility chemical inventories by moving to on-site manufacturing when chemicals are needed can cost millions of dollars, according to a stakeholder. One company also voiced opposition even to a legislative requirement that facilities “consider” safer options. The official explained that the company opposed such a provision—even if legislation does not explicitly give the government the authority to require implementation of safer technologies—because it might leave companies liable for an accident that might have been prevented by a technology option that was considered but not implemented. Despite voluntary efforts by industry associations and a number of DHS programs to assist companies in protecting their chemical facilities, the extent of security preparedness at U.S. chemical facilities remains largely unknown. DHS does not currently have the authority to require the chemical industry to take actions to improve their security. On this basis, DHS has concluded—as we did in 2003 and again in January 2006—that its existing authorities do not allow it to effectively regulate chemical sector security. Since 2002, both DHS and EPA have called for legislation creating security requirements at chemical facilities, and legislation has been introduced without success in every Congress since September 11, 2001. By granting DHS the authority to require high-risk chemical facilities to take security actions, policy makers can better ensure the preparedness of the chemical sector. Furthermore, implementing inherently safer technologies potentially could lessen the consequences of a terrorist attack by reducing the chemical risks present at facilities, thereby making facilities less attractive targets. However, substituting safer technologies can be prohibitively expensive and can shift risks onto other facilities or the transportation sector. Also, in many cases, it may not be feasible to substitute safer chemicals or change to safer processes. Therefore, given the possible security and safety benefits as well as the potential costs to some companies of substituting safer technologies, a collaborative study employing DHS’s security expertise and EPA’s chemical expertise could help policy makers determine the appropriate role of safer technologies in facility security efforts. For further information about this statement, please contact John B. Stephenson at (202) 512-3841. Karen Keegan, Omari Norman, Joanna Owusu, Vincent P. Price, and Leigh White made key contributions to this statement. Since 2001, the Congress has considered a number of legislative proposals that would give the federal government a greater role in ensuring the protection of the nation’s chemical facilities. These legislative proposals would have granted DHS or EPA, or one of these agencies in consultation with the other, the authority to require chemical facilities to conduct vulnerability assessments and implement security measures to address their vulnerabilities. In the 109th Congress, five bills have been introduced but have not yet been acted upon: H.R. 1562, H.R. 2237, S. 2145, H.R. 4999, and S. 2486. High-priority facilities would be required to submit vulnerability assessments and security plans to DHS; other chemical sources would be required to self-certify completion of assessments and plans and provide DHS copies upon request. High-priority facilities would be required to submit vulnerability assessments and to certify that they have prepared prevention, preparedness, and response plans to EPA. Designated chemical sources would be required to submit vulnerability assessments, security plans, and emergency response plans to DHS. The assessment and security plan would be required to address security performance standards established by DHS for each risk-based tier. Chemical sources would be required to self-certify completion of assessments and plans. DHS, in consultation with EPA, would identify high-priority categories of facilities; DHS would receive and review assessments and plans. EPA, in consultation with DHS and state and local agencies, would identify high-priority categories of facilities; EPA would receive assessments and certifications. DHS would designate facilities as chemical sources and assign each chemical source to a risk-based tier. DHS would receive and review assessments, plans and certifications. EPA would have no role. DHS would, when and where it deems appropriate, conduct or require the conduct of vulnerability assessments and other activities to ensure and evaluate compliance; DHS could disapprove a vulnerability assessment or site security plan; following written notification and consultation with the owner or operator, DHS could issue a compliance order. Not later than 3 years after the deadline for submission of vulnerability assessments and response plans, EPA, in consultation with DHS, would review and certify compliance of each assessment and plan; following consultation with DHS, and 30 days after providing notification to the facility and providing advice and technical assistance to bring the assessment or plan into compliance and address threats, EPA could issue a compliance order. DHS would review and approve or disapprove all vulnerability assessments, security plans, and emergency response plans for facilities in higher risk tiers within one year, and within five years for all other facilities. DHS would be required to disapprove of any vulnerability assessment, site security plan, or emergency response plan not in compliance with the vulnerability assessment, site security plan, and emergency response plan requirements. For higher risk facilities, if DHS disapproves the assessment or plans, the Secretary could issue an order to a chemical source to cease operation. For other facilities, the Secretary could issue an order to a chemical source to cease operation, but only after a process of written notification, consultation and time for compliance. Would provide for court awarded civil penalties up to $50,000 per day for failure to comply with an order, site security plan, or other recognized procedures, protocols, or standards, and administrative penalties up to $250,000 for failure to comply with an order. Would provide for court awarded civil penalties up to $25,000 per day, criminal penalties, and administrative penalties (if the total civil penalties do not exceed $125,000) for failure to comply with an order. Would provide for court awarded civil penalties up to $50,000 per day, and administrative penalties of not more than $25,000 per day (not to exceed $1 million per year) for failure to comply with a DHS order or directive issued under the act. Also calls for criminal penalties of up to $50,000 in fines per day, imprisonment for not more than two years, or both for knowingly violating an order or failing to comply with a site security plan. Response plans would be required to include a description of safer design and maintenance options considered and reasons those options were not implemented; EPA would be required to establish a clearinghouse for information on inherently safer technologies and would be authorized to provide grants to assist chemical facilities demonstrating financial hardship in implementing inherently safer technologies. None. Would exempt information obtained from disclosure under the Freedom of Information Act (FOIA) or otherwise, or from disclosure under state or local laws; information would also not be subject to discovery or admitted into evidence in any federal or state civil judicial or administrative procedure other than in civil compliance action brought by DHS. Calls for DHS, in consultation with others, to establish confidentiality protocols. Would exempt information obtained from disclosure under FOIA; calls for EPA, in consultation with DHS, to establish information protection protocols. Would exempt information obtained from disclosure under FOIA, or from disclosure under state or local laws. Certifications submitted by the chemical sources, orders for failure to comply, and certificates of compliance and other orders would generally be made available to the public. Calls for DHS, in consultation with the Director of the Office of Management and Budget and appropriate federal law enforcement officials, to create confidentiality protocols for the maintenance and use of records; would establish penalties for the unlawful disclosure of protected information. Upon petition, DHS would be required to endorse other industry, state, or federal protocols or standards that the Secretary of DHS determines to be substantially equivalent. None. Would allow the Secretary to determine that vulnerability assessments, security plans, and emergency response plans prepared under alternative security programs meet the act’s requirements and to permit submissions or modifications to the assessments or plans. Would grant DHS right of entry; would exempt facilities that are subject to MTSA (port facilities) or the Bioterrorism Act (community water systems). Except with respect to protection of information, would not affect requirements imposed under state law. Would grant EPA right of entry; would authorize EPA to provide grants for training of first responders and employees at chemical facilities; would not affect requirements imposed under state law. Would grant DHS right of entry; would exempt facilities that are subject to MTSA from certain area security requirements but these facilities would otherwise comply with the act’s requirements. Would preserve the right of States to adopt chemical security requirements that are more stringent than the Federal standard, as long as the State standard does not conflict with the Federal standard. S. 2486, introduced on March 30, 2006, would impose a general duty on chemical facility owners and operators, in the same manner as the duty under the Clean Air Act’s Section 112(r), to identify hazards that may result from a criminal release, ensure the design, operation, and maintenance of safe facilities by taking such actions as are necessary to prevent criminal releases, and eliminate or significantly reduce the consequences of any criminal release that does occur. S. 2486 also directs DHS to work with EPA, as well as state and local agencies, to identify not fewer than 3,000 high priority chemical facilities. These facilities would be required to take adequate actions (including the design, operation, and maintenance of safe facilities), to detect, prevent, or eliminate or significantly reduce the consequences of criminal releases and to submit a report to DHS that includes a vulnerability assessment; a hazards assessment; a prevention, preparedness, and response plan; statements as to how the response plan meets regulatory requirements and general duty requirements; and a discussion of the consideration of the elements of design, operation, and maintenance of safe facilities. “Design, operation, and maintenance of safe facilities” is defined as practices of preventing or reducing the possibility of a release through use of inherently safer technologies, among other things. DHS would certify compliance and DHS and EPA would establish a program to conduct inspections of facilities. The bill also provides for civil penalties, administrative penalties, and criminal penalties (including imprisonment for up to 2 years for first violations and up to 4 years for subsequent violations), for owners or operators of high priority facilities who fail to comply with an order. Also in the 109th Congress, the conference committee for H.R. 2360, making appropriations for DHS for fiscal year 2006, directed DHS to submit a report to the Senate and House Committees on Appropriations by February 10, 2006, describing (1) the resources needed to implement mandatory security requirements for the chemical sector and to create a system for auditing and ensuring compliance with the security standards and (2) the security requirements and any reasons why the requirements should differ from those already in place for chemical facilities that operate in a port zone; complete vulnerability assessments of the highest risk U.S. chemical facilities by December 2006, giving preference to facilities that, if attacked, pose the greatest threat to human life and the economy; and complete a national security strategy for the chemical sector by February 10, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Terrorist attacks on U.S. chemical facilities could damage public health and the economy. The Department of Homeland Security (DHS) coordinates federal efforts to protect these facilities from attacks. GAO was asked to provide a statement for the record based on its report Homeland Security: DHS Is Taking Steps to Enhance Security at Chemical Facilities, but Additional Authority Is Needed ( GAO-06-150 , January 27, 2006), GAO reviewed (1) DHS's actions to develop a strategy to protect chemical plants, assist with the industry's security efforts, and coordinate with other federal agencies, (2) industry security initiatives, (3) DHS's authorities and the need for additional security legislation, and (4) stakeholders' views on any requirements to use safer technologies. DHS is developing a Chemical Sector-Specific Plan, which is intended to, among other things, describe DHS's ongoing efforts and future plans to coordinate with federal, state, and local agencies and the private sector; identify chemical facilities to include in the sector, assess their vulnerabilities, and prioritize them; and develop programs to prevent, deter, mitigate, and recover from attacks on chemical facilities. DHS officials told GAO that they now expect to complete and release the plan in the fall of 2006. In addition, DHS has taken a number of actions to protect the chemical sector from terrorist attacks. DHS identified 3,400 facilities that, if attacked, could pose the greatest hazard to human life and health and has initiated programs to assist the industry and local communities in protecting chemical plants. DHS also coordinates with the Chemical Sector Coordinating Council, an industry-led group that acts as a liaison for the chemical sector, and with EPA and other federal agencies. The chemical industry is voluntarily addressing plant security, but faces challenges. Some industry associations require member companies to assess plants' vulnerabilities, develop and implement mitigation plans, and have a third party verify that security measures were implemented. Other associations have developed guidelines and other tools to encourage their members to address security. Industry officials said that high costs and limited guidance on how much security is adequate create challenges in preparing facilities against terrorism. Because existing laws provide DHS with only limited authority to address security at chemical facilities, it has relied primarily on the industry's voluntary security efforts. However, the extent to which companies are addressing security is unclear. DHS does not have the authority to require chemical facilities to assess their vulnerabilities and implement security measures. Therefore, DHS cannot ensure that facilities are taking these actions. DHS has stated that its existing authorities do not permit it to effectively regulate the chemical industry, and that the Congress should enact federal requirements for chemical facilities. Many stakeholders agreed--as GAO concluded in 2003 and again in January 2006--that additional legislation placing federal security requirements on chemical facilities is needed. Stakeholders had mixed views on whether any chemical security legislation should require plants to substitute safer chemicals and processes, which could lessen the potential consequences of an attack, but could be costly or infeasible for some plants. DHS has stated that safer practices may make facilities less attractive to terrorist attack, but may shift risks rather than eliminate them. Environmental groups told GAO that they favored including or considering inherently safer technologies in any federal requirements, but most industry officials GAO contacted opposed a requirement to use safer technologies because they may shift risks or be prohibitively expensive. |
We have identified several key elements of an effective national strategy that should be considered by the new administration in developing national strategies for Iraq and Afghanistan to guide the way forward. First, our work shows that new strategies for both countries should reflect a comprehensive governmentwide approach and clearly delineate U.S. government roles, responsibilities, and coordination mechanisms. Not only should the strategy identify the specific U.S. federal departments, agencies, or offices involved, but also the responsibilities of the private and international sectors, and specific processes for coordination and collaboration among the entities. In particular, our work in Iraq has shown problems in these areas. For example, in July 2006, we reported that the National Strategy for Victory in Iraq (NSVI) did not clearly identify the roles and responsibilities of specific federal agencies for achieving the strategy’s objectives, or how disputes among them will be resolved. Later, in March 2008 we noted that U.S. efforts to build the capacity of the Iraqi government have been hindered by multiple U.S. agencies pursuing individual efforts without overarching direction. We further noted that no single agency was in charge of leading U.S. development efforts, and that the U.S. State Department, DOD, and the U.S. Agency for International Development (USAID) all led separate efforts with little or no coordination. As the United States considers increasing its presence in Afghanistan, it will be even more important that roles and responsibilities of the various U.S. agencies are clearly identified and their programs and activities are coordinated. For example, DOD’s Commanders’ Emergency Response Program (CERP) and other funding have been used to a great extent for building roads. At the same time, USAID has also invested funds in constructing roads. In July 2008, we reported that coordination between DOD and USAID on road projects was problematic because information was not being shared among the agencies. As DOD expands its CERP program, and other agencies expand their respective programs, it will be important that their efforts be coordinated as part of an overall development plan to identify priorities and maximize resources. Second, national strategies should include specific goals, objectives, performance measures, and time frames for achieving the goals. Regarding Iraq, one major issue that will need to be addressed is to determine to what extent a drawdown of U. S. forces will be determined based on the achievement of goals or conditions in light of the specific time frames for withdrawal included in the November 2008 SOFA between Iraq and the United States that took effect in January 2009. Adopting a withdrawal timetable marks a major change from the prior U.S. approach of withdrawing forces based on security, political, economic, and diplomatic conditions in Iraq. The SOFA sets a two- phase timetable—but no conditions—for withdrawing U.S. combat forces from Iraq by the end of 2011. The President recently called for the implementation of a responsible drawdown of U.S. forces in Iraq. A new U.S. strategy and campaign plan for Iraq will need to clarify how a responsible withdrawal of U.S. forces will be carried out consistent with the SOFA timeframe. Furthermore, as the administration develops strategies for both countries and plans to adjust force levels, it will need to closely examine the availability of resources, given the heavy commitment of U.S. forces to ongoing operations over the past several years. The high pace of operations, particularly for ground forces personnel, and heavy wear and tear on equipment have taken a toll on the overall readiness of the U.S. military. These factors, coupled with the likelihood of competing demands for certain capabilities to support the drawdown of forces in one location and increase in forces in another, such as strategic airlift, intelligence, surveillance, and reconnaissance assets, and support forces, will need to be considered in assessing the feasibility of various strategy options. Third, in light of future demands on the federal budget, attention will be needed to ensure that U.S. efforts are executed in a manner that maximizes the use of available resources and includes mechanisms for oversight. From this perspective, it will be important that the U.S. government make a concerted effort to avoid some of the problems that occurred in Iraq which, in some cases, created numerous opportunities for waste, fraud and mismanagement, particularly with respect to the oversight and management of contractors. Another area warranting attention is in DOD’s approach to developing requirements for equipment and other critical items to support operations in both Iraq and Afghanistan. As such, it will be important for DOD to carefully screen and validate requirements and use cost-effective approaches to acquiring items. Clearly, strong oversight on the part of the Congress and senior decision makers within DOD will also be a critical element to protecting the taxpayers’ interest and resources. It is unclear how the timeline in the SOFA and growing operations in Afghanistan will affect DOD plans for redeploying U.S. forces and equipment from Iraq. As of September 2008, DOD’s redeployment plans for Iraq were based on three key assumptions that may no longer be applicable in light of the SOFA and evolving U.S. strategy. These assumptions were that any redeployment will be based on MNF-I and Department of State assessments of security and other conditions in Iraq; there will be sufficient lead time to refine redeployment plans once an order with a specific timetable and force posture in Iraq is issued; and the redeployment of forces will be deliberate and gradual, predicated on a 180-day process for units leaving Iraq and an estimated flow of no more than 2.5 brigades’ worth of equipment and materiel out of Iraq primarily through Kuwait each month. Based on discussions with DOD officials and an analysis of planning efforts, we found that the effectiveness and efficiency of DOD’s redeployment efforts from Iraq will depend on the extent to which it develops plans that address several issues such as the following: Although the U.S. Central Command (CENTCOM) has designated an executive agent to coordinate the retrograde of materiel and equipment from the Iraqi theater of operations, no unified structure exists to coordinate the teams and units engaged in efforts to manage and execute the return of materiel and equipment. This results in confusion and a lack of clarity on the ways those teams should be utilized. Joint doctrine states that an unambiguous chain of command and clear responsibilities and authorities are necessary for any such effort. We have recommended, therefore, that DOD take steps to clarify a unified or coordinated chain of command over logistical operations to support this effort. While DOD has taken some actions to clarify certain aspects of the command and control structure, we believe additional steps are still needed to improve the efficiency of the retrograde process. Closing or handing over U.S. installations in Iraq will be time- consuming and costly. As of November 2008, there were 286 U.S. installations in Iraq that will need to be closed or turned over to the Iraqi forces during a U.S. redeployment, depending on its scope. According to U.S. Army officials, experience has shown it takes 1 to 2 months to close the smallest platoon- or company-size installations, which contain from 16 to 200 combat soldiers or marines. However, MNF-I has never closed large, complex installations—such as Balad Air Force Base, which contains about 24,000 inhabitants and has matured over 5 years—making it difficult to accurately predict the time it will take to close them. U.S. Army officials estimate it could take longer than 18 months to close a base of that size. Maintaining accountability for and managing the disposition of U.S. government property under the control of contractors may present challenges to redeploying U.S. forces from Iraq. According to Defense Contract Management Agency officials, there is at least $3.5 billion worth of contractor-managed government-owned property in Iraq. From late 2007 through July 2008, planning for the redeployment of U.S. forces in Iraq did not include a theaterwide plan for contractors. The pace at which units can be redeployed and equipment and materiel returned to the United States from Iraq will be governed by the capacity of facilities in neighboring countries as well as restrictions on the use of those facilities. According to DOD officials, Kuwait is the main point of exit for all personnel, equipment, and materiel in Iraq. At present there are three U.S. bases and five Kuwait facilities that the United States is using to support operations in Iraq, and the U.S.- Kuwait Defense Cooperation Agreement governs the use of these facilities. According to DOD officials, any redeployment must take into consideration the terms of this agreement, particularly given that in their view, the government of Kuwait desires to limit the size of the U.S. footprint in Kuwait. The availability in theater of military-owned and operated heavy equipment transports and convoy security assets, combined with limits on the primary supply route, could inhibit the flow of materiel out of Iraq. According to DOD officials, two types of heavy equipment transports support U.S. forces in the Iraqi theater of operations: commercially contracted unarmored transports and armored military transports with military crews. Any increase in the number of civilian transports without a corresponding increase in the number of military transports, they maintain, increases the risk of accidents. However, DOD officials have reported shortages of military transports in theater. Based on our work examining current and past military operations, there are several operational issues that must be considered as the United States refines its strategy and plans for using military forces in Afghanistan. We have identified several issues in the following five key areas that warrant consideration by DOD planners as they develop strategies and plans for these operations: availability of forces, training of personnel, availability of equipment, transportation of equipment and personnel, and management and oversight of contractors. Given the range of likely forces in Iraq and Afghanistan, DOD may continue to face near-term challenges in providing personnel for operations in both locations. For the past several years, demands on DOD’s forces have been extremely high as the department has rotated personnel in and out of Iraq and Afghanistan. As of December 1, 2008, more than 180,000 service members were deployed in the two countries. Demands have been particularly high within certain ranks and occupational specialties. For example, officers and senior noncommissioned officers are in high demand due to increased requirements within deployed headquarters organizations, and requirements for transition teams to train Iraqi and Afghan forces. These teams do not exist in any of the services’ force structures, and the demand for these leaders creates challenges because the leaders are generally pulled from units or commands, which are then left to perform their missions while undermanned. The ongoing operations have challenged DOD’s ability to provide sufficient numbers of forces for certain specialized capabilities including engineering, civil affairs, transportation, and military police. As operations in Iraq and Afghanistan have continued, DOD has used a number of different approaches to meet the ongoing requirements. For example, it has adjusted the length and frequency of deployments and reserve component mobilizations; moved personnel between units to support deployments of units that were short of personnel; and used Navy and Air Force personnel to fill some CENTCOM requirements that would otherwise have exceeded the Army’s capability to supply personnel. While these approaches have helped DOD fill its ongoing requirements, they have also created a number of challenges. For example, many service members have experienced deployment and mobilization rates in excess of DOD’s stated goals. These goals generally call for active component personnel to be deployed for 1 of every 3 years and reserve component personnel involuntarily mobilized 1 of 6 years. In addition, the use of Navy and Air Force personnel has presented challenges in meeting other service mission requirements. Faced with these challenges, DOD developed a global force management process that among other things was designed to prioritize requirements, identify the most appropriate forces to meet combatant command requirements, and provide predictability. The portion of the global force management process that is being used to fill stable, recurring world-wide requirements provides predictability and the time necessary to consider a full range of options for meeting the combatant commander requirements. However, a significant portion of emerging requirements, including many of the Afghanistan requirements, are being filled under a “request for forces” process that involves shorter time lines. Within the shorter time lines, DOD may not have a full range of options available to meet its requirements. For example, reserve component forces may not be an option to meet some immediate requirements because reserve forces train part-time and thus require longer lead times to accomplish the same amount of training and preparation when compared to full-time active component forces. If emerging requirements for Afghanistan include many of the high demand support skills that are resident in the reserve components, including military police, engineers, and civil affairs units, DOD is likely to continue to need to use its alternate approaches for filling requirements—such as moving people between units, or using Navy and Air Force personnel to fill traditional Army roles—rather than using longer term options such as growing the force. These near-term challenges could be exacerbated because many of these support forces may also be needed to support the drawdown of forces in Iraq. To meet mission requirements in CENTCOM, the services, particularly the ground forces, have focused their unit training on counterinsurgency tasks rather than full-spectrum operations. For example, since 2004, all combat training rotations conducted at the Army’s National Training Center have been mission rehearsal exercises to prepare units for deployments, primarily to Iraq and Afghanistan. While DOD has invested heavily in training for particular mission sets related to requirements in Iraq and Afghanistan, the majority of that effort has been directed at preparing for missions in Iraq, which has had about five times as many U.S. forces as Afghanistan. As the number of forces decreases in Iraq and increases in Afghanistan, it will take time to adjust DOD’s training capacity from one type of mission or theater to another. For example, DOD has designed extensive training areas to mimic Iraqi urban settings, has incorporated Arabic speakers (the language spoken in much of Iraq) into training exercises, and focused on weapons and tactics useful in densely populated areas, such as training for escorting large armored convoys and using short-barreled weapons in high-density population areas. In contrast, training in Afghanistan has to take into consideration the more austere operating environment, myriad mix of languages and cultures, and lack of major infrastructure, such as paved roads. In addition, to support ongoing operations, the Army has done an admirable job of enlisting personnel returning from deployment to train next-deployers. While DOD has some training infrastructure and combat- tested veterans to support training for the Afghanistan mission, its training base is not currently configured to support a large increase of forces deploying to Afghanistan, and adjustments may need to be made to provide the necessary capacity. Thus, it would be a risk to assume that units that were preparing for deployments to Iraq could be easily rerouted for deployments to Afghanistan with no changes in preparation, equipping, or training. Our previous work has shown that as of May 2008, DOD had the equivalent of 47 brigades’ worth of materiel and equipment in Iraq spread out over some 311 installations of varying size. The majority of this materiel and equipment, some 80 percent according to DOD officials, is theater- provided equipment which includes approximately 582,000 pieces of equipment such as up-armored High Mobility Multipurpose Wheeled Vehicles, Mine Resistant Armored Program (MRAP) vehicles, and other wheeled and tracked vehicles. Although much of this equipment has remained in Iraq as units rotate in and out, significant amounts will be brought back to the United States if and when there is a decrease in size of U.S. forces in Iraq. Upon returning from operations, equipment is reset in preparation for future operations. The services have also relied on prepositioned equipment stored at land sites around the world as well as ships afloat. As we have previously reported, the Army has withdrawn prepositioned equipment at various stages throughout operations in Iraq and Afghanistan and removed equipment from its prepositioned ships in December 2006 to accelerate creation of two additional brigade combat teams. The Army plans to reconstitute its prepositioned stocks by 2015; the Marine Corps plans to reconstitute its prepositioned stocks by 2012. The harsh operating environment and prolonged length of operations have placed tremendous stress on deployed equipment. At the onset of operations in Iraq in 2003, the Army and Marine Corps deployed with equipment that in some cases was already more than 20 years old. The services continue to operate equipment at a pace well in excess of peacetime operations. In response to those challenges, the Army and Marine Corps developed initiatives to retain large amounts of equipment in theater and provide enhanced maintenance over and above the unit level to sustain major equipment items such as High Mobility Multipurpose Wheeled Vehicles and other tracked and wheeled vehicles. In-theater maintenance consists of field-level maintenance in Iraq and some depot- level repair and upgrade capabilities at Camp Arifjan in Kuwait. There are also limited maintenance facilities in Afghanistan. The Army and Marine Corps have developed rotation plans that allow equipment to be sent back to the United States for depot-level maintenance cycles which essentially rebuilds equipment and extends its service life. Equipment availability may pose challenges depending on equipment requirements for operations in Afghanistan. Army and Marine Corps officials stated that they are in the process of determining equipment requirements for Afghanistan; however, final equipment needs will be based on several factors such as the type of operations, force structure, and capabilities needed. For example, Army and Marine Corps officials recently stated that operations in Afghanistan may require lighter body armor and lighter MRAP vehicles. In addition, geographic and environmental factors also play a role in determining equipment requirements for Afghanistan. For example, heavy brigade combat teams, which include tanks, may not be well suited for the Afghanistan terrain. As a result, the Army is currently developing a lighter version of the MRAP vehicle better suited for the difficult terrain of Afghanistan. Also, given the fact that, since 2006, there have been about 4,800 Army, Marine Corps, and joint urgent needs requests processed to date for operations in Iraq and Afghanistan, it is likely that the number of urgent needs requests will increase in the future as DOD continues to build up its forces in Afghanistan. In addition to ground equipment, DOD will need to assess its requirements for intelligence, surveillance, and reconnaissance (ISR) capabilities to support increased force levels in Afghanistan, given its current allocation of assets to support ongoing operations in Iraq. Although DOD has experienced a high level of mission success with ISR, our work has shown that DOD continues to face challenges in maximizing the use of these assets, including unmanned aerial systems. ISR assets have proven especially useful in counter-insurgency operations and counter-terrorism, enabling the identification of improvised explosive devices and the enemy forces who planted them. In Iraq and Afghanistan, DOD has employed military ISR collection assets from each of the services, as well as national ISR collection assets. As a result of operational successes, the demand for and use of ISR assets continues to grow. However, military commanders have also experienced numerous challenges that should be considered as DOD considers its options for adjusting force levels in Iraq to Afghanistan. During Operation Iraqi Freedom, difficulties in airborne ISR assets’ abilities to provide strategic, operational, and tactical users with timely, accurate, and actionable intelligence were reported. In addition, our previous work has shown that DOD has faced challenges in optimizing the use of these assets, including unmanned aerial systems. For example, DOD continues to experience problems related to interoperability, availability of communications bandwidths, and airspace integration. Some unmanned aerial systems components cannot easily exchange and transmit data with ground forces because they were not designed to interoperable standards. In addition, stove-piped ISR allocation and tasking systems do not allow consideration of the capabilities of all available ISR assets in determining how best to meet the warfighters’ needs. Commanders at the theater level do not have information on how assets controlled by tactical units are being employed, and tactical units do not have information on how theater-level assets or assets controlled by other tactical units are being used. Furthermore, DOD is still in the process of developing metrics to measure the performance of these assets. As we have recommended, improving visibility of all available ISR capabilities and establishing performance metrics would help DOD identify needs, make decisions about priorities, and optimize the use of available assets. The Report of the Joint Defense Science Board Intelligence Science Board Task Force on Integrating Sensor-Collected Intelligence stated in 2008 that the number of images and signal intercepts being captured by ISR assets is beyond the capacity of the current ISR infrastructure so there are backlogs of data waiting for translators or image interpreters. The Task Force made recommendations to improve integration of data from different types of ISR assets and ensure that information is visible and widely available to users. We are currently assessing DOD’s processes for analyzing, using, and disseminating intelligence information and expect to report on these issues this summer. Transportation issues should be a key factor in developing a strategy for Afghanistan and continue to be a challenge for commanders. Changes in regional staging base options, stresses on the limited military and commercial air fleets, and underdeveloped infrastructure in landlocked Afghanistan are only a few of the challenges that could exacerbate already difficult transportation into and around the country. As noted by military officials, operations in landlocked Afghanistan depend on difficult and uncertain overland supply routes from neighboring countries. This makes airlift very important, but Afghanistan operations do not have the benefit of a nearby Kuwait-like environment where staging and reception occur. Kuwait affords the commanders in Iraq both air facilities and a seaport capable of handling ships. To support air operations, commanders in Afghanistan depend on access to bases such as Manas, Kyrgyzstan, which is still a distance from Afghanistan. However, this access may not continue and any strategy developed for operations in Afghanistan may have to consider a regional approach. To this end, the Commander, U.S. Transportation Command, has recently made efforts to secure other options supporting movement into Afghanistan. Land routes, such as the Khyber Pass, are also problematic. We have previously reported the lack of a transloading operation for materiel shipped into Afghanistan, similar to the one at the port of Kuwait for materiel going to Iraq, is a limiting factor. Currently, items being shipped by sea to Afghanistan enter through the port of Karachi, Pakistan, since Afghanistan is landlocked. Officials told us that establishing a transloading operation in Pakistan would be difficult. U.S. strategy will have to consider the degree to which potentially overlapping operations, the increase in U.S. forces in Afghanistan and decrease of U.S. forces in Iraq, could stress U.S. strategic transportation assets, both military and commercial. The U.S. military primarily depends on commercial aircraft for strategic movement of military personnel (93 percent of DOD personnel during a crisis) and, to a lesser extent, for movement of equipment in a crisis or contingency. Military-contracted commercial aircraft currently do not enter either Iraq or Afghanistan, and military personnel and contractors must transfer to U.S. military aircraft to reach their final destinations. The Afghanistan situation differs from Iraq in that military aircraft moving passengers into Afghanistan must travel greater distances than those arriving in Iraq, and operations tempo and aircraft utilization will reflect these increased demands. Also, U.S. commercial aircraft do not deliver critical equipment into Afghanistan, and essential systems, like MRAPs, arrive via contracted Russian aircraft. Limited existing facilities currently complicate arrival and onward movement of forces and equipment and, as we increase force levels, may have strategy implications for the near future. Ramp space and fuel availability have been improved since operations began, but infrastructure is limited and may influence the rate that forces can be received and moved forward. For example, the way fuel is obtained and distributed can potentially limit operations. In Afghanistan, Bagram is the hub for fuel distribution, and distribution within the country is difficult. In November 2008, the United States had over 100 forward deployed locations in Afghanistan. Most fuel deliveries are made to forward operating bases using commercial contractors, and we have found through our work that fuel contractors strike often, delay delivery of fuel, or arrive at destinations with fuel missing. Security issues include attacks and threats on fuel convoys, and DOD officials have told us that in June 2008, 44 trucks and 220,000 gallons of fuel were lost in such events. It is unclear how the increased number of troops will impact these issues. In Iraq and Afghanistan, DOD relies heavily on contractors to not only provide traditional logistical support—such as base operations support (e.g. food and housing) and the maintenance of weapons systems—but also intelligence analysis and interpreters who accompany military patrols. DOD officials have stated that without a significant increase in its civilian and military workforce, the department is likely to continue to rely on contractors in support of future deployments. Our body of work has identified several long-standing and systemic problems that continue to hinder DOD’s management and oversight of contractors at deployed locations, which have led to negative financial and operational impacts. Although we have made a number of recommendations aimed at addressing these challenges, DOD has made limited progress in implementing these recommendations. The key problems we have identified include the following: Lack of adequate numbers of contract oversight personnel: Having the right people with the right skills to oversee contractor performance is crucial to ensuring the efficient and effective use of contractors. However, most of the contract oversight personnel we have met with in conducting work at deployed locations have told us DOD does not have adequate personnel at those locations. We have found several cases in Iraq where too few contract oversight personnel limited DOD’s ability to identify savings, monitor contractor performance, or resolve contractor performance issues. While these personnel shortfalls are a DOD-wide problem, the more demanding contracting environment at deployed locations creates unique difficulties for contract oversight personnel. Although the Army is taking steps to increase its acquisition workforce, this will take several years, and in the interim, the problems posed by personnel shortages in Iraq and elsewhere are likely to become more significant in Afghanistan as we increase the number of forces and the contractors who support them there. Failure to systemically collect and distribute lessons learned: DOD has made few efforts to leverage its institutional knowledge and experiences using contractors to support deployed forces, despite years of experience using contractors to support deployed forces in the Balkans, Southwest Asia, Iraq, and Afghanistan. As a result, many of the management and oversight problems we identified in earlier operations have recurred in current operations. For example, we found that a guidebook developed by U.S. Army, Europe on the use of a logistical support contract in the Balkans was not made available to military commanders in Iraq until 2006, limiting their ability to build on efficiencies the Army had previously identified. We have also found a failure to share best practices and lessons learned between units as one redeploys and the other deploys to replace it. Given these challenges, we have concerns that lessons learned from the experience of using contractors to support forces deployed in Iraq may not be shared with forces deploying to Afghanistan and many of the contractor-related issues in Iraq may therefore recur in Afghanistan. Inadequate training of military commanders and contract oversight personnel: We have issued multiple reports regarding the need for better pre-deployment training of military commanders and contract oversight personnel on the use of contractor support at deployed locations. Limited or no pre-deployment training on the use of contractor support can hinder the ability of military commanders to adequately plan for the use of contractors and cause confusion. Several commanders of combat units that deployed to Iraq told us that limited or no pre-deployment training on services contractors would limit their ability to integrate the need to provide on-base escorts for third country and host country nationals, convoy security, and other force protection support to contractors into their planning efforts. As a result, the commanders were surprised by the substantial portion of their personnel they had to allocate to fulfill these missions — personnel they had expected to be available to perform other functions. Lack of training also hinders the ability of contract oversight personnel, such as contracting officer’s representatives, to effectively manage and oversee contractors, creating a variety of problems including concerns about the quality of services being provided and difficulties reviewing contractor performance. Although DOD has taken steps to improve the contractor-related training of military commanders and contract oversight personnel, it is likely that training- related problems will continue to affect the management and oversight of contractors in Afghanistan. Background screening of host nation and third country contractor personnel: While contractor employees can provide significant benefits to U.S. forces, they can also pose a security risk to U.S. troops, particularly when U.S. forces are involved in a military operation against an insurgency, as they are in Iraq. DOD and contractors, however, have difficulty conducting background screenings of host nation and third country national contractor employees because of a lack of reliable information. Recognizing the limitations of data, military officials responsible for security at installations in Iraq and elsewhere told us that they take steps such as searching contractors and escorting contractors on base to mitigate the risks contractors, particularly non-U.S. contractors, pose. U.S. forces in Afghanistan currently work with a number of host nation and third country contractor employees. The number of these employees will likely go up as the U.S. presence in Afghanistan increases, further exacerbating challenges related to background screening. In addition to these long-standing challenges, the unique aspects of Afghanistan along with ongoing efforts regarding the drawdown of forces in Iraq may present additional challenges regarding the use of contractors to support forces deployed to Afghanistan. Different language needs: DOD relies on contractors to provide linguist services in Iraq and Afghanistan. As the U.S. presence increases in Afghanistan, so too will demand for contractor personnel able to speak the languages in Afghanistan. The pool of Arabic linguists will not be useful in supporting this requirement, and the department may find it difficult to rapidly acquire sufficient numbers of qualified individuals to support the mission in Afghanistan. Transportation and security concerns: Operation Iraqi Freedom required the movement of large numbers of personnel and equipment over long distances into a hostile environment involving harsh desert conditions. The collective effort of military, civilian, and contractor personnel in Iraq since then has been complicated by the country’s lack of a permissive security environment. Afghanistan presents its own unique transportation and security concerns that will need to be factored into how contractors will be able to support the increased number of U.S. forces and, potentially, bases in Afghanistan. Drawdown will increase demands on contractors and contract oversight personnel in Iraq: As noted above, the United States is planning for the drawdown of its forces in Iraq. However, our previous work has shown that there is not a one-for-one correlation between the number of troops withdrawn from a contingency and the number of contractors withdrawn. For example in 2003, we noted that when troop levels decreased in the Balkans, contract support increased as additional contractors were needed to continue the missions previously done by service members. There may also be an increase in the overall use of contractors to support the drawdown effort itself. For example it is likely that DOD will need to increase its equipment reset capabilities in theater by adding contractors. These increased requirements will also increase the demands on contract oversight personnel to manage and oversee these contractors. Contract oversight personnel will also face increased requirements due to the need to close out contracts supporting forces in Iraq. As a result, these individuals may not be available to manage and oversee contractors in Afghanistan. As I have stated today and as we have previously recommended, in developing a comprehensive strategy for both Iraq and Afghanistan several basic principles apply; that is, both strategies should include clear and actionable near- and long-tem goals and objectives, as well as roles, responsibilities, resources to ensure success, and some means to measure progress. In addition, as DOD considers the diverse but related operational factors such as force availability, training, equipment, transportation, contracting, and related infrastructure and regional issues, these principles can be applied to both the drawdown in Iraq and the buildup in Afghanistan. As the United States develops a strategy for Iraq and Afghanistan, and related plans for adjusting force levels, we believe that increased awareness of significant challenges may improve their ability to successfully develop and execute a strategy. In addition, transparency of these strategies and operational factors will also assist congressional decision makers with their oversight responsibilities, especially as Congress considers programmatic issues and funding requests. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Committee may have at this time. For further information about this testimony, please contact Janet St. Laurent, Managing Director, Defense Capabilities and Management or stlaurentj@gao.gov. Other key contributors to this testimony include Ann Borseth, Bruce Brown, Carole Coffey, Grace Coleman, Michael Ferren, Jeremy Hawk, Larry Junek, Hynek Kalkus, Guy Lofaro, Gregory Marchand, Judith McCloskey, Margaret Morgan, Marcus Oliver, Sharon L. Pickup, James A. Reynolds, Donna Rogers, Cary Russell, Matthew Sakrekoff, David Schmitt, Marc Schwartz, William. M. Solis, Maria Storts, Matthew Tabbert, and Stephen Woods. Unmanned Aircraft Systems: Additional Actions Needed to Improve Management and Integration of DOD Efforts to Support Warfighter Needs. GAO-09-175. Washington, D.C.: November 14, 2008. Operation Iraqi Freedom: Actions Needed to Enhance DOD Planning for Reposturing of U.S. Forces from Iraq. GAO-08-930. Washington, D.C.: September 10, 2008. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington D.C.: July 8, 2008. Securing, Stabilizing, and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed. GAO-08-837. Washington D.C.: June 23, 2008 Afghanistan Security: Further Congressional Action May Be Needed to Ensure Completion of a Detailed Plan to Develop and Sustain Capable Afghan National Security Forces. GAO-08-661. Washington D.C.: June 18, 2008. Military Readiness: Joint Policy Needed to Better Manage the Training and Use of Certain Forces to Meet Operational Demands. GAO-08-670. Washington, D.C.; May 30, 2008. Stabilizing and Rebuilding Iraq: Actions Needed to Address Inadequate Accountability over U.S. Efforts and Investments, GAO-08-568T. Washington, D.C.: March 11, 2008. Military Readiness: Impact of Current Operations and Actions Needed to Rebuild Readiness of U.S. Ground Forces. GAO-08-497T. Washington, D.C.; February 14, 2008. Defense Logistics: Army Has Not Fully Planned or Budgeted for the Reconstitution of Its Afloat Prepositioned Stocks. GAO-08-257R. Washington, D.C.; February 8, 2008. Defense Logistics: Army and Marine Corps Cannot Be Assured That Equipment Reset Strategies Will Sustain Equipment Availability While Meeting Ongoing Operational Requirements. GAO-07-814. Washington, D.C.: September 19, 2007. Military Training: Actions Needed to More Fully Develop the Army’s Strategy for Training Modular Brigades and Address Implementation Challenges. GAO-07-936. Washington, D.C.: August 6, 2007. Unmanned Aircraft Systems: Advance Coordination and Increased Visibility Needed to Optimize Capabilities. GAO-07-836. Washington, D.C.: July 11, 2007 Securing, Stabilizing, and Reconstructing Afghanistan: Key Issues for Congressional Oversight. GAO-07-801SP. Washington, D.C.: May 24, 2007. Defense Logistics: Improved Oversight and Increased Coordination Needed to Ensure Viability of the Army’s Prepositioning Strategy. GAO-07-144. Washington, D.C.: February 15, 2007. Defense Logistics: Preliminary Observations on the Army’s Implementation of Its Equipment Reset Strategies. GAO-07-439T. Washington, D.C.: January 31, 2007. Reserve Forces: Actions Needed to Identify National Guard Domestic Equipment Requirements and Readiness. GAO-07-60. Washington, D.C.: January 26, 2007. Securing, Stabilizing, and Rebuilding Iraq: Key Issues for Congressional Oversight. GAO-07-308SP. Washington, D.C.: January 9, 2007. Defense Transportation: Study Limitations Raise Questions about the Adequacy and Completeness of the Mobility Capabilities Study and Report. GAO-06-938. Washington, D.C.: September 20, 2006. Force Structure: DOD Needs to Integrate Data into Its Force Identification Process and Examine Options to Meet Requirements for High-Demand Support Forces. GAO-06-962. Washington, D.C.: September 5, 2006. Rebuilding Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S. Goals. GAO-06-788. Washington, D.C.: July 11, 2006 Defense Logistics: Preliminary Observations on Equipment Reset Challenges and Issues for the Army and Marine Corps. GAO-06-604T. Washington, D.C.: March 30, 2006. Defense Logistics: Better Management and Oversight of Prepositioning Programs Needed to Reduce Risk and Improve Future Programs. GAO-05-427. Washington, D.C.: September 6, 2005. Defense Logistics: DOD Has Begun to Improve Supply Distribution Operations, but Further Actions Are Needed to Sustain These Efforts. GAO-05-775. Washington, D.C.: August 11, 2005. Defense Logistics: Actions Needed to Improve the Availability of Critical Items during Current and Future Operations. GAO-05-275. Washington, D.C.: April 8, 2005. Military Personnel: A Strategic Approach Is Needed to Address Long- Term Guard and Reserve Force Availability. GAO-05-285T. Washington, D.C.: February 2, 2005. Military Personnel: DOD Needs to Address Long-term Reserve Force Availability and Related Mobilization and Demobilization Issues. GAO-04-1031. Washington, D.C.: September 15, 2004. Defense Logistics: Preliminary Observations on the Effectiveness of Logistics Activities during Operation Iraqi Freedom. GAO-04-305R. Washington, D.C.: December 18, 2003. Military Operations: Contractors Provide Vital Services to Deployed Forces but Are Not Adequately Addressed in DOD’s Plans. GAO-03-695. Washington, D.C.: June 24, 2003. | The United States is in the process of developing its strategy for operations in Afghanistan, as well as for the drawdown and continued operations of forces in Iraq. As of December 2008, approximately 32,500 U.S. troops were deployed in Afghanistan. Moreover, DOD may add an additional 30,000 troops in Afghanistan. Since 2001, the war in Afghanistan changed from a violent struggle against al Qaeda and its Taliban supporters to a multi-faceted counterinsurgency effort. As of December 2008, U.S. troops in Iraq numbered approximately 148,500. DOD also had about 162,400 contractors in Iraq as of mid-2008. Today's testimony addresses (1) key observations regarding the development of U.S. strategy in Iraq and Afghanistan; (2) factors that should be considered as the United States refines its strategy for Iraq and plans to draw down forces; and (3) factors that should be considered as the United States develops a strategy for Afghanistan and plans for increasing forces. This statement is based on GAO reports and testimonies on Iraq and Afghanistan. Lessons learned from GAO's past work indicate that U.S. strategy for Iraq and Afghanistan should reflect a governmentwide approach and contain a number of key elements, including clear roles, responsibilities, and coordination mechanisms among government agencies, as well as specific goals, performance measures, and time frames that take into account available resources. Given the heavy commitment of U.S. forces to ongoing operations over the past several years, the availability of forces, equipment, and infrastructure will need to be closely examined in developing plans to reposture military forces. Finally, in light of future demands on the federal budget, attention will be needed to ensure that U.S. plans are developed and executed in an efficient and cost-effective manner. Clearly, strong oversight by the Congress and senior decision makers will be needed to minimize past problems such as contract mismanagement and insufficient attention to overseeing contractors. In refining its strategy and plans for the drawdown of forces in Iraq, senior leaders will need to consider several operational factors. For example, DOD will need to develop plans to efficiently and effectively relocate thousands of personnel and billions of dollars worth of equipment out of Iraq; close hundreds of facilities; and determine the role of contractors. Furthermore, the capacity of facilities in Kuwait and other neighboring countries may limit the speed at which equipment and materiel can be moved out of Iraq. With regard to Afghanistan, DOD will likely face an array of potential challenges related to people, equipment and infrastructure. For example, the availability and training of personnel will be critical considerations as the force is already significantly stressed from ongoing operations and current training capacity has been primarily focused on operations in Iraq. Additionally, the availability of equipment may be limited because the Army and Marine Corps have already deployed much of their equipment to Iraq and much of the prepositioned assets also have been withdrawn to support ongoing operations. Similarly, DOD will need to assess its requirements for intelligence, surveillance, and reconnaissance capabilities given its current allocation of these assets to support ongoing operations in Iraq. Further, the ability to transport personnel and equipment into Afghanistan will be challenged by the limited infrastructure and topography of Afghanistan. Moreover, the extent to which contractors will be used to support deployed U.S. forces must be considered as well as how oversight of these contractors will be ensured. Given all of these factors, sound planning based on a well-developed strategy is critical to ensure lessons learned over the years from Iraq are incorporated in Afghanistan and that competing resources are prioritized effectively between both operations. |
The Immigration and Nationality Act, as amended, provides ICE with broad authority to detain aliens believed to be removable while awaiting a determination of whether they should be removed from the United States as well as aliens ordered removed, and mandates that ICE detain certain categories of aliens. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 increased the number of aliens subject to mandatory detention, resulting in the former Immigration and Naturalization Service expanding the number of detention beds available to meet the mandate. The Intelligence Reform and Terrorism Prevention Act of 2004 directed the Secretary of Homeland Security to further increase the number of detention beds by 8,000 annually starting in fiscal year 2006 and continuing through fiscal year 2010. Subsequently, the House Appropriations Committee began incorporating a mandate into the annual appropriations bill. The fiscal year 2014 appropriation act requires DHS to maintain 34,000 detention beds per day. Immigration custody is civil, not criminal, detention, and is not to be punitive; rather, ICE is to confine detainees for the administrative purpose of holding, processing, and preparing them for removal. According to ICE data, during fiscal year 2013, the agency housed an average of 32,805 detainees in its detention facilities each day and held detainees for an average of about 27 days.women from a wide variety of countries and with criminal and noncriminal ICE detainees include a mix of men and backgrounds. When detention facilities admit aliens, they are to use a classification system that separates detainees by threat risk and special vulnerabilities by assigning them a custody level of low, medium, or high. From fiscal years 2010 through 2013, about 44 percent of ICE detainees were of a low custody level, 41 percent were of a medium custody level, and 15 percent were of a high custody level. ERO oversees the confinement of ICE detainees in approximately 250 detention facilities that it manages in conjunction with private contractors or state or local governments, of which 166 were authorized to house detainees for over 72 hours, as of August 2013. Over 90 percent of the facilities are operated under agreements with state and local governments and house about half of ICE’s total detention population, together with, or separately from, other confined populations. The remaining facilities house exclusively ICE detainees and are operated by a mixture of private contractors and ICE, state, and local government employees. Table 1 presents information about the number and types of facilities that ICE uses to house detainees, the entities that own and operate them, and the percentage of the detainee population confined in each facility type. ICE’s detention facilities are located across the United States. In general, facilities that house the most detainees and exclusively ICE detainees are concentrated in the states along the southern United States border, while facilities that house fewer detainees are more evenly distributed across the nation. Figure 1 presents the locations of ICE’s over-72-hour facilities by size and type. The number of admissions to detention and related appropriations has more than doubled since 2005, as shown in figure 2. In fiscal year 2014, Congress provided about $2.8 billion for detention and removal operations, which include ICE’s maintenance of 34,000 detention beds, as required by law. ICE primarily uses three sets of national detention standards with varying requirements to govern the conditions of confinement in its detention facilities. ICE establishes the set of standards applicable to each detention facility through an individual contract or agreement with the facility. Accordingly, different facilities are governed by different standards. Table 2 provides information about each of these three sets of standards. ICE has two offices, OBPP and ERO Operations Support Division, that use different methods to collect and assess data on detention expenditures and costs for different purposes; however, these two methods do not provide ICE with complete data for managing detention costs across facilities and facility types. First, for the purposes of developing ICE’s annual budget requests for detention, ICE’s OBPP developed a method to estimate total detention costs per detainee per day. ICE refers to this as the bed-rate—or the total cost to house 1 detainee for 1 day. OBPP estimates this bed rate for budgetary purposes by conducting standardized, repeatable queries of ICE’s financial management system—the Federal Financial Management System. These standardized queries provide ICE with an average overall bed rate and the average bed rate for each of ICE’s 24 areas of responsibility.However, ICE officials stated that through fiscal year 2013 these queries did not produce data that can be used to track or manage costs for individual facilities or facility types because of errors in how ICE field office personnel enter data into ICE’s Federal Financial Management System and limitations in the system that make it difficult for ICE to accurately record expenditures for all individual facilities. Specifically, OBPP officials said that field office personnel manually enter financial codes for each expenditure to categorize and provide descriptive information about that expenditure—such as if it was for detention operations—which allows ICE to link expenditures to specific facilities, among other things. However, OBPP officials have found significant coding errors in these data fields for costs incurred through fiscal year 2013. For example, according to the officials, charges for 5 facilities operating under intergovernmental service agreements (IGSA) in five states were erroneously assigned to a SPC, because, according to ICE officials, the facilities were in different counties with the same name. In addition, while ICE could link expenditures to individual facilities of certain types—specifically SPCs, contract detention facilities (CDF), and facilities operating under a dedicated intergovernmental service agreement (DIGSA)—in its Federal Financial Management System in fiscal year 2013, it could not link expenditures to individual facilities operating under an IGSA because there were not codes in ICE’s Federal Financial Management System to link expenditures to IGSAs during fiscal year 2013. According to ICE officials, in fiscal year 2014, ICE introduced new financial coding processes. These processes are intended to address this limitation and allow costs to be linked to all types of facilities, including IGSA facilities; however, as ICE has recently begun to implement these new processes, it is too soon to determine the extent to which they will provide ICE with more reliable cost data across individual facilities and facility types. Second, for the purposes of tracking monthly costs at individual facilities, among other purposes, ICE ERO’s Operations Support Division—the budget office within ERO—developed a mechanism to manually track monthly costs by facility, called the Contract Financial Monitoring File, according to ICE ERO Operations Support Division officials. Specifically, the Operations Support Division developed the Contract Financial Monitoring File to monitor obligations and monthly expenditures related to the primary contract for each detention facility using information manually taken from facility invoices and contracts in addition to data in the Federal Financial Management System, according to ERO officials and Contract Financial Monitoring File guidance. The Operations Support Division developed this manual tool to work around the limitations in the Federal Financial Management System, which, in addition to those limitations discussed above, does not automatically interface with ICE’s invoice management system, according to ICE officials. Operations Support Division officials said they use the Contract Financial Monitoring File data to determine how much funding to allocate to each facility and to track expenditures and contract pricing at a single facility over time, among other uses. However, these data have limitations that preclude using the data to track and manage costs across individual facilities and facility types. For example, the Contract Financial Monitoring File data do not consistently or completely capture costs for facilities because some facility contracts include services such as medical care and transportation, while other contracts do not. For facilities with contracts that do not include such services, ICE or service providers contract with a third-party to provide these services. As a result, ICE officials said that some higher-cost facilities may therefore be providing services that are not provided by lower-cost facilities, or that are provided and billed by third parties. For example, ERO officials said that ICE provides medical care at most CDFs either through the ICE Health Service Corps or through a separate third-party contract with a health care provider, ICE’s medical costs paid instead of directly through the facility operator.for through headquarters—which, according to ICE officials totaled about $157.6 million in fiscal year 2013—are not reflected in facility invoice costs, and therefore are not included in the Contract Financial Monitoring File as costs to those individual facilities. Other facilities that directly provide these services would reflect these costs in facility invoices, and these costs would therefore be tracked separately in the Contract Financial Monitoring File. Further, some facilities provide transportation for detainees as part of the primary detention contract, and therefore the Operations Support Division captures these costs—which composed up to 47 percent of total facility expenditures in fiscal year 2013—for each facility in the Contract Financial Monitoring File. However, at other facilities, transportation services are not included in the facility contract. For these facilities, ICE provides transportation services for detainees through separate contracts with transportation providers, which ERO tracks separately, and does not link these costs to individual facilities in the Contract Financial Monitoring File. In addition, the file’s cost data do not include ICE overhead costs that vary across facilities. These costs include, among other things, shared utilities and telecommunication charges that occur in the field but are paid for through ICE service-wide contracts, according to an ICE official. As a result of these limitations, the Contract Financial Monitoring File data cannot be used for tracking and managing cost data across individual facilities and facility types. Since 2009, ICE has taken some steps to strengthen how it tracks and manages detention costs and expenditures. However, we identified limitations in ICE’s controls and processes in three areas. These limitations relate to (1) collecting and maintaining cost data, (2) ensuring cost is considered in placing aliens in detention facilities, and (3) preventing improper payments to detention facility operators. Collecting and maintaining cost data. ICE is in the process of planning to upgrade its new financial management system; however, ICE does not have a target time frame for when this upgrade will occur, according to ICE officials. The agency, however, has taken steps to manually track and manage costs, referred to as manual work-arounds. First, ICE has required field office personnel to use a new coding system to link all financial transactions entered into the Federal Financial Management System to individual facilities, including IGSAs, to help ICE more reliably track costs. According to ICE OBPP officials, this requirement began in fiscal year 2014. Second, ICE has taken steps to help ensure that expenditures are correctly applied to obligations in the Federal Financial Management System. These steps include developing standard operating procedures for linking obligations to expenditures and, beginning in the third quarter of fiscal year 2014, requiring personnel to input a specific period of performance for each facility expenditure, according to ICE officials. Finally, as a manual work-around for estimating transportation costs, ICE has developed a statement of work to study transportation costs to optimize ICE’s ground and air transportation networks and identify any inefficiencies in the current process. Although these manual work-arounds are positive steps that should help strengthen the completeness and reliability of ICE data on detention facilities costs, ICE has not assessed the extent to which these manual work-arounds are sufficient to address data limitations and allow it to reliably compare costs among and across facilities and facility types, according to ICE officials. ICE officials said they have not conducted such an assessment because they have focused on higher priorities, such as developing a national bed rate to support the agency’s annual budget request. In addition, ICE has not assessed the extent to which additional internal controls are needed to address the challenges we identified and collect and maintain more complete data on costs and expenditures for individual facilities. For example, as previously discussed, ICE identified data entry errors made by staff in entering cost data into the Federal Financial Management System. ICE also identified challenges in tracking and maintaining complete data on all costs or expenditures associated with individual facilities, including costs for medical care and transportation, for example. ICE has not assessed the extent to which additional controls, such as a process to check for data entry errors, could help the agency track and maintain more complete data on detention facility costs, as ICE stated that the agency recently implemented the manual work-arounds. The ICE Strategic Plan FY2010-2014 states that ICE will proactively identify and correct financial and operational risks and continually strengthen internal controls to safeguard the public’s resources and trust. ICE has strengthened some controls, but it has not assessed the extent to which it has appropriate internal controls in place for all tracking and reporting of financial information to link costs to individual facilities. Standards for Internal Control in the Federal Government notes that internal controls are an integral part of each system that management uses to regulate and guide its operations, and that control activities are an integral part of an entity’s planning, implementing, review, and accountability for stewardship of government resources and achieving effective results. Furthermore, the standards state that control activities, which include a wide range of diverse actions and maintenance of related records, need to be clearly documented and help to ensure that all transactions are completely and accurately recorded. Assessing the extent to which ICE’s manual work-arounds could provide ICE with more complete data on facility costs and the extent to which additional controls may be needed could better position ICE to have more reliable data for tracking and managing costs across facilities and facility types. Moreover, as ICE is in the process of planning for upgrading its financial management system, assessing the extent to which the appropriate internal controls are in place for tracking and managing detention facility costs and developing any additional controls deemed necessary could help provide ICE with more complete data to help ensure that ICE is accurately tracking costs and has the data needed to appropriately and effectively manage detention costs. Ensuring cost is considered in placing aliens in detention facilities. ICE ERO officials stated that field office personnel are to take cost into account, as appropriate, when making detainee placement decisions; however, ICE headquarters does not have a process or controls in place to ensure that field offices are appropriately considering cost in order to promote efficient field office management. ERO field offices are responsible for deciding where to house detainees within their areas of responsibility and are to consider a variety of factors, including cost, when making detainee placement decisions, according to ICE officials. ICE ERO officials stated that other factors that may be more important than cost in making placement decisions include whether (1) the detainee has medical needs that can be best served by a particular facility, (2) the detainee has an attorney or family located near a particular facility, and (3) there are transportation requirements to bring the detainee to the facility. ERO officials stated that field offices are to place detainees in facilities that have guaranteed minimum populations when possible, as ICE pays In addition, for these beds regardless of whether or not they are used.facilities that have guaranteed minimums tend to have tiered pricing— meaning the contractor charges a lower per diem for each detainee housed above an agreed-upon guaranteed minimum number of detainees and below the facility’s full capacity—than at other facilities that do not have guaranteed minimums. In 2009, the DHS Office of the Inspector General reported that ICE had not fully implemented its National Detention Management Plan, resulting in mixed progress in moving toward a more cost-effective strategy for acquiring detention bed space.the agency has taken steps to ensure that cost is taken into account, as appropriate, in deciding where to house detainees. For example, ICE ERO headquarters develops daily capacity reports that show the percentage of capacity filled at SPCs, CDFs, DIGSAs, and large IGSAs. According to ICE ERO headquarters officials, if they notice that a particular area of responsibility has open space in facilities with guaranteed minimums, they can call the field office director to find out why the guaranteed minimum is not being met. Since then, according to ICE officials, However, our analysis of ICE data showed that in some cases ICE did not fill all guaranteed minimum bed spaces, effectively paying for beds that the agency did not use. Specifically, our analysis of the ADP and ICE’s contractual guaranteed minimums at selected dedicated facilities for fiscal years 2011 through 2013 showed instances where ICE paid for beds it did not use. For example, our analysis showed that the ADP at a CDF had fewer detainees than the guaranteed minimum for each fiscal year, 2011 through 2013, which is the equivalent of about $3.6 million in bed space that ICE did not use, based on the per diem rates for this period. According to ICE officials, the guaranteed minimum had been negotiated with the facility by USMS, which previously used the facility, and ICE renegotiated a lower guaranteed minimum in fiscal year 2012. However, we noted that the ADP in fiscal years 2012 and 2013 remained below the revised guaranteed minimum number of beds. ERO officials also said that during that timeframe ICE moved detainees from the CDF to a new facility that ERO opened nearby that was intended to better meet ICE’s civil detention goals. We also found instances through fiscal year 2014—as of July 2014—in which ICE placed the guaranteed minimum of detainees in facilities, but did not take advantage of the tiered pricing structure, which would have provided less costly bed rates for detainees placed above the guaranteed minimum. For example, at one CDF, ICE met the guaranteed minimum each year from fiscal years 2011 through 2013 and also housed additional detainees at the facility, for whom ICE was charged a lower bed rate because the facility has a tiered pricing structure. However, the number of detainees housed over the guaranteed minimum also decreased each year over that time period. Therefore, because ICE did not maximize the number of detainees over and above the guaranteed minimum, the average cost per detainee at the facility increased from $133 per day in 2012 to $135 per day in 2013. analysis, ICE’s bed space procurement study—published in April 2014— found that at certain SPCs, ICE underutilized facilities with guaranteed minimums. Therefore ICE could conserve resources by better filling the capacity above the guaranteed minimum, as it costs ICE less per detainee to house detainees in these facilities. As described above, these costs may not include the full costs of detention at that facility. ICE ERO Operations Support Division did not have complete data for fiscal year 2011. guidance, ERO officials said they will be working with ICE OBPP to develop and share cost reports and facility utilization reports with field office management. While ICE’s plan to develop and issue this guidance is a positive step, as of August 2014, ICE did not have plans to monitor the extent to which field offices consider and implement cost as a factor in making detainee placement decisions over time, according to ICE officials. In particular, ICE’s daily capacity reports are intended to provide information to ICE personnel regarding bed space availability on a daily basis. However, ICE ERO does not currently use these reports or other data to monitor and ensure field offices are appropriately considering cost in making detainee placement decisions over time. The ICE strategic plan for fiscal years 2010-2014 notes that to expend government resources wisely, ICE will work to increase efficiency in every step of the removal process—from apprehension through removal. Furthermore, Standards for Internal Control in the Federal Government notes that managers need to compare actual performance with planned or expected results throughout the organization and analyze significant differences, and should monitor the quality of performance over time. Developing an oversight mechanism to ensure that field offices comply with guidance to place detainees, whenever possible, in facilities with guaranteed minimums and tiered pricing could provide ICE with better assurance that it is cost-effectively managing detainee placement. Preventing improper payments to detention facility operators. ICE has taken steps to strengthen internal controls over the process used to pay contractors for detention services; however, ICE ERO remained designated as at high risk for making improper payments in fiscal year 2013 by DHS. ICE uses manual internal controls over the process to review invoices and pay contractors for detention services. Contractors at all ICE detention facilities are to receive payment for providing detention services by submitting invoices to ICE for review and payment. Contractors are to submit summary invoices to the Burlington finance center and all required invoice support documentation to the contracting officer representative (COR) at the ICE ERO field office overseeing the facility. Burlington finance center personnel are to provide an initial review of the summary invoice to ensure that the necessary contract information is correctly recorded and if it is, are to notify the COR that the invoice is available for approval. The COR is then required to review the invoice to verify that it accurately reflects work completed in accordance with requirements in the contract. The COR is also to ensure that all required supporting documentation is received prior to approving an invoice. The Improper Payments Information Act (IPIA) of 2002, the Improper Payments Elimination and Recovery Act (IPERA) of 2010, and the Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012 require agencies to review payments made by their components in order to identify those susceptible to significant improper payments and to carry out cost-effective programs for identifying and recovering overpayments made to contractors. Improper payments are calculated as the percentage of the total dollar value of payments made in each year that were improper. For fiscal year 2013, a significant improper payment was defined as exceeding $10 million of all program or activity payments and 1.5 percent of program payments, or exceeding $100 million alone. IPERIA of 2012 applied these thresholds to fiscal year 2014 and each fiscal year thereafter. DHS’s annual review of component improper payments has highlighted that ICE ERO had unacceptable levels of improper payments. ICE ERO reduced improper payment amounts by nearly half from fiscal year 2011 to 2012, but remains designated as at high-risk for making improper payments. DHS reported that in fiscal year 2012 testing of fiscal year 2011 payments, ICE ERO made an estimated $133 million in improper payments (approximately 8 percent of all payments), and fiscal year 2013 testing of fiscal year 2012 payments showed that ICE made an estimated $73 million in improper payments (approximately 4 percent of all payments). ICE has taken several steps to address the primary reasons for improper payments. ICE’s analysis of the findings revealed that most of ERO’s improper payments were caused by either unresolved discrepancies between the invoice and contract documents or that ERO personnel responsible for invoice approval did not ensure sufficient documentation had been provided by contractors to support the payment of invoices. To reduce the improper payment rate, ICE ERO issued requirements aimed at standardizing the invoice submission and review process across facilities, and strengthening the process, among other actions. These requirements include a requirement that facilities provide an itemized list of charges and list contract line items on invoices, among other things. According to ICE officials, as of September 2013, ICE had updated all facility contracts with the new requirements, and invoices submitted by facilities for services in December 2013 and later should meet the new requirements. However, our review of a sample of 31 of 158 invoices from 15 facilities for detention services provided in December 2013 showed that corrective actions taken by DHS and ICE had not yet fully addressed issues of the completeness and accuracy of invoices and supporting documentation submitted by detention contractors. Specifically, our review showed that 13 invoices from 6 facilities did not include all invoice elements required in ICE’s new guidance. Examples of missing elements included unit prices for mileage and the contractor’s address. In addition, our analysis showed that 20 invoices from 11 facilities did not include all required supporting documentation, as specified in ICE’s new invoice submission and review guidance. Invoices for transportation charges were the type of invoice that was most commonly missing supporting documentation. For example, invoices included the dates detainees were transported, but did not include elements such as the names of detainees, or the number of detainees transported. Standards for Internal Control in the Federal Government notes that control activities should be efficient and effective in accomplishing the agency’s control objectives, and should occur at all levels of the agency. The standards also note that the responsibility for good internal control rests with managers, and that management sets the objectives, puts the control mechanisms in place, and monitors and evaluates the controls. In June 2014, ICE issued a policy manual to provide general instruction and guidance to CORs in recording the receipt and acceptance of goods and services, including the processing of contractor invoices, and plans to further assess the need for additional controls through April 2015. Such an assessment of internal controls is necessary as ICE ERO has remained at high risk for improper payments despite issuance of past guidance. By taking additional steps to help ensure that personnel responsible for reviewing and paying invoices follow internal control procedures contained in the new guidance to ensure proper payment, and that their actions are appropriately overseen and reviewed by management, ICE ERO could have better assurance that its detention management practices are in compliance with relevant laws to safeguard federal resources for detention services. Despite the limitations we identified with ICE’s data on facility costs, we determined—by interviewing officials and checking data for errors—that data maintained by the ICE ERO Operations Support Division in its Contract Financial Monitoring File were sufficiently reliable to provide a general indication of approximate cost ranges across and within facility types for fiscal year 2013. Our analysis of these data indicated that ICE generally spent more per detainee per day at ICE-owned SPCs than at other types of detention facilities. Specifically, our analysis indicated that while the median expenditure per detainee per day at SPCs was about $200, these costs were lower at about $120 for CDFs and about $75 for IGSAs and facilities operated under USMS intergovernmental agreement (IGA) or contract. Our analysis of these data also indicated that the range of costs within a facility type was greatest for SPCs than for other types of facilities. Specifically, our analysis showed that the range between the lowest- and highest-cost SPC facilities was about $195, while the range was lower for IGSAs and IGAs (about $110), CDFs (about $80), and DIGSAs (about $50). ICE officials cited labor costs—which compose approximately 70 percent of all facility costs—as one of the common reasons for the differences in the ranges of costs across types of detention facilities. ICE officials stated that the agency has limited ability to negotiate labor rates in its detention and ground transportation contracts because they are subject to the Service Contract Act (SCA) of 1965, which, among other things, specifies prevailing wages by geographic area. ICE officials stated that as a result of the SCA’s requirements, facilities that are located in more expensive areas tend to have higher labor costs. Factors that influence the amount of labor needed also affect overall costs at a particular facility, according to ICE officials. For example, a facility’s design and physical layout affect the number of staff needed to monitor the facility, and therefore affect older facilities, which usually have more blind corners and require more staff, according to officials. Other cost drivers include characteristics of the detainee population held at the facility, such as a large population with specialized medical needs that increase staff costs; the distance between the facility and other locations, such as immigration courts, which affects transportation costs; and the extent to which there are other nearby facilities that can house immigration detainees, which can lower costs because of competition, according to ICE officials. ICE has taken steps to more specifically identify the reasons for cost differences across facility types, including hiring a contractor to identify actions the agency could take to more efficiently manage the procurement options for dedicated facilities. Other issues at CDFs contributing to higher costs were a need to consolidate detention bed capacity among facilities within common operating areas and the lack of competition that drives up prices. business over a longer time period.a DIGSA had a profit margin of 20 percent. For example, one contractor for Government- and privately owned IGSAs. According to officials, the study did not specifically examine costs at individual IGSAs, but noted that facility costs at IGSAs may increase in the future when implementing the 2011 PBNDS—ICE’s most recently implemented detention standards. The study did not estimate such costs but presumed that according to interviews with ICE officials and contractors, implementing the 2011 PBNDS at IGSAs would not be cost neutral and would require significant contracting action. ICE detention standards vary in rigor as defined by the number and content of standards in place to protect detainees and focus on performance outcomes. Since 2000, ICE has primarily used three sets of detention standards—the 2000 NDS, the 2008 PBNDS, and the 2011 PBNDS. In regard to the number of standards, the 2000 NDS contains 38 standards related to aspects of detainee care and services and facility operation, while the 2008 PBNDS contains 41 standards and the 2011 PBNDS contains 42 standards. These standards are discussed in further detail in appendix II. ICE has added standards over time to address issues of heightened concern or to address gaps in procedures. For example, ICE added a standard in the 2008 PBNDS to address sexual abuse and assault, and a standard in the 2011 PBNDS to address medical care for women. According to ICE ODPP officials, the agency made enhancements or revisions to 39 of the 42 standards in the 2011 PBNDS, such as in the areas of medical and mental health care. In regard to the content of standards, ICE noted certain additional requirements that were applicable to a different extent across facility types. For example, under the NDS and 2008 PBNDS, ICE requires ICE- owned SPCs and privately owned CDFs to conform to these additional requirements, while ICE states that government- or privately owned DIGSAs and IGSAs may adopt, adapt, or develop alternatives to the procedures provided they meet or exceed the intent represented by the additional requirements. Appendix III provides more detailed information on the additional requirements that SPCs and CDFs are required to follow. ICE officials said that under the 2011 PBNDS, some of these more substantive requirements became applicable to all facilities and ICE also introduced a new concept of optimal provisions that agency officials characterize as more stringent than the mandatory provisions, and therefore contractors may choose to adopt the optimal provisions voluntarily. While these optimal provisions are voluntary, ICE states that facility implementation of these provisions would further effective facility operation at the level intended by ICE under the revised standards. Appendix IV provides additional information on optimal provisions and an example. Finally, in regard to the focus of the standards, ICE officials explained that the 2008 PBNDS and 2011 PBNDS shifted language from expressing what is to be done under the required policies and procedures to focus on the results or outcomes the required procedures are expected to accomplish; they also provide a higher level of procedural detail than the 2000 NDS. ICE officials stated that the expected outcomes each standard is intended to produce are stated, rather than assumed, and the prescribed expected practices represent what is to be done to accomplish those expected outcomes. For example, while both the NDS and PBNDS include policies and procedures related to medical care, the 2000 NDS states that facilities “must have a procedure in place” to ensure that medical staff are alerted to health care requests in a timely manner, while the 2008 PBNDS states that health care needs “will be met in a timely and efficient manner,” and that each facility shall have a procedure to ensure that sick call requests are “received and triaged by appropriate medical personnel within 48 hours.” According to ICE officials, ICE is to specify in each facility’s contract or agreement the standards to which the facility is to be held. Our analysis of ICE documents, however, showed that in fiscal year 2013, ERO held 3 (2.5 percent) of the 118 facilities that had the 2000 NDS or nonfederal standards cited in the contract or agreement to the more rigorous 2008 PBNDS during the inspection process. For facilities operating under a contract that cites the NDS, ERO officials stated that field officials responsible for overseeing the facilities, or the administrators operating the facilities, may decide to inspect them to the 2008 PBNDS if the officials judge that the facilities are able to meet the more rigorous requirements, and the facilities agree to this practice, or if the facilities themselves ask to be held to more rigorous standards. An ICE official responsible for detention policy explained that ERO inspecting a facility to more rigorous standards than those cited in the facility’s contract or agreement can be beneficial to ICE and detainees because it permits the agency to hold facilities accountable for more rigorous requirements. According to this official, it can be more efficient and cost-effective for ICE to ensure that facilities adhere to more rigorous standards through the inspection process rather than modifying the facilities’ contracts or agreements to include the more rigorous standards because, for example, facility contractors may request to open negotiations for the entire contract, which could be a time-consuming process, as well as request additional funding from ICE for the change in contract terms. For example, inspecting a facility to the 2008 PBNDS when the facility contract cites the 2000 NDS standards allows ERO to hold the facility accountable to standards for sexual abuse and assault prevention and intervention that would not be required of the facility if it was inspected under the 2000 NDS, which do not include those provisions. ICE officials reported that as of January 2014, 20 of the 22 facilities that exclusively house ICE detainees—SPCs, CDFs, and DIGSAs—as well as 5 IGSAs, were held to the most recent and rigorous 2011 PBNDS. In fiscal year 2013, ICE housed approximately 54 percent of its ADP in these 25 facilities. Fourteen of the remaining 141 IGSA facilities—or approximately 16 percent of ADP—are held to the 2008 PBNDS, while the remaining 125 IGSA facilities—or 28 percent of ADP—that house ICE detainees along with other populations are held to 2000 NDS (see fig.3). Furthermore, ODPP officials stated that a number of facilities, regardless of whether they have been updated to the 2011 PBNDS, have voluntarily adopted the Sexual Abuse and Assault Prevention and Intervention standard of the 2011 PBNDS, which requires, among other things, that written sexual abuse and assault prevention and intervention policies and procedures include components beyond those of the 2008 PBNDS, such as a statement of a zero tolerance policy for all forms of sexual abuse or assault. As of April 2014, ICE officials said that they were in the process of requesting that additional facilities authorized to hold detainees for 72 hours or longer implement the most recent 2011 PBNDS, and documenting that change in facility contracts. Specifically, ICE officials stated that they planned to request that all such facilities with an ADP of 150 detainees or greater adopt the 2011 PBNDS by the end of fiscal year 2014. If implemented, this would increase the number of facilities held to the 2011 PBNDS from 25 to 61 facilities, or from 54 percent to 89 percent of the ADP. According to ICE officials, implementing the 2011 PBNDS has taken longer than anticipated. In April 2012, ICE disseminated an implementation plan to dedicated facilities requesting that they adopt the 2011 PBNDS over a staggered 6-month period. According to ODPP officials, ICE reached out to dedicated facilities first because they house the greatest population of detainees and because any increased costs would be spread across the entire population of the facility. ODPP officials said that ICE did not meet the plan’s original milestones because most facility contractors submitted extensive questions about the new standards and then requested that ICE modify their contract or agreement to include higher per diem rates to cover estimated costs of complying with the higher standards. ICE’s attempts to minimize the potential increased costs associated with adopting the newer standards required lengthy negotiations with facilities to arrive at cost-neutral contracts. In the case of nondedicated facilities that house fewer ICE detainees, ICE officials said it may not be cost-effective for the agency to negotiate with the facility contractors to increase standards for relatively few detainees who are held in detention or are held for short periods of time. For example, in fiscal year 2013, 46 facilities housed fewer than 10 detainees during the year, and the time these detainees spent in detention averaged less than 14 days. In addition, some facilities may be limited in their ability to comply with higher standards because of reasons such as space limitations. For example, the 2011 PBNDS require that detainees in administrative segregation receive at least 1 hour of daily exercise opportunities outside of the living area, but according to ICE officials, some facilities that house ICE detainees may not have space to expand the opportunities for outdoor recreation. ICE has not documented the reasons for using different standards across facilities or why the 125 facilities under 2000 NDS as of January 2014 had not been transitioned to the 2011 PBNDS. ICE officials said that reasons different standards were used across facilities include cost issues as well as facilities’ ability to comply with recent standards. These officials also stated that agency implementation plans for progressively adopting the 2008 and 2011 PBNDS across certain facilities served to document the agency’s rationale for using different standards across facilities. However, while these plans documented which facilities were to receive requests to adopt the newer standards, they do not document the reasons why these facilities were chosen or why remaining facilities cannot be transitioned to the most recent standards. For example, the implementation plan for the 2011 PBNDS did not explain why some smaller—in terms of facility type and ADP—facilities that were not listed in the plan were transferred to the 2011 PBNDS, while other, similar facilities not included in the plan were not transferred to the newer standards. ICE officials said that in certain instances, detention facilities can have standards waived after a review and approval by ICE. Specifically, the agency may choose to waive certain detention requirements for a facility if the contractor can comply with all but a specific detention standard, such as the 2011 PBNDS standard for outdoor recreation, which describes detainees’ access to exercise and recreation activities within the appropriate security restraints. These officials said that waivers are granted infrequently and usually only after ICE has (1) reviewed the facility contractor’s request, (2) worked with the facility contractor to identify a work-around solution that would allow the facility to comply with the standard, and (3) confirmed that the facility has a “better than acceptable” process in place that meets the intent of the standard even if it does not meet the strict letter of the standard. According to ICE ERO, as of August 2014, waivers were in effect for 41 standard components— the line items that compose the standards—across 35 facilities; these waivers were approved from fiscal year 2012 through August 2014. Our analysis of these waivers showed that 22 (54 percent) of the waivers are related to a component of the environmental health and safety standard, which requires facilities to, among other things, maintain a dedicated barbering space and test power generators every 2 weeks. For example, one facility lacks a separate barbering facility and has collocated barbering services in a multipurpose room that is also used for dental appointments. Another 6 (15 percent) of the 41 waivers relate to a component of the key and lock standard, which requires facilities to ensure that an on-site security officer completes locksmith training. In these instances, facilities have agreed to use a contractor to install and repair locks because they say training a security officer to perform that function would be too expensive. The remaining 13 waivers address a variety of other standards. According to ERO officials, copies of approved waivers are provided to the facility contractor and to the ICE ERO field office that oversees the facility; copies are also to be provided to ODO officials upon request. Standards for Internal Control in the Federal Government specifies that all transactions and other significant events should be clearly documented and the documentation should be readily available for review. According to ICE officials, implementation of the 2011 PBNDS at facilities with an ADP of fewer than 150 is to be conducted on a case-by-case basis. However, ICE ERO was not able to provide documentation of the reasons it decided to implement the 2008 or 2011 PBNDS at some of these facilities while keeping other facilities at the older, less rigorous 2000 NDS or 2008 PBNDS. A senior ICE official stated that ICE relies on institutional knowledge within the agency to track reasons for assigning certain standards to individual facilities. For example, our analysis identified 1 facility that reverted to 2008 PBNDS after attempting to adopt the higher 2011 PBNDS; ICE officials stated that the rationale for this decision had not been documented. Documenting reasons why facilities cannot be transitioned to the most recent standards could help strengthen ICE’s ability to oversee facilities’ compliance with detention standards and could provide an institutional record of decisions ICE has made about why facilities are held or not held to certain standards. ICE uses four mechanisms for assessing facilities’ compliance with detention standards: (1) annual or biennial inspections conducted by an ERO contractor, (2) annual self-inspections conducted by facility staff under ERO’s Operational Review Self-Assessment (ORSA) process, (3) periodic compliance inspections of selected facilities by ODO personnel, and (4) on-site monitoring provided by an ERO detention service manager (DSM). ICE officials responsible for detention oversight stated that these different oversight mechanisms complement one another and serve different purposes. ERO inspections are to assess compliance with all applicable detention standards at each facility. Likewise, self- inspections, which apply to more than half of the smallest IGSAs and IGAs—generally those with an ADP of fewer than 10 detainees—cover key components of the detention standards. ODO is to conduct in-depth compliance inspections that focus on certain standards and facilities selected through a risk-based approach. DSMs are to monitor facility adherence to ICE’s detention standards on a day-to-day basis and provide facilities with technical guidance, including guidance advising how to implement corrective action plans, as needed. Five medium IGSA and USMS IGA facilities (1 percent)—ranging in average daily population from 69 to 137—had on-site monitors during fiscal year 2013 and are excluded from this analysis. monitoring, and none received an ODO compliance inspection. ICE typically applied fewer types of oversight mechanisms at facilities with small detainee populations—generally less than 10 ADP—where more than half received oversight in the form of a self-inspection and about a third were inspected by ERO. These small facilities were not subject to ODO compliance inspections and did not have DSMs. Eighteen facilities that housed about 1 percent of total ADP in fiscal year 2013 were not subject to any of the four types of oversight mechanisms. ICE officials attributed this to various reasons, such as ICE not holding detainees in the facility during the year, ICE deciding to no longer use the facility, and the fact that some facilities met the criteria for biennial review and therefore they were not inspected in fiscal year 2013 (their next scheduled inspection was in fiscal year 2014). ICE ERO officials stated that the agency determines which ERO oversight mechanisms are to be used at facilities primarily based on the size of the facility—total detainee population—and available resources, among other factors. For example, facilities that have an ADP of between 10 and 50 are inspected by a contractor on an annual basis, or a biennial basis if their past two inspections were satisfactory. Because of time and resource concerns, facilities that have an ADP of fewer than 10 may not be inspected by ERO, but are required to perform self-inspections on an annual basis and report the results of the inspections to ERO. According to ERO officials, DSMs are to monitor facility conditions on a day-to-day basis. However, ERO officials also stated that ERO generally reserves on-site monitoring for facilities with large populations of 100 or more detainees and that resource constraints currently limit further expansion of the program. According to ODO officials, resource constraints also limit the number of facilities ODO can inspect on an annual basis. Our analysis of the number of detainees confined in facilities where ICE used varying oversight mechanisms showed that in fiscal year 2013, nearly all ICE detainees were housed in facilities that were subject to at least one form of oversight. Further, in fiscal year 2013, the majority of detainees—94 percent of ICE’s average daily population—were in facilities that received an annual ERO inspection—and continuous on-site monitoring by a DSM—78 percent of ICE’s average daily population—as shown in figure 5. About 40 percent of ICE’s average daily population of detainees were held in facilities that received an in-depth ODO compliance inspection in fiscal year 2013. A small minority of detainees— about 1 percent of ICE’s average daily population—was housed in facilities that conducted a self-inspection. Additionally, less than 1 percent of the average daily population was not subject to any of these oversight mechanisms during fiscal year 2013. ERO and ODO conducted inspections at many of the same facilities, but collectively their inspections showed different results in fiscal year 2013. Specifically, our analysis of ICE inspection results showed that ERO and ODO included 35 of the same facilities in their inspections conducted during fiscal year 2013, and in 29 of these inspections, ODO found more deficiencies than ERO across facility types (see table 3). Collectively, for those 35 facilities, ODO identified 448 deficiencies and ERO identified 343 deficiencies. For these facilities inspected under the 2000 NDS and the 2008 and 2011 PBNDS, these deficiencies represented failure to comply with one or more components that constitute a detention standard, but not failure to comply with the overall standard. For the 35 facilities at which both ICE ERO and ODO conducted an inspection in fiscal year 2013, in some cases ERO and ODO found different facility deficiencies within the same standards. This included three standards that ICE has determined are some of the highest-priority standards, because they have a high potential for adverse effects: For Medical Care, Special Management Units, and Use of Force.example: Medical Care. ICE ERO and ODO inspection reports differed in the extent to which they found deficiencies in medical care for the same facilities, including facility inspection reports in which only ERO found deficiencies, facility reports in which only ODO found deficiencies, and reports in which both ERO and ODO found deficiencies but the specific deficiencies differed. For example, at one IGSA, ODO found that the facility was not properly safeguarding detainee medical information, as all facility staff had access to each detainee’s medical intake form. At this same facility, ICE ERO did not find any deficiencies related to medical care. Special Management Units. ERO and ODO inspection reports differed in the extent to which they identified deficiencies pertaining to special management unit standards. For example, at one facility, ERO found the facility deficient in most elements of the special management unit standard, as the facility did not have a special management unit. ODO noted that the facility did not operate a special management unit and therefore did not report the absence as a deficiency. At another facility, ODO reported that the facility’s policies and procedures did not require the facility administrator to consult with ERO’s Detention Management Division prior to approving the placement of an individual in a special management unit cell, which would provide ERO an opportunity to consult with DHS or ICE legal counsel as required by the standard. At that same facility, an ERO inspection found that the facility met all components of the special management unit standard. Use of Force. ODO and ERO inspections both found deficiencies related to the use of force standard. For example, at one facility, ODO found two deficiencies in the standard: (1) the facility had no procedures established for after-action reviews of use of force incidents, and (2) facility policy did not require calculated use of force incidents to be video-recorded, as required by the standards. At this same facility, ERO found one use of force deficiency—staff were not trained in use of force team techniques, as required. ICE officials told us they have not assessed the extent to which ODO compliance inspection results showed a greater number of deficiencies at facilities in fiscal year 2013, or the extent to which ERO contract inspections have the capacity to fully capture deficiencies in facilities’ compliance with relevant detention standards. However, ICE officials cited several reasons as to why ERO and ODO inspection results may differ across facilities: Timing of inspections. According to ICE officials, between inspections, facilities may resolve previously identified deficiencies or may incur new ones. In fiscal year 2013, ERO and ODO inspections at the 35 facilities ranged from less than 1 to 10 months apart. Coverage and depth of inspections. According to an ICE official, ODO’s in-depth compliance inspections are more likely to identify a greater number of deficiencies. For example, in reviewing the medical care standard, ERO inspectors may select 10 files to review to determine if a facility is following policies and procedures. ODO may check 50 files to assess overall compliance and may look beyond the standards and inspection checklist requirements addressed by ERO to address any quality of care concerns that have been raised. Reporting of results. According to ICE officials, differences in ERO and ODO reporting styles can make it difficult to assess the extent to which inspection results differ. ERO’s contracted inspector uses a checklist to identify deficiencies in the components that compose the standards, and determine whether the number of deficient components rises to the level of a deficiency in standards. ODO does not use a checklist and reports its findings in a narrative descriptive report and identifies deficiencies in components but does not assess whether these deficiencies meet the threshold of a deficient standard. For example, if the ICE ERO inspection sheet does not include a component directly related to a particular part of the standard, ODO may cite a deficiency that ERO may not find or identify. Given the different purposes of ODO and ERO inspections, it is reasonable to expect in some cases the respective findings differ, according to differences in the depth and scope of the inspections. However, without assessing why these differences occur, ICE is not well positioned to determine the extent to which the oversight mechanisms are functioning as intended. Moreover, Standards for Internal Control in the Federal Government calls for operational information to be recorded and communicated to management and others within the entity so that the entity can determine whether compliance requirements are being met. In addition, management is to ensure there is adequate and effective communication between internal and external stakeholders to help ensure appropriate decisions are made based on reliable and relevant information. ICE officials stated that ERO and ODO have not discussed differences in their inspection findings and have not addressed broader issues of why ERO and ODO inspection results differed across almost all inspections conducted at the same facilities within fiscal year 2013, or to what extent oversight mechanisms are functioning as intended. Assessing the underlying reasons why ERO and ODO inspection results may differ, and the extent to which these differences may reflect broader issues, could help ICE ensure that inspection mechanisms are working as intended and the extent to which any changes may be needed to ensure safe, secure, and humane confinement. As the number of aliens in detention facilities has dramatically increased over the past decade, so too have the associated costs of maintaining and operating what is now the nation’s largest civil detention system. ICE has recently taken steps to assess the primary drivers of facility costs by types of facilities while continuing to improve confinement standards and maintain a robust oversight program. However, ICE faces challenges in the extent to which it can use its financial management system—including manual work-arounds—to reliably identify and compare facility costs, a fundamental aspect of effectively estimating and controlling the cost of operations. Assessing and developing additional internal controls over the management of facility cost data could help ensure that the mechanisms ICE has in place, or is developing, to identify facility costs are accurate and reliable, and provide ICE with more reliable data to effectively manage detention costs. Similarly, while we recognize that ICE faces competing priorities in determining detainee placement, developing an oversight mechanism to ensure that field offices comply with guidance to appropriately consider costs in making detainee placement decisions could help ensure that the agency is effectively managing the costs of housing detainees. Moreover, although ICE has taken steps to reduce the improper payment rate for facility contractors, taking additional steps to ensure that responsible personnel follow internal control procedures to ensure contractor payments are accurate and properly supported could provide additional assurance that ICE’s detention management practices comply with relevant laws and are effectively protecting federal resources. As it seeks to more efficiently manage facility costs, ICE is also in the process of applying more rigorous detention standards to generally larger detention facilities. Documenting the reasons why remaining facilities are not held to the new standards could provide the agency with an institutional record and enhance the transparency and accountability of the agency’s process for managing detention facilities. Finally, identifying the underlying reasons why inspections conducted by ERO and ODO for the same facilities may result in different findings could help ICE better ensure that oversight mechanisms are working as intended and inspection results are accurately reflecting facilities’ compliance with relevant standards. To enhance ICE’s ability to analyze and manage detention facility costs, ensure transparency and accountability in the management of detention facilities, and strengthen the oversight mechanisms that ensure detention facilities provide safe, secure, and humane confinement, we recommend that the Director of U.S. Immigration and Customs Enforcement take the following five actions: assess the extent to which ICE has appropriate internal controls for tracking and managing detention facility costs and develop additional controls as necessary; develop an oversight mechanism to ensure that field offices comply with guidance to appropriately consider costs in making detainee placement decisions; take additional steps to help ensure that personnel responsible for reviewing and paying facility detention invoices follow internal control procedures to ensure proper payments; document the reasons facilities cannot be transitioned to the most review reasons for differences between ERO and ODO inspection results and assess the extent to which differences reflect broader issues with the inspection mechanisms themselves to help ensure the mechanisms are working as intended. We provided a draft of this report to DHS and DOJ for their review and comment. In an e-mail from DOJ’s Audit Liaison on September 10, 2014, DOJ indicated that it did not have any comments on the draft report. DHS provided written comments, which are summarized below and reproduced in full in appendix V, and technical comments, which we incorporated as appropriate. DHS concurred with four of the five recommendations in the report and described actions underway or planned to address them. DHS did not concur with one recommendation in the report. With regard to the first recommendation, that ICE assess the extent to which ICE has appropriate internal controls for tracking and managing detention facilities costs and develop additional controls as necessary, DHS concurred and stated that the ICE Office of the Chief Financial Officer developed enhanced financial coding to identify expenditures by individual detention centers and began collecting data in fiscal year 2014. DHS stated that ICE will monitor expenditures to determine proper allocation, future funding requirements, and if additional internal controls are required. DHS provided an estimated completion date of September 30, 2015. These planned actions, if fully implemented, should address the intent of the recommendation. With regard to the second recommendation, that ICE develop an oversight mechanism to ensure that field offices comply with guidance to appropriately consider costs in making detainee placement decisions, DHS concurred and stated that ICE ERO will develop such an oversight mechanism using the Self-Inspection Program. DHS provided an estimated completion date of September 30, 2015. To the extent that the Self-Inspection Program provides ICE with oversight of field office compliance with the guidance, these planned actions, if fully implemented, should address the intent of the recommendation. With regard to the third recommendation, that ICE take additional steps to help ensure that personnel responsible for reviewing and paying facility detention invoices follow internal control procedures to ensure proper payments, DHS concurred. DHS stated that ICE had issued a new policy applicable to all program offices and will assess if additional internal controls are required and implement any needed ones, as appropriate. DHS estimated a completion date of April 30, 2015. To the extent that ICE assesses the status and need for internal controls necessary to ensure personnel compliance with the policies to ensure proper payments, these planned actions, if fully implemented, should address the intent of the recommendation. With regard to the fourth recommendation, that ICE document the reasons facilities cannot be transitioned to the most recent standards, DHS did not concur. DHS stated that ICE believed it had already appropriately documented the rationale for the decisions made in the course of implementing PBNDS 2011 and that additional documentation is not necessary in this regard. DHS stated that it established and followed an implementation plan for transitioning facilities to PBNDS 2011 first focusing on dedicated facilities, to be followed by non-dedicated intergovernmental service agreement facilities with an average daily population of 150 or greater and that on an ongoing basis, has been making efforts to incorporate PBNDS 2011 into facility agreements as contracting opportunities arise. DHS stated that the implementation process was labor-intensive and time-consuming, and ICE made an assessment of which facilities represent priorities for transitioning to PBNDS 2011 given the limits on agency personnel and resources, and in recognition of the fact that not all 250 facilities could be transitioned at once, or quite possibly, compelled to transition at all. DHS stated that our findings and recommendation appeared to presume PBNDS 2011 as a starting point for all detention facilities, with ICE making decisions on a case-by-case basis whether to make an exception and deviate from that norm. DHS noted that as ICE does not have the authority to unilaterally impose new detention standards upon facilities, it can only request that a facility adopt the new standards with the facility retaining the right to refuse implementation or to request additional funds as a condition of compliance. We continue to believe that ICE should document the reasons why individual facilities cannot be transitioned to the most recent standards. In our report, we noted that ICE makes requests to facilities to adopt new standards and that facilities’ adoption of new standards may involve contract negotiations between ICE and the facilities. For example, in our report, we noted that ICE has attempted to minimize the potential increased costs associated with adopting the newer standards and that these attempts have required lengthy negotiations with facilities to arrive at cost-neutral contracts. Further, as noted in our report, ICE’s implementation plan discusses priorities for transitioning facilities to the 2011 PBNDS. In its comments to our draft report, DHS discussed the reasons why some smaller (less than 150 ADP) nondedicated facilities have been transitioned to the 2011 PBNDS—these facilities were transitioned because their contracts had come up for renegotiation of the per diem rate—however, the 2011 PBNDS implementation plan did not document these reasons or why remaining facilities cannot be transitioned to the most recent standards. For example, the implementation plan for the 2011 PBNDS did not explain why some smaller facilities that were not listed in the plan were transferred to the 2011 PBNDS, while other, similar facilities not included in the plan were not transferred to the newer standards. Specifically, the plan did not discuss why the 125 individual facilities under 2000 NDS as of January 2014 were not transitioned to 2011 PBNDS. Documenting reasons why facilities cannot be transitioned to the most recent standards would help strengthen ICE oversight of facility detention standards and provide an institutional record of decisions ICE has made about why facilities are held or not held to certain standards. It would also provide more transparency and accountability to facility contractors and to the public regarding ICE management decisions that result in different standards of care for detainees across facilities. With regard to the fifth recommendation, that ICE review reasons for differences between ERO and Office of Detention Oversight inspection results and assess the extent to which differences reflect broader issues with the inspection mechanisms to ensure the mechanisms are working as intended, DHS concurred. DHS estimated that ERO and ODO would complete such action by March 30, 2015, and stated that it was important to note that ODO must maintain independent oversight authority when conducting inspections, and that any proposed changes must be reviewed by senior ICE leadership prior to implementation, as appropriate. This planned action, if effectively implemented, should address the intent of the recommendation. We are sending copies of this report to the appropriate congressional committees, the Secretary of Homeland Security, the Attorney General of the United States, 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, please contact me at (202) 512- 8777 or gamblerr@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 VI. This report addresses the following three objectives: 1. How do federal costs compare across different types of immigration detention facilities, and to what extent does Immigration and Customs Enforcement (ICE) have processes to track and manage these costs? 2. To what extent do the federal standards that govern conditions of confinement vary across different types of immigration detention facilities, and what are the reasons for any differences. 3. To what extent do federal oversight and the results of that oversight vary across different types of immigration facilities? In this report, we assessed the costs to the federal government of housing ICE detainees at different types of facilities, the federal standards that govern confinement conditions at those facilities, and ICE oversight mechanisms for ensuring compliance with these standards. The Department of Homeland Security (DHS) defines an immigration detention facility as a confinement facility operated by or affiliated with ICE that routinely holds persons for over 24 hours. However, of the 251 facilities authorized by ICE to hold detainees as of August 2013, we limited our analysis to the 166 facilities that were designated to hold detainees for 72 hours or longer because of the frequent turnover in the detainee population at short-term facilities—such as holding facilities— which temporarily house detainees waiting for ICE transfer. These 166 facilities also exclude three federal prisons where ICE had detention bed space in fiscal year 2013; two of the prisons housed a few detainees and the third prison was discontinued for immigration detainees as of the end of calendar year 2013, according to Bureau of Prisons and ICE officials. We also excluded facilities for juvenile detainees—individuals under 18 years of age—because these facilities are regulated by the Department of Health and Human Services. To determine how federal costs compare across different types of immigration detention facilities, we analyzed ICE fiscal year 2013 data, the most recent fiscal year for which data were available, related to ICE expenditures for detention facilities. These data include the Contract Financial Monitoring File (CFMF), a manual tool maintained by ICE Office of Enforcement and Removal Operations’ (ERO) Operational Support Division to budget and track costs at individual facilities, and ICE Office of Budget and Program Performance (OBPP) fiscal year 2013 data drawn from ICE’s Federal Financial Management System (FFMS). ICE OBPP uses these data to calculate ICE’s average facility “bed rate”—the average cost to house one detainee for 1 day. To determine the reliability of the CFMF, we conducted data testing to look for anomalies, reviewed related documentation, and interviewed knowledgeable agency officials. We determined that these data were sufficiently reliable for our purposes, but have limitations as discussed in this report. To assess the reliability of ICE OBPP’s bed rate data, we tested the data and interviewed knowledgeable agency officials. We determined that the data are not reliable for reporting on the differences in cost by facility type, as discussed in this report. To determine the reasons for possible differences in costs, we analyzed ICE documents, including an ICE- funded study of detention bed rate costs across facilities and in particular at ICE-owned service processing centers (SPC), and interviewed agency officials. We assessed the methodology for the ICE-funded study and determined that it was reliable for our purposes. To determine the extent to which ICE has processes in place to track and manage detention facility costs, we analyzed relevant documents, including DHS annual financial reports, previous GAO reports related to DHS financial management, and ICE financial management guidance, and interviewed agency officials. We assessed our findings related to ICE’s financial management practices against Standards for Internal Control in the Federal Government and ICE’s 2010-2014 strategic plan. We also analyzed the extent to which ICE’s average daily population (ADP) in its facilities met the guaranteed minimums—the number of beds ICE pays for each day regardless of their utilization—in those facilities. We assessed ICE’s plans to develop guidance for the field related to considering cost in detainee placements against Standards for Internal Control in the Federal Government. We reviewed relevant laws, including the Improper Payments Information Act (IPIA) of 2002, the Improper Payments Elimination and Recovery Act (IPERA) of 2010, and the Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012, as well as related Office of Management and Budget guidance. We analyzed a sample of invoices and supporting documentation submitted to ICE by detention services contractors for services provided in December 2013 to determine the extent to which these invoices met ICE’s requirements for invoice elements and supporting documentation, and were managed in accordance with Standards for Internal Control in the Federal Government. We selected invoices from December 2013 because, according to ICE officials, invoices from December 2013 and later should adhere to ICE’s new invoice submission and review guidance. We analyzed 31 of the 158 invoices for detention services in December 2013 that ICE had received by February 2014. The selection included invoices from a range of facility types. Results of our analysis are not generalizable beyond the sample, but they provide insight into facility invoice adherence to the new guidance. To determine the extent to which ICE has processes to track and manage detention facility costs and plans for developing guidance related to detainee placements, we also interviewed cognizant agency officials. To assess the extent to which the federal standards that govern conditions of confinement vary across different types of immigration detention facilities and reasons for any differences, we identified ICE detention standards, including the 2000 National Detention Standards (NDS), the 2008 Performance-Based National Detention Standards (PBNDS), and the 2011 PBNDS and analyzed the extent to which ICE applied these different standards across detention facilities. We analyzed these three sets of standards to assess the similarities and differences among the standards in terms of the number, content, and application across facilities. To identify the standards to which each facility was held, we first analyzed the standards included in 166 facility contracts and agreements in place as of August 2013, the date that ICE had provided us a list of facilities that are authorized to house detainees for over 72 hours when we began our analysis. Because ERO officials told us that facilities can be inspected to higher standards than those specified in the signed contract or agreement, we next analyzed ERO inspection data to identify the standards to which facilities were inspected in fiscal year 2013, or the most recent year inspected. If a facility was inspected to a more rigorous set of standards than those identified in its contract or ERO’s facilities list, we categorized the facility by the standards to which it was inspected. Finally, we updated our analysis to incorporate facility standards updated by ERO in facility contracts or agreements as of January 2014, to capture all updates made during 2013. To determine the percentage of ICE detainees who were covered by each set of standards during fiscal year 2013, we analyzed the standards to which each facility was held against the ADP. In addition, we assessed the extent to which ICE documented its decision-making process for determining which standards to apply at which facilities in accordance with Standards for Further, we analyzed 41 Internal Control in the Federal Government.waivers ICE had granted to detention facilities to exempt them from certain detention standards, and which were still in effect in August 2014, when we performed the analysis. These waivers were approved from fiscal year 2012 through August 2014. We assessed these waivers to identify the specific standards for which ICE has issued waivers. We also interviewed ICE officials to determine the reasons why standards vary by facility type and ERO’s plans to implement the most recent set of detention standards at facilities. To assess how federal oversight compares across different types of immigration detention facilities, we identified the various oversight mechanisms ICE used at detention facilities in fiscal year 2013 and analyzed differences in their use and results. Specifically, we analyzed the extent to which ICE used (1) annual and biennial facility inspections conducted by the ERO contractor, (2) annual facility self-inspections conducted under ERO’s Operational Review Self-Assessment (ORSA) process, (3) ERO’s detention service manager (DSM) on-site monitoring program, and (4) Office of Detention Oversight (ODO) risk-based facility inspections at 166 ICE facilities authorized to hold detainees for over 72 hours as of August 2013. With respect to ERO’s inspection program, we analyzed ERO inspection data for fiscal year 2013, the most recent fiscal year for which inspection data were available. To determine the reliability of ERO’s inspection data, which are maintained in ERO’s Facility Performance Management System (FPMS), we conducted data testing to identify anomalies and interviewed knowledgeable agency officials. We concluded that the FPMS data were sufficiently reliable for the purposes of this report. We interviewed cognizant agency officials regarding these mechanisms and the reasons why different oversight mechanisms were used at different facilities. We compared the percentage of fiscal year 2013 ADP in immigration detention facilities by facility type and oversight mechanisms used at facilities to determine what percentage of detainees are housed in facilities at which ICE uses the various oversight mechanisms. To determine the extent to which the results of oversight mechanisms vary, we compared the results of ICE ERO’s annual inspections and ICE ODO inspection results for the 35 facilities that received both an ERO and ODO inspection in fiscal year 2013. Specifically, we compared ERO and ODO inspection results across the 35 facilities to determine differences in the overall number of deficiencies identified by each office. We also compared ERO and ODO facility inspection results for selected facilities across three standards that ICE has identified as high priority—medical care, special management unit, and use of force—to illustrate differences between ERO and ODO inspections of the same facilities. We also interviewed ICE ERO and ODO agency officials regarding the reasons for any differences in results between the two oversight mechanisms. We assessed the extent to which ICE addressed the differences in the results of the two oversight mechanisms and communicated these differences to management and others within the agency in accordance with Standards for Internal Control in the Federal Government. We conducted this performance audit from March 2013 to October 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. U.S. Immigration and Customs Enforcement primarily uses three sets of national detention standards with varying requirements to govern the conditions of confinement in its detention facilities—the 2000 National Detention Standards (NDS), the 2008 Performance-Based National The 2000 NDS Detention Standards (PBNDS), and the 2011 PBNDS.contains 38 standards related to aspects of detainee care and services and facility operation, while the 2008 PBNDS contains 41 standards, and the 2011 PBNDS contains 42 standards, as shown in table 4. In addition to the procedures that all detention facilities are expected to meet, U.S. Immigration and Customs Enforcement (ICE) detention standards can require specific types of facilities to conform to more detailed procedures; however, all sets of standards identify these detailed procedures in italicized text (referred to as “italicized requirements”). ICE’s 2000 National Detention Standards (NDS) and the 2008 Performance-Based National Detention Standards (PBNDS) require service processing centers (SPC) and contract detention facilities (CDF) to conform to the more detailed procedures; facilities operating under a nondedicated intergovernmental service agreement (IGSA), however, may either conform to the italicized procedures or adopt, adapt, or establish alternative procedures. The 2011 PBNDS require all dedicated facilities—SPCs, CDFs, and those dedicated facilities operating under an intergovernmental service agreement (DIGSA)—to conform to the more detailed procedures; nondedicated IGSAs may choose to conform to or adopt alternative procedures. According to ICE, the italicized procedures are intended to make conditions of confinement more uniform at facilities where only ICE detainees are housed. Table 5 presents an example of an italicized procedure from the 2011 PBNDS. For a complete list of 2011 PBNDS italicized procedures, go to http://www.ice.gov/detention-standards/2011/. Appendix IV: Example of an Optimal Provision in U.S. Immigration and Customs Enforcement’s (ICE) 2011 Performance-Based Detention Standards (PBNDS) In the 2011 PBNDS, ICE introduced the concept of optimal provisions— nonmandatory provisions that facilities may choose to implement, but are not required. According to ICE, implementation of these provisions furthers the effective operation of a facility at the level intended under the revised 2011 PBNDS. ICE reports that these optimal provisions allow for a range of compliance across its diverse facilities, which facilitates the immediate implementation of the revised standards—at minimal cost— while ICE continues to lay the groundwork for future reform of the detention system. Table 6 provides an example of an optimal provision in the 2011 PBNDS. For a complete listing of all optimal provisions in the 2011 PBNDS, go to http://www.ice.gov/detention-standards/2011/. In addition to the contact named above, Lacinda Ayers (Assistant Director), Pedro A. Almoguera, Carla D. Brown, Frances A. Cook, Michele Fejfar, Allyson R. Goldstein, Barbara A. Guffy, Melissa Hargy, Paul D. Kinney, Amanda K. Miller, Jessica S. Orr, James J. Ungvarsky, John Warner, and Eric M. Warren made significant contributions to this report. | DHS has reported that the number of noncitizens in immigration detention has increased from about 230,000 in fiscal year 2005 to about 440,600 in fiscal year 2013. ICE applies various sets of detention standards—such as medical services—at over 250 facilities owned by ICE or private contractors, or owned by or contracted to state and local governments. GAO was asked to examine differences in cost, standards, and oversight across types of facilities. This report addresses the extent to which (1) ICE has processes to track costs, (2) standards vary across facility types and the reasons for any differences, and (3) oversight and the results of that oversight vary across facility types. GAO reviewed ICE data and information on costs, detention population, standards, and oversight for 166 facilities that held detainees for 72 hours or more, from fiscal years 2011 through 2013, reviewed facility contracts, and interviewed federal contractors and DHS and ICE officials. Within the Department of Homeland Security (DHS), U.S. Immigration and Customs Enforcement (ICE) uses two different methods to collect and assess data on detention costs; however, these methods do not provide ICE with complete data for managing detention costs across facilities and facility types. One method uses the agency's financial management system to estimate total detention costs per detainee per day for the purposes of developing ICE's annual detention budget request. However, ICE identified errors in the entry of data into this system and limitations in the system make it difficult for ICE to accurately record expenditures for individual facilities. ICE's other method involves the manual tracking of monthly costs by individual facilities for the purposes of reviewing data on individual facility costs. However, this method does not include data on all costs for individual facilities, such as for medical care and transportation, and such costs are not standardized within or across facility types. Thus, ICE does not have complete data for tracking and managing detention costs across facilities and facility types. ICE has taken some steps to strengthen its financial management system, such as implementing manual work-arounds to, among other things, better link financial transactions to individual facilities. However, ICE has not assessed the extent to which these manual work-arounds position ICE to better track and manage costs across facilities or facility types and the extent to which additional controls are needed to address limitations in its methods for collecting and assessing detention costs, in accordance with federal internal control standards. Conducting these assessments could better position ICE to have more reliable data for tracking and managing costs across facility types. GAO's analysis of ICE facility data showed that ICE primarily used three sets of detention standards, with the most recent and rigorous standards applied to 25 facilities housing about 54 percent of ICE's average daily population (ADP) as of January 2014. ICE plans to expand the use of these standards to 61 facilities housing 89 percent of total ADP by the end of fiscal year 2014; however, transition to these standards has been delayed by cost issues and contract negotiations and ICE does not have documentation for reasons why some facilities cannot be transitioned to the most recent standards in accordance with internal control standards. Documenting such reasons could provide an institutional record and help increase transparency and accountability in ICE's management of detention facilities. GAO's analysis of ICE facility oversight programs showed that ICE applied more oversight mechanisms at facilities housing the majority of the ADP in fiscal year 2013. For example, 94 percent of detainees were housed in facilities that received an annual inspection. GAO's analysis of ICE's inspection reports showed that inspection results differed for 29 of 35 facilities inspected by both ICE's Enforcement and Removal Operations (ERO) and Office of Detention Oversight (ODO) in fiscal year 2013. ICE officials stated that ODO and ERO have not discussed differences in inspection results and whether oversight mechanisms are functioning as intended. Assessing the reasons why inspection results differ, in accordance with internal control standards, could help ICE better ensure that inspection mechanisms are working as intended. GAO recommends, among other things, that ICE assess the extent to which it has appropriate controls for tracking facility costs, document reasons why facilities cannot be transitioned to the most recent standards, and review reasons for differences in inspection results. DHS concurred with all recommendations but one to document reasons why facilities cannot be transitioned to the most recent standards because, among other reasons, DHS believes it already has sufficient documentation. As discussed in this report, GAO continues to believe in the need for such documentation. |
Responsibility for dietary supplement oversight is shared among several offices at FDA: FDA’s Center for Food Safety and Applied Nutrition (CFSAN) manages the CFSAN Adverse Event Reporting System (CAERS), which collects and stores AERs related to foods and dietary supplements. CFSAN also houses the Division of Dietary Supplement Programs, within its Office of Nutrition, Labeling and Dietary Supplements, which is responsible for developing guidance, providing scientific and technical expertise, and directing dietary supplement priorities across the agency. Additionally, CFSAN’s Office of Compliance has primary responsibility for compliance and enforcement of FDA regulations and federal laws within FDA’s jurisdiction with respect to foods—such as dietary supplements— including coordinating compliance and regulatory actions within the center and with other FDA components. Among other responsibilities, the Office of Compliance reviews incoming investigational findings and recommendations to determine if a proposed action or remedy is supported by the documented observations and other evidence; assesses the integrity and relevance of the evidence; and obtains necessary scientific verification from appropriate subject matter experts. FDA’s Office of Regulatory Affairs is responsible for managing the agency’s field operations in 25 regional and district offices for each of FDA’s centers, including CFSAN. Among other responsibilities, the Office of Regulatory Affairs supports FDA centers by performing inspections and import operations. The Office of Regulatory Affairs also takes advisory and regulatory actions for dietary supplements, but generally these actions are coordinated with CFSAN’s Office of Compliance. FDA’s Center for Drug Evaluation and Research is responsible for oversight of over-the-counter and prescription drugs, including generic drugs and some biological therapeutics. Center for Drug Evaluation and Research officials work with other FDA offices to identify products that are marketed as dietary supplements but that have been deliberately adulterated with active ingredients in FDA-approved drugs or their analogues. Once identified, FDA alerts the public and takes action to protect the public through a variety of consumer protection actions, such as working with firms on voluntary product recalls. Table 2 provides examples of consumer protection actions FDA may take in response to identified safety concerns. According to FDA officials, the estimated resources for all dietary supplement activities across FDA grew slightly from $14.6 million in fiscal year 2009 to a projected $18.9 million in fiscal year 2012. These activities include regulatory and technical review, policy and guidance development, research, education and outreach, compliance and inspection activities, and associated administrative support activities, including infrastructure costs. There are three different paths consumers, health care practitioners, or others can follow for reporting any serious, moderate, or mild health problem related to a dietary supplement to FDA. First, consumers, health care practitioners, or others can complete an electronic voluntary AER form at FDA’s MedWatch webpage—FDA’s agencywide safety information and adverse event reporting program—and submit it to FDA. The information is then sent to CFSAN via fax. Second, consumers, health care practitioners, or others can report the health problem to the dietary supplement firm listed on the product label. The firm evaluates the problem and, if it determines it to be serious in accordance with the 2006 act, it is to complete a hard copy mandatory AER form and submit the form to FDA by mail, along with a copy of the product label. If the firm determines the problem is not serious, it can complete and submit a voluntary AER form at its discretion. Third, consumers, health care practitioners, or others can report the health problem to an FDA Consumer Complaint Coordinator. The coordinators are located in FDA district offices and document and follow up on a variety of health and nonhealth-related complaints about FDA-regulated products. Coordinators enter health problems reported by consumers into a database from which the health problems are later uploaded into the CAERS database as voluntary AERs, as shown in figure 1. Alternatively, consumers, health care practitioners, or others can call a poison center about a health problem. Poison centers are independently operated and provide free medical advice from health care professionals who are trained in the toxicological management of poison exposures and can address toxic exposure situations and adverse events. Poison exposures can result from a variety of circumstances and substances, including adverse reactions to dietary supplements under use as directed. Calls received at the 57 poison centers covering the United States and its territories are uploaded into a national database for analysis. However, the 57 poison centers are not an adverse event reporting system. Consequently, individual health problems involving dietary supplements and managed as poison exposure cases by poison centers are generally not sent to CFSAN. When reporting a health problem to FDA, individuals are asked to provide a short description of the reported health problem; a brief description of the affected person, such as age, gender, weight, and any preexisting medical conditions; and information about the dietary supplement, such as the product name and manufacturer, as well as dosage associated with the health problem. Firms submitting mandatory AERs are also asked to provide the above information. However, to avoid duplication in its database, FDA asks for the following five data elements at a minimum for mandatory AERs: (1) an identifiable patient, (2) an identifiable individual who is reporting the health problem to the firm, (3) identity and contact information for the responsible firm submitting the serious AER to FDA, (4) a suspect dietary supplement, and (5) a serious adverse event or fatal outcome. Once FDA receives an AER for a serious, moderate, or mild health problem, contractors enter the information into the CAERS database, either electronically or manually, and record information by product, industry code, ingredient(s), medical symptom(s) and other information. CAERS staff review the AERs for accuracy and then distribute them to subject matter experts within CFSAN’s program offices, including the Division of Dietary Supplement Programs, for their review. These subject matter experts review the AERs to determine the extent of the relationship between the reported health problem and the product. In addition, CAERS data analysts use statistical tools to analyze relationships across all AERs to detect potential indicators of unsafe products, including patterns or relationships among health problems, products, and ingredients that are found to be significant, according to CFSAN officials. These officials said that, if CFSAN’s subject matter experts find that a product in an AER contains active ingredients in FDA- approved drugs or their analogues, the AER is shared with FDA’s Center for Drug Evaluation and Research, which shares oversight responsibility for supplement products that have been deliberately adulterated with active ingredients in FDA-approved drugs or their analogues. If an issue related to compliance with dietary supplement regulations is identified— such as CGMPs describing the conditions under which supplements must be manufactured, packed, and held—CFSAN’s subject matter experts pass the AER or cluster of AERs to CFSAN’s Office of Compliance, which works with FDA’s Office of Regulatory Affairs to determine if consumer protection actions are needed, as shown in figure 2. FDA uses other postmarket surveillance approaches in addition to AERs to identify potential safety concerns and conduct oversight related to dietary supplements. Examples of these approaches are listed in table 1. According to FDA officials, inspections of dietary supplement firms constitute the agency’s primary method for monitoring compliance with requirements to report adverse events. According to CFSAN guidance, FDA investigators take several steps during inspections to monitor compliance with AER requirements, including determining whether a firm has a process in place to report serious adverse events, determining whether the firm has any serious AERs that it did not submit to FDA, and reviewing labels to determine if the product has contact information for reporting AERs. As table 2 shows, once FDA has identified a potential safety concern or a violation for dietary supplements, it has a range of consumer protection actions available, from advisory actions, such as issuing a warning letter, to regulatory actions, such as seizing adulterated dietary supplements. According to FDA officials, products or ingredients of greatest concern for public health are subject to regulatory actions. In addition, FDA may pursue a regulatory action against a firm if the firm does not correct violations in response to an advisory action, such as a warning letter. FDA received more than 6,000 AERs from 2008 through 2011, primarily from industry, and most of these AERs were for supplements containing a combination of different types of ingredients (e.g., vitamins and minerals) or supplements that were otherwise not classified into one of FDA’s existing product categories, according to our analysis of FDA data. However, FDA may not have received information on all adverse events that are associated with dietary supplements because consumers and others may not be voluntarily reporting them to FDA—either directly or through firms—although they may be contacting poison centers about some of these events. Specifically, poison centers received over 1,000 more reports of adverse events from 2008 through 2010 than FDA did. From 2008 through 2011, FDA received a total of 6,307 AERs related to dietary supplements; 71 percent of these AERs came from industry for serious health problems (i.e., based on consumer, health care practitioner, or others’ reports), and most of these AERs were linked with dietary supplements containing a combination of ingredients—such as products containing both vitamins and minerals or otherwise unclassified dietary supplements—according to our analysis of FDA data. Specifically, the total number of AERs FDA received annually more than doubled over the period, from 1,119 in 2008 to 2,480 in 2011. This rise in AERs was driven by a large increase in the number of mandatory industry AERs, according to our analysis. As shown in figure 3, mandatory AERs almost tripled from 2008 through 2011, from 689 in 2008 to 2,040 in 2011. During the same period, AERs submitted voluntarily by consumers, industry, health care practitioners, and others remained relatively stable, averaging 461 annually. All mandatory AERS from industry involved serious health problems, and FDA classified roughly 64 percent (1,179) of all voluntary AERs (1,844) as “serious as reported.” “Serious as reported” means that the adverse event met the criteria to be classified as serious as it was reported to FDA (based on the reporter’s responses to standard questions about it), whether or not FDA’s later medical review classified it as serious. Appendix II incorporates data on AERs from our 2009 report to provide information on AERs FDA received from January 1, 2003, through September 30, 2012. According to FDA officials, two factors are driving the increase in mandatory AERs. First, FDA has increased its enforcement efforts against AER noncompliance. For example, FDA has taken advisory actions, such as issuing warning letters, against firms that have not reported serious AERs or failed to include contact information to report an adverse event on the product label. Second, lawsuits have publicized the consequences of adverse events and a firm’s decision not to report these events. Specifically, a number of lawsuits have been filed against firms that produced and distributed Hydroxycut™—a weight loss supplement linked to serious liver damage—that cite FDA’s request for a recall because of AERs as evidence. In addition, in 2011, the Supreme Court ruled in favor of investors suing a publicly traded drug manufacturing firm for securities fraud, allowing shareholders to rely on the firm’s decision not to report, among other things, AERs as grounds for a claim in their suit. FDA officials stated that these lawsuits have raised firms’ sensitivity to the risk involved in noncompliance with AER requirements, leading to the increase in mandatory AERs. The 6,307 AERs FDA received from 2008 to 2011 reported the following serious outcomes: 53 percent (3,370) resulted in unspecified important medical events of 29 percent (1,836) resulted in hospitalization, 20 percent (1,272) resulted in serious injuries or illnesses, 8 percent (512) resulted in a life-threatening condition, and 2 percent (92) resulted in death. When interpreting AERs, FDA officials said that it is important to understand that an AER by itself does not demonstrate a causal relationship between the dietary supplement and the reported health problem. Rather, the officials said that there are several other factors that must be considered to determine causality, such as the role of other products consumed at the same time and preexisting health conditions. Some demographic information on the individuals affected by these and other outcomes in the AERs was available. Specifically, of the 6,307 AERs, 63 percent (3,980) affected females; however, the age of the individual affected was missing in about one-third (2,029) of the AERs. According to FDA officials, the absence of such information can hinder the agency’s ability to determine whether there is a causal relationship between the product and the reported health problem. As shown in figure 4, the vast majority (5,248) of the supplements identified in the AERs were a combination of different types of dietary ingredients (e.g., vitamins and minerals) or supplements that were not otherwise classified by FDA into one of the agency’s existing supplement categories. Vitamins were the second most frequently reported supplement, included in 952 AERs, followed by minerals, included in 619 AERs. According to FDA officials, the predominance of combination and unclassified supplements in AERs reflects the growing number of complex supplements on the market. These officials said that these supplements are challenging for FDA because of limited scientific knowledge on how different supplement ingredients interact and their effect on consumers’ health. Although product names are not standardized within CAERs, we matched firm and product names across AERs data to estimate which types of products were associated with the most mandatory AERs. According to our analysis, 6 of the 10 supplements receiving the most mandatory AERs were multivitamins; 2 were weight-loss supplements; 1 was an energy supplement, and 1 was an herbal concentrate. Three supplements were associated with over roughly 100 AERs; 7 were associated with about 51 to 100 AERs; and 24 were associated with about 26 to 50 AERs. Most of the supplements identified in the mandatory AERs were associated with approximately one AER from 2008 to 2011. FDA relies on consumers, health care practitioners, and others to voluntarily report adverse events associated with dietary supplements to FDA and to firms and, in turn, FDA relies on firms to submit to it any serious AERs it receives from these individuals, as required by law. However, FDA may not receive information on all adverse events that are associated with dietary supplements because consumers and others may not be voluntarily reporting these AERs—either directly or through firms, as indicated by our analysis and interviews with FDA officials. We found several potential reasons for this underreporting based on our review of relevant studies and our prior work. For example, we and others have reported that consumers, health care practitioners, or others may not recognize the chronic or cumulative toxic effects of a dietary supplement, or they may broadly assume dietary supplements to be safe and not attribute negative effects to them. Additionally, in an October 2012 report, the HHS Office of Inspector General found that 20 percent of a judgmental sample of 127 weight loss and immune support dietary supplements did not have contact information that would enable consumers and health care practitioners to report adverse events. The HHS Inspector General study is not representative of the dietary supplement industry but indicates that some firms may not be providing consumers with the necessary information to report adverse events to firms, which could lead to underreporting if consumers do not report the adverse event directly to FDA. FDA officials said that they receive fewer AERs than they would expect to given the number of dietary supplements on the market and their widespread use. However, they said that, similar to other voluntary reporting systems, the extent of underreporting is unknown because the agency can only know about those adverse events that are reported to it. One potential measure of underreporting is the number of dietary supplement-related health problems managed as poison exposure cases by poison centers. According to annual reports by the American Association of Poison Control Centers (AAPCC), poison centers received 145,775 calls from consumers or others related to dietary supplements from 2008 through 2010. These include cases in which the consumer took more than the directed amount of a product, accidentally ingested the product, or used the product as directed but experienced an adverse event. According to AAPCC reports, there were 4,863 cases of adverse events from 2008 to 2010, over 1,000 more than the 3,827 AERs FDA received during the same period. We could not estimate how much overlap, if any, occurred between cases reported to FDA and the poison centers or determine whether some of the cases managed by poison centers were serious and might have also been reported to firms. However, the greater number of calls received by poison centers suggests that consumers, health care practitioners, and others may have contacted poison centers without reporting the adverse event to FDA. FDA officials said that they are interested in reviewing the poison center data related to dietary supplements and have held discussions with AAPCC representatives. Specifically, CFSAN officials said that they want to review the raw poison center data on dietary supplements to understand what it includes and whether it would be useful for their analysis. However, these officials said that they were unable to review the raw dietary supplement data without purchasing it and said that FDA should have access to the data at no additional cost given the current level of federal support for poison centers. For example, a 2012 study commissioned by the AAPCC, federal funding accounted for an estimated 13 percent (about $17 million) of poison centers’ annual operating budget in 2011. An FDA official noted that, in a 2004 report, the Institute of Medicine recommended that poison center data become available to all appropriate local, state, and federal public health units on a real-time basis and at no additional cost. In this report, the Institute of Medicine also recommended that poison centers receive sufficient federal funding to cover core activities, which at the time were estimated to cost approximately $100 million annually. According to AAPCC representatives, AAPCC does not receive federal appropriations to cover cost of collecting, maintaining, and sharing poison center data at the national level and generally charges federal agencies to access the data. AAPCC representatives also said that they were willing to work with FDA on reduced pricing. Specifically, based on a May 2012 quote, accessing 4 years’ worth of AAPCC data of about 5,400 product codes would have cost almost $76 million prior to the AAPCC discount, and $800,000 after the discount. However, even with the significant AAPCC discount, access to the data remained more than twice the nearly $400,000 budgeted to process and perform surveillance of dietary supplement adverse events in fiscal year 2011. According to CFSAN officials, as of October 2012, negotiations with AAPCC had stalled at the CFSAN level. CFSAN officials said that the cost of accessing the data was a factor. They also said that, although negotiations had stalled at the CFSAN level, as of December, 2012, they were ongoing at the department level, but from their perspective, progress remained difficult. According to CFSAN officials, the greatest challenge for identifying potential safety concerns from AERs is the small number of AERs that FDA receives related to dietary supplements. Specifically, these officials said that it is difficult to establish a baseline of doses and responses to help the agency detect anomalies that might indicate a potential safety concern using such a small number of AERs. These officials also said that they could not determine whether the poison center data would be useful for such signal detection until they could access it. However, researchers and the HHS Inspector General have concluded that accessing poison center data may help FDA detect and monitor potential safety concerns. For example, a 2008 study performed in conjunction with CFSAN and the San Francisco Division of the California Poison Control System concluded that active surveillance of poison center reports of dietary supplement adverse events could enable rapid detection of potentially harmful products and may facilitate oversight. Additionally, under contract with the AAPCC, the Centers for Disease Control and Prevention (CDC)—like FDA, an HHS component—has used national poison center data to identify and track adverse events related to dietary supplements. For example, in March 2008, poison centers in three states (Florida, Georgia, and Tennessee), state health departments, and FDA began receiving voluntary AERs of muscle cramps, hair loss, and joint pain related to Total Body Formula and Total Body Mega Formula. On FDA’s behalf, CDC scientists used national poison center data to identify which states were reporting similar cases and to track the geographical extent of the outbreak. If FDA can access more information about dietary supplement-related adverse events that are reported to poison centers, FDA may be able to analyze the increased data on doses and responses to help it identify potential safety concerns. To help ensure firms are complying with AER requirements for submitting serious AERs, maintaining AER records, and including AER contact information on supplement labels, from 2008 through 2011, FDA increased its monitoring of firms through inspections and has taken some advisory and regulatory actions against noncompliant firms. FDA has increased its compliance monitoring of firms through inspections to help ensure that dietary supplement firms are complying with AER requirements for (1) reporting serious AERs within 15 business days, (2) maintaining AER records for 6 years, and (3) including domestic contact information on product labels for individuals to submit AERs, according to our analysis of FDA data. Specifically, in 2008, FDA inspected 120 dietary supplement firms, which represented at least 6 percent of FDA’s total inventory of dietary supplement firms at the beginning of 2008. In contrast, from January through September 2012, FDA inspected 410 dietary supplement firms, which represented at least 18 percent of FDA’s total inventory of dietary supplement firms at the beginning of 2012. FDA also increased the number of foreign firms it inspected over this period, from conducting no inspections in 2008 to conducting 35 from January through September 2012. Figure 5 shows the number of foreign and domestic inspections of dietary supplement firms FDA or its partners at the state level conducted annually from January 1, 2008 to September 30, 2012. According to FDA officials, the key factors underlying this increase in inspections were the full implementation of dietary supplement CGMP regulations in 2010 (i.e., describing the conditions under which supplements must be manufactured, packed, and held) and an increase in field investigators available to conduct inspections. The dietary supplement CGMP regulations established new quality control standards for dietary supplement firms and new compliance criteria for FDA investigators to use during dietary supplement inspections. The CGMPs were phased in by firm size starting in 2008, with full implementation completed in 2010. Additionally, an FDA official said that new field investigators became available to conduct inspections in 2010 and 2011. These investigators had been hired following higher appropriations for FDA in fiscal years 2008 and 2009, but they did not become available to conduct inspections until 2010 and 2011 because it takes 1 to 2 years of training before an investigator is ready to perform inspections, according to this official. As the CGMPs were being phased in, FDA identified problems or concerns during inspections, such as a manufacturer not maintaining, cleaning, or sanitizing equipment. The percentage of inspections where FDA identified problems or concerns increased from 51 percent in 2008 to 73 percent in 2011, largely resulting from CGMP inspections, according to our analysis. See figure 6 for the proportion of dietary supplement inspections where FDA identified problems or concerns from 2008 to 2011. According to our analysis of FDA inspection results from fiscal years 2008 through 2012, FDA identified 20 problems related to AER requirements during inspections. In 3 of these instances, FDA found that the firm did not submit a mandatory AER within the required 15 days. In the 17 other instances, FDA found that a firm did not submit a mandatory AER. When FDA identifies a problem during an inspection, firms may decide to take voluntary corrective action, or FDA may choose to take an advisory or regulatory action against the firm for the observed violations. We identified a total of 19 advisory and regulatory actions that FDA initiated from 2008 to 2011 for noncompliance with AER requirements. Specifically, we found three warning letters (advisory actions), one injunction (regulatory action) to prevent the sale of a firm’s products, and 15 import refusals (regulatory actions). All three of the warning letters stated that the supplement label did not include domestic contact information so that individuals could report an adverse event. The injunction against the dietary supplement manufacturer cited noncompliance with several sections of the Federal Food, Drug and Cosmetic Act, including the failure to report serious adverse events as required by law. It prohibited the firm from producing and distributing over 400 products; this was the first time FDA had taken legal action against a large manufacturer for CGMP noncompliance, according to FDA documents. All of the 15 import refusals—spanning nine supplement companies—that we identified cited violations of supplement labeling requirements for domestic contact information so that individuals can report an adverse event. Table 3 provides more information on the 19 advisory and regulatory actions related to noncompliance with AER requirements that we identified. According to FDA officials, inspections are the primary way FDA identifies and develops direct evidence of noncompliance with AER requirements. However, FDA and others have identified noncompliant firms through other surveillance actions. Specifically, FDA can also identify and act on noncompliance with some AER requirements through Internet monitoring. For example, in March 2012, after reviewing a product label on a firm’s website, FDA sent a warning letter to the firm for failing to include domestic contact information to report an adverse event on the product label. In addition, in October 2012, the HHS Inspector General reported that 20 percent of a judgmental sample of 127 dietary supplement products purchased from retail stores or online lacked contact information to report adverse events. This study is not representative of the dietary supplement industry, but it indicates that compliance with AER requirements remains an issue for some firms. According to Inspector General officials, the Inspector General provided a list of the noncompliant firms to FDA for the agency’s review. FDA can estimate noncompliance to some extent using its known advisory and regulatory actions specific to AER requirements, but the actual number of noncompliant firms may not be fully reflected by these data. For example, an FDA official said that companies that deliberately adulterate supplement products with active pharmaceutical ingredients to increase their potency probably are also noncompliant with AER requirements, but FDA can only act on those violations for which it has direct evidence. Specifically, FDA may be able to identify a supplement adulterated with such ingredients from voluntary AERs submitted by consumers, health care practitioners, or others, but it would need to perform an inspection to determine noncompliance with most AER requirements. FDA may also have difficulty targeting such firms for inspections because they may not register with FDA as required by law. For example, in its October 2012 report, the HHS Inspector General found that 28 percent, or 22 of the 79 companies in its sample, had not registered with FDA as required. FDA officials believe that the rate of noncompliance is greater than the regulatory action data indicate, but these officials told us that they have not estimated what the noncompliance rate might be because they cannot make assumptions about the behavior of firms. FDA has used AERs for some consumer protection actions (i.e., surveillance, advisory, and regulatory actions), although the exact number is largely unknown. FDA officials said that most AERs do not initiate or support consumer protection actions because it is difficult to establish causality based on the limited information in an AER. However, FDA does not collect information on how it uses AERs for its consumer protection actions; FDA could draw on such information to assess whether AERs are being used to their fullest extent for consumer protection. FDA could also expand electronic reporting to firms for mandatory AERs, which could reduce data entry costs and make more program funds available for analysis. FDA is not required to provide information to the public about potential safety concerns from dietary supplement AERs as it is for drugs. Making such information public, if consistent with disclosure provisions in existing law, could expand FDA’s use of AERs and improve consumer awareness and understanding of potential health problems associated with supplements. FDA has used AERs to initiate or support some consumer protection actions, but the exact number of reports used and actions taken is largely unknown. According to FDA officials, FDA uses AERs to initiate or support certain consumer protection actions on a case-by-case basis, such as inspections, consumer alerts, and recalls. FDA officials said they also use AERs to provide data for general research on products and ingredients. However, it is difficult to identify the full extent to which FDA uses AERs to initiate or support consumer protection actions because FDA does not have mechanisms in place to systematically monitor the relationship between AERs and these actions. According to FDA officials, most AERs that are received by FDA do not initiate or support consumer protection actions because it is difficult to establish a causal link between supplements and reported health problems based on the limited information available within an individual AER. Specifically, AERs typically do not include details on the consumer’s medical history or other products, such as prescription drugs that the consumer may have consumed simultaneously. Details such as underlying medical conditions and allergies are requested as part of the reporting process, but FDA officials said that there is generally a lot of missing information in both voluntary and mandatory AERs. For example, age was not available in 32 percent of the dietary supplement AERs that FDA received, and pregnancy status was not available in 98 percent of the AERs involving females. Additionally, because AERs represent a reported association in time between a supplement and a health problem, FDA must first establish the likelihood that the supplement caused the health problem before considering it in the context of consumer protection actions. However, FDA officials told us that AERs may contain inconclusive and often inconsistent data from which it may be impossible to draw consistently strong inferences. For example, FDA was only able to establish a “certain” relationship between the supplement and reported health problem in 3 percent (212 of 6,307) of the AERs. For 67 percent (4,211 of 6,307) of the AERs, FDA could not determine whether the supplement caused the reported health problem because the AER contained insufficient information. Additionally, FDA officials told us that AERs may be complete but contain little evidence necessary for FDA to take action. For example, FDA needs to demonstrate a known effect from the timing and dosage of the supplement product in question. Because FDA has the burden of proof to demonstrate that a product carries a significant or unreasonable risk of injury or illness for dietary supplement products on the market prior to 1994 under current law, the limited information available to FDA based on an individual AER does not usually provide enough evidence to take action. FDA officials said it is more common to identify potential problems after analyzing a cluster of AERs, along with evidence from other sources, such as published research. For example, a subject matter expert in the Division of Dietary Supplement Programs may track a cluster of AERs separately in a spreadsheet and then forward the information to CFSAN’s Office of Compliance if the expert believes that a regulatory compliance issue or potential health issue may be present. The Office of Compliance, in turn, may initiate an advisory or regulatory action, or coordinate with FDA’s Office of Regulatory Affairs to conduct additional surveillance, such as an inspection prior to taking an advisory or regulatory action. However, accumulating enough evidence to discern a clear relationship between a specific product or ingredient and a reported health problem may take receiving a number of AERs over a span of months or years. For example, because liver-related problems associated with Hydroxycut™ were reported infrequently, it took 7 years for FDA to establish a clear relationship between the Hydroxycut™ products and liver disease. After establishing a causal relationship in 2009, FDA discussed a voluntary recall with the manufacturer of Hydroxycut™ products and issued a consumer advisory against using these products. To estimate the extent to which FDA uses AERs to initiate or support consumer protection actions, we compared firm and product names identified in both mandatory AERs and FDA actions to determine if an AER preceded a consumer protection action related to a dietary supplement. Out of the roughly 4,700 consumer protection actions related to dietary supplements that we reviewed, we found 61 actions (about 1 percent) where FDA received a mandatory AER for the same firm or product prior to taking action, as detailed in table 4, which supports FDA officials’ assessment that most AERs do not support consumer protection actions. However, we could not verify that all of the 61 actions we identified were necessarily initiated or supported by AERs because FDA does not systematically monitor this information, and officials could not verify a relationship between the AERs and the actions taken prior to the issuance of this report. Additionally, our analysis does not include situations where FDA used AERs to inform its decisions but did not take formal action. According to our analysis, we identified 47 inspections for firms also listed in an AER, representing 6 percent of all dietary supplement inspections from 2008 and 2011. Similarly, we found 3 advisory actions for firms also listed in an AER, which represent less than 1 percent of all such actions. Two of the advisory actions were warning letters for noncompliance with CGMP requirements, and another was a consumer alert on Hydroxycut™ products. We also identified 11 regulatory actions for firms also listed in an AER, representing less than 1 percent of all such actions. The regulatory actions included 8 import refusals and 3 product recalls, most of which were for Hydroxycut™ products. (See app. II for more information on consumer protection actions.) FDA officials told us they also use AERs to monitor the results of these actions. For example, if FDA issued a warning letter to a firm based on violations of CGMP requirements during an inspection, receipt of subsequent AERs may indicate that the firm has not rectified its practices. Similarly, if FDA receives an AER for a product that FDA has removed from the market by a regulatory action such as a recall, FDA’s receipt of AERs subsequent to the initial action indicates to FDA that further action may be needed. FDA has limited information on how it uses AERs to initiate and support its consumer protection actions; such information could improve FDA’s ability to assess whether the agency is using AERs to their fullest extent in this capacity and make improvements as needed. For example, prior work has shown that agencies can use data on performance to identify and mitigate problems, allocate resources, and improve effectiveness. Currently, FDA uses six separate data management systems to monitor the consumer protection actions we reviewed apart from AERs, as outlined in table 5. FDA can track each type of action in its respective data management system and tracks certain identifying information, such as firm name, across all the systems. However, FDA generally does not track AERs across these systems. Specifically, within the six data management systems we reviewed, we found that FDA only tracks the relationship between consumer complaints and AERs. Without having a mechanism to follow an AER through to other actions, FDA misses the opportunity to assess how frequently AERs initiate or support consumer protection actions and to identify ways to potentially broaden their use. For example, FDA internal guidance states that AERs can be used to demonstrate potential health risks associated with violative conditions found during other surveillance activities, such as inspections, and be part of the evidence gathered to support regulatory actions. Establishing the potential for harm is particularly important for dietary supplements because the burden of proof to demonstrate a significant or unreasonable risk of illness or injury prior to removing a product from the market through a regulatory action falls upon FDA. However, by not tracking the relationship between AERs and its other data management systems, FDA cannot systematically identify the extent to which AERS were used in this capacity. Having such information could improve FDA’s and policymakers’ abilities to make fully informed decisions about resource allocation and AERs’ future role in FDA’s consumer protection activities related to dietary supplements. Furthermore, unlike other FDA-regulated products, dietary supplement firms cannot submit mandatory AERs electronically. Rather, they must submit these AERs in hard copy by mail. FDA’s requirement that firms submit mandatory AERs in hard copy form by mail—which must be entered manually into the CAERS database by CAERS staff—may reduce the AER system’s effectiveness by diverting resources to data entry rather than analysis. According to CFSAN officials, FDA has plans to expand electronic reporting to mandatory AERs for dietary supplements in mid-2014 as part of its Safety Reporting Portal Program. However, FDA had similar plans at the time of our prior report in 2009 that have not been realized yet. Communicating effectively about risks related to dietary supplements is a key part of FDA’s mission to protect and promote public health, according to FDA’s strategic plan. Specifically, helping consumers better understand the risks and benefits of regulated products is a key part of FDA’s responsibilities, as described in the agency’s 2009 Strategic Plan for Risk Communication. This plan outlines a number of strategies to improve communication, including identifying and filling gaps in key areas of risk communication and improving the effectiveness of FDA’s website and web tools. In addition, guidance from the Office of Management and Budget and HHS, as well as our prior work, has emphasized providing greater transparency and participation of federal agencies in publishing government information online. However, unlike drugs and certain biologic products—where FDA is required to provide information about identified potential safety concerns by law—little information on potential safety concerns from dietary supplement AERs is publicly available and accessible to consumers, health care practitioners, and others. Specifically, for dietary supplement AERs, FDA generally provides information on its website on the number of mandatory AERs it received and the number of unique firm names from all mandatory AERs on a monthly basis. This aggregated information, which is located under FDA’s performance measures for CFSAN and is not directly linked with the dietary supplement web pages, does not provide any indication to consumers of potential risks associated with specific dietary supplements. In November 2012, FDA also posted information on its website about individual AERs the agency had received from January 2004 through October 2012 associated with four types of “energy drinks”—three of which were sold as dietary supplements, one as a conventional food. Individuals may also request information about adverse events related to dietary supplements by submitting a Freedom of Information Act request to FDA. According to FDA officials, there are certain disclosure provisions within the Federal Food, Drug, and Cosmetic Act that limit FDA’s ability to provide unredacted information on AERs related to dietary supplements. However, FDA provides detailed aggregated analysis, including a list of products with potential safety concerns, and raw disaggregated data on AERs related to drugs and certain biologic products on its website, even though some of the same and similar disclosure provisions may apply to such products. Specifically, in the disaggregated data on prescription drugs, FDA redacts names and other information that would identify the individual reporting the adverse event and, occasionally, information on any ongoing clinical studies or other pending actions, if applicable. The publicly available disaggregated data, including product names and health problems, are then used for health and medical research. For example, researchers have used data available from prescription drug AERs to study cardiovascular risk, bladder cancer, and tachycardia (accelerated heart rate). FDA officials told us that they use dietary supplement-related AERs to conduct safety-related research on dietary supplement ingredients, and other government researchers have used AERs in a similar capacity. According to agency officials, FDA already applies a redaction approach to prescription drug AERs that meets the nondisclosure provisions within the Federal Food, Drug, and Cosmetic Act that apply to dietary supplement AERs. An FDA official has stated publicly that the agency is exploring ways to expand the amount of publicly available information about AERs for dietary supplements. To the extent that FDA can do so under existing law—providing greater information about dietary supplement AERs to the public, such as potential safety concerns and redacted data on its website—could create opportunities for external researchers to use AERs and to improve consumer awareness and understanding of potential health problems associated with dietary supplements. FDA has partially implemented each of our four recommendations from our 2009 report on dietary supplements. Table 6 summarizes our 2009 recommendations and FDA or congressional action. FDA officials said that the agency is planning to issue final guidance and complete implementation for most of our recommendations, but they do not have a time frame for completion. Specifically, FDA officials said they plan to issue final NDI guidance, but they are still reviewing more than 7,000 distinct comments they received in response to the draft NDI guidance issued in July 2011. Furthermore, although FDA officials have indicated they intend to issue final guidance clarifying whether a liquid product may be labeled and marketed as a dietary supplement and possibly issuing similar guidance for non-liquid products, they have not indicated to us where they are in this process. Regarding our recommendation on consumer outreach, FDA officials said that assessing the effectiveness of its outreach efforts through the WebMD™ and other partnerships, consumer updates, and fact sheets on dietary supplement safety issues would require extensive consumer research, which would have to be considered in light of FDA’s limited resources and competing priorities. Consequently, regulatory uncertainty remains an issue for areas covered only by draft guidance. As we have previously reported, without final NDI guidance in place, firms may not notify FDA before marketing products with ingredients that have drastically different safety profiles than their historical use. In addition, “energy drinks”—some of which are marketed as beverages and others as dietary supplements—have raised concerns about potential health risks among consumer advocacy groups, academics, government agencies, and members of Congress. Specifically, concerns raised by these groups include the potential health risks associated with the level of caffeine in these products, the combination of caffeine and botanical ingredients with stimulant properties in these products, and their popularity with youth. Two of the four top-selling brands of energy drinks in 2012, as identified by a market research firm, were marketed as dietary supplements, while the others were marketed as beverages. As we noted in our 2009 report, this boundary matters because the safety standard for a certain ingredient in food is different than that for the same ingredient when it is used as a dietary ingredient in a dietary supplement. The differences in how products are regulated may lead to circumstances when an ingredient would not be allowed to be added to a product if it was labeled as a conventional food but would be allowed in the identical product if it was labeled as a dietary supplement. Even without final guidance to industry, the agency has issued warning letters to firms for violations related to NDI notifications and the distinction between liquid dietary supplements and conventional foods on a case-by-case basis. With clear guidance to industry about these issues, firms may have the information necessary to guide appropriate product development—including the development of safety information—and marketing, and FDA’s enforcement burden in these areas may be reduced as a result. Moreover, by assessing its outreach efforts, FDA would have information on whether its new approaches are effective, which could help FDA target future efforts, particularly in the area of increasing voluntary adverse event reporting. Because of an increase in mandatory AERs, the number of AERs FDA has received since 2008 for dietary supplements has more than doubled, and FDA has used AERs to initiate and support some consumer protection actions. However, consumers and others may not be voluntarily reporting information to FDA on all adverse events that occur, although they may be contacting poison centers about some of these events. FDA officials said that their greatest challenge to identifying potential safety concerns from AERs is the relatively small number of AERs the agency receives, and that—depending on its review of the poison center data—FDA may benefit from obtaining access to these data for analysis. According to FDA officials, negotiations to access the data are ongoing at the HHS level but, as of December 2012, the results of these negotiations were still pending. Furthermore, although FDA has used AERs for some consumer protection actions, FDA may have opportunities to expand its use of AERs. FDA does not systematically collect information on how it uses AERs; such information could improve FDA’s ability to assess whether the agency is using AERs to their fullest extent in consumer protection actions and make improvements as needed. For example, FDA guidance states that AERs can be used to demonstrate potential health risks associated with violations found during other surveillance activities, such as inspections, and be part of the evidence gathered to support regulatory actions. However, by not tracking the relationship between AERs and its other data management systems, FDA cannot identify the extent to which AERS were used in this capacity. Having such information may also improve FDA’s and policymakers’ abilities to make fully informed decisions about resource allocation and AERs’ future role in FDA’s consumer protection activities related to dietary supplements. In addition, FDA’s process for collecting and managing mandatory AERs could be more efficient because dietary supplement firms, unlike other FDA-regulated products, cannot submit mandatory AERs electronically. Rather, they must submit these AERs in hard copy by mail. FDA officials said that they have plans to expand electronic reporting; however, FDA had similar plans in place at the time we issued our 2009 report that were never realized. To the extent that FDA can do so under existing law, providing greater information about dietary supplement AERs to the public—such as identified potential safety concerns and redacted data on its website—could create opportunities for external researchers to use AERs and to improve consumer awareness and understanding of potential health problems associated with dietary supplements. Moreover, regulatory uncertainty remains an issue in two key areas of dietary supplement regulation because FDA has not set a time frame for issuing final guidance for draft NDI notification guidance and draft guidance clarifying when liquid products may be marketed as dietary supplements or conventional foods with added ingredients or for issuing similar guidance for nonliquid products. With final guidance in these areas, firms may be able to make more informed marketing and product development decisions, including the development of safety information, and ultimately FDA’s enforcement burden in these areas may be reduced as a result. To enhance FDA’s ability to use AERs and to oversee dietary supplement products, we recommend that the Secretary of the Department of Health and Human Services direct the Commissioner of FDA to take the following five actions: Continue efforts to explore all possible options to obtain poison center data if the agency determines that the data could inform FDA’s ability to identify potential safety concerns from adverse event reports for dietary supplements. Incorporate a mechanism to collect information on when AERs are used to support and inform consumer protection actions (i.e., surveillance, advisory, and regulatory actions). Implement the agency’s efforts to facilitate industry reporting of mandatory AERs electronically. Determine what additional information FDA can provide to the public about dietary supplement AERs consistent with existing law and make the information publicly available and readily accessible on its website. Establish a time frame for issuing final guidance for the draft (1) NDI guidance and (2) guidance clarifying whether a liquid product may be labeled and marketed as a dietary supplement or as a conventional food with added ingredients. We provided the Secretary of Health and Human Services with a draft of this report for review and comment. We received a written response from the Assistant Secretary for Legislation that included comments from FDA and is reprinted in appendix III. FDA generally agreed with each of the report’s recommendations. HHS also sent us technical comments on behalf of FDA, which we incorporated as appropriate. We are sending copies of this report to the Secretary of the Department of Health and Human Services, the 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 members have any questions about this report, please contact me at (202) 512-3841 or gomezj@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 objectives were to determine the (1) number of adverse event reports (AER) the Food and Drug Administration (FDA) has received since 2008, the source of these reports, and the types of products identified; (2) actions FDA has taken to ensure that firms are complying with new reporting requirements; (3) extent to which FDA is using AERs for its consumer protection actions; and (4) extent to which FDA has implemented GAO’s 2009 recommendations for enhancing FDA oversight of dietary supplements. For this report, dietary supplement refers to a product intended for consumption as defined in the Dietary Supplement Health and Education Act of 1994 (DSHEA)—products that, among other things, are intended for ingestion to supplement the diet, labeled as a dietary supplement and not represented as a conventional food or as a sole item of a meal or diet. They must also contain one or more dietary ingredients. This definition covers supplements for human consumption. We did not examine FDA’s oversight of products that would otherwise meet the definition of a dietary supplement in DSHEA but are intended for veterinary use. We also did not examine FDA’s oversight of products that would otherwise meet the definition of a dietary supplement in DSHEA but are available only by prescription. We did include products that are marketed as dietary supplements but that have been deliberately adulterated (e.g., tainted with active ingredients in FDA-approved drugs or their analogues to increase their potency). Although such products may not meet the legal definition of a dietary supplement because they contain prescription drug ingredients, we included them in our review because these products are often marketed as dietary supplements and can cause serious health problems. To determine the number of AERs that FDA received, the source of the reports, and the types of products identified, we obtained and analyzed FDA data on the number and type of AERs received since the reporting requirements went into effect in January 2008 through December 2011. Some of the data and analyses were provided by FDA in aggregate form, although FDA also provided us with disaggregate data on serious AERs. We supplemented our initial analysis with updated data on the number of AERs that FDA received between January 1 and September 30, 2012. To count the number of AERs associated with a unique firm or product, we sorted the data by firm name then manually reviewed the names to identify firms with similar or related names. We used the same approach for products, reasoning that products with similar formulations and active ingredients should be grouped together because they would cause similar reactions in consumers and may be manufactured in the same facility. In some cases, we performed additional Internet research to verify the accuracy of a match between a firm or product name. We also reviewed and analyzed data on calls about adverse events related to dietary supplements to poison centers from annual reports of the American Association of Poison Control Centers (AAPCC) from 2008 through 2010. Because poison centers classify certain dietary supplement products differently than FDA, such as including homeopathic agents as dietary supplements, we worked with AAPCC and FDA officials to make the appropriate adjustments to the data to make them comparable to FDA AERs. Similarly, because FDA officials told us that AERs are primarily associated with product use as directed, we adjusted the poison center data to include only those cases where an individual experienced an adverse reaction when using the product as directed and excluded reports resulting from misuse, abuse, or accidental ingestion. To assess the reliability of these data, we reviewed related documentation, reviewed internal controls, and worked with agency or AAPCC officials to identify any data problems. For the FDA data on serious AERs, which we received in disaggregate form, we examined the data to identify obvious errors or inconsistencies. We also reviewed FDA’s laws, rules, and regulations relevant to collecting and maintaining AERs. We determined the data to be sufficiently reliable for the purposes of this report. To determine actions FDA has taken to ensure that firms are complying with new reporting requirements, we reviewed FDA’s procedures, planning documents, and guidance and obtained and analyzed data on FDA’s oversight activities, such as inspections, advisory, and regulatory actions, to identify which of these actions were related to monitoring or enforcing firms’ compliance. Specifically, we obtained aggregate data on the number of dietary supplement inspections from January 1, 2008, through September 30, 2012 and analyzed record-level data on the type and results of dietary supplement inspections FDA conducted from 2008 through 2011 from FDA’s Field Accomplishments and Compliance Tracking System. To determine the number of AER violations observed during inspections, we obtained and analyzed aggregate data from FDA’s Turbo EIR system on inspection observations from fiscal year 2008 through fiscal year 2012. To determine the number of advisory and regulatory actions related to AER violations from January 1, 2008 through December 31, 2011, we obtained and analyzed data and documents on warning letters, seizures, and injunctions from FDA’s Compliance Management System and FDA’s online warning letter database; Class I recalls from FDA’s Recall Enterprise System and other safety-related recalls identified from press releases on FDA’s Recalls - Health Fraud web page and Recalls, Market Withdrawals, and Safety Alerts web page; import refusals from FDA’s Operational and Administrative System for Import Support; and prosecutions with charges filed, convictions, or settlements reached in FDA’s Automated Investigative Management System. We also reviewed individual firm inspection reports for examples of specific observations found during dietary supplement inspections, and accompanied FDA investigators on an inspection of a dietary supplement manufacturing facility. To assess the reliability of data supporting this objective, we reviewed related documentation, internal controls, examined the data to identify obvious errors or inconsistencies, traced data back to source documents, and identified and removed data that were outside the scope of our review, such as data related to products for animal or prescription uses, or data that did not meet the definition of dietary supplement used for this report, as described above. We determined the data to be sufficiently reliable for the purposes of this report. To determine the extent to which FDA is using AERs to initiate and support its consumer protection actions, we matched firm and product names from mandatory AERs against firm and product names in the following FDA consumer protection actions from January 2008 through December 2011: inspections, consumer alerts, industry advisories, warning letters, seizures and injunctions, import refusals, safety-related recalls, and prosecutions. The matching process was necessary because FDA does not track how it uses AERs to initiate or support consumer protection actions across its other data systems. Because CFSAN officials told us that product and firm names are not standardized within the CFSAN Adverse Event Reporting System (CAERS) or across FDA’s systems, we used statistical software to build wild-card searches to identify potential matches and then reviewed each potential match to confirm or reject potential matches. Specifically, we used an analytical software function that measures spelling differences between words to determine the likelihood that firm and product names from two data sets matched and to generate possible matches between AERs and actions. The statistical software returns a numeric value indicating how closely related the names are. After reviewing the initial results, we established a threshold for matching that gave us confidence we were capturing most of the potential matches and excluding those that were definitely not a match. The matches were then manually reviewed to confirm or reject potential matches. For matched records, we determined whether an AER was received prior to the consumer protection action, as an indicator that the AER may have contributed to FDA’s decision to take action. For matched records, we tabulated both the number of AERs that contributed to each action, and the number of actions that matched AERs. We verified the appropriateness of this approach with FDA officials prior to conducting the analysis and provided a list of matches to FDA for their verification. We also reviewed FDA’s guidance and procedures relevant to using AERs to initiate or support surveillance, advisory, and regulatory actions. To determine the extent to which FDA has implemented GAO’s 2009 recommendations for enhancing FDA oversight of dietary supplements, we reviewed FDA’s laws, planning documents, and guidance. We reviewed proposed legislation to expand FDA’s oversight authority for dietary supplements. We also obtained data on the extent to which FDA’s web-based consumer outreach initiatives were distributed. In addition, to address all of our objectives, we reviewed relevant studies related to dietary supplements, adverse event reporting, industry compliance, and using poison center data for public health surveillance, among others. We reviewed the methodology for each of these studies and assessed them for reasonableness in accordance with our objectives. We also interviewed officials from several FDA offices, including FDA’s Center for Food Safety and Applied Nutrition (CFSAN) who receive and analyze AERs, officials from FDA’s Division of Dietary Supplements Program, officials from the Office of Regulatory Affairs familiar with FDA’s field operations and regulatory actions related to dietary supplements, and officials from the Center for Drug Evaluation and Research. We interviewed a wide range of stakeholders, including officials from federal agencies, industry and trade organizations, and consumer advocacy groups. At the federal level outside of FDA, we met with officials from the Department of Health and Human Services’ (HHS) Centers for Disease Control and Prevention, the National Institutes of Health, and the Federal Trade Commission. At the industry level, we spoke with representatives from the American Herbal Products Association, the Council for Responsible Nutrition, and the Natural Products Association. At the consumer advocacy level, we met with representatives from the Center for Science in the Public Interest, Consumers Union, and Public Citizen. We also spoke with representatives from the American Association of Poison Control Centers. We conducted this performance audit from December 2011 to March 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix combines data collected during this review with data from our prior report to provide additional detail on FDA’s actions to identify and respond to safety concerns related to dietary supplements. FDA actions to identify safety concerns related to dietary supplements include receiving and analyzing adverse event reports and consumer complaints and conducting inspections. Incorporating data from our prior report, figure 7 shows the number of dietary supplement-related AERs entered into FDA’s database from January 1, 2003, through September 30, 2012. As shown in 2008, mandatory reporting had an immediate impact on the number of dietary supplement-related AERs FDA received. Incorporating data from our prior report, figure 8 shows the number of dietary supplement-related consumer complaints with adverse event results or reported symptoms FDA received from January 1, 2002, through December 31, 2011. Consumer complaints are not limited to adverse events. For example, consumers may report a complaint if one or more pills in a product are discolored. Incorporating data from our prior report, figure 9 shows the number of dietary supplement inspections conducted by FDA or its state partners and the proportion of these inspections where the investigator identified problems from January 1, 2002, through December 31, 2011. For our determination for whether FDA identified a problem during an inspection, we included all inspections where the district determined that: (1) official action is indicated, (2) voluntary action is indicated, and (3) the case should be referred to CFSAN’s Office of Compliance. We also included all cases where the investigator completed an inspectional observation form—a form used by FDA to document concerns observed during inspections. The items listed on these forms are preliminary and vary in severity. Each inspection was counted only once. Figure 10 shows the type of dietary supplement inspections conducted from January 1, 2008, through December 31, 2011. Complaint inspections are conducted to investigate consumer complaints about a firm. Follow-up inspections are conducted to assess a firm’s progress after an advisory or regulatory action such as a warning letter or recall. Compliance inspections are “for-cause” inspections to investigate specific compliance issues. Surveillance inspections are routine inspections that generally assess whether a firm is following dietary supplement good manufacturing practices, as applicable. An inspection may include product examinations, sampling and testing, as well as the inspection of the firm and facility involved with dietary supplements, according to FDA officials. FDA actions to respond to safety concerns related to dietary supplements include issuing warning letters to dietary supplement firms, working with firms on recalls, and refusing imports. Incorporating data from our prior report, figure 11 shows the number of warning letters related to dietary supplements FDA issued from January 1, 2002, through December 31, 2011. The relatively low number of letters issued in 2007 is in part due to the timing of the letters—if we calculated the number of letters issued by fiscal year, the number would be 43. Figure 12 shows the number of Class I, health fraud, and other safety- related voluntary recalls related to dietary supplements from January 1, 2008, through December 31, 2011. We focused on these three types of recalls because FDA determined they (1) are the most likely to cause a serious health problem, (2) could cause a serious health problem, or (3) considered them to be of sufficient concern to issue a safety alert press release. Figure 13 shows the number of import refusals by product type from January 1, 2008, through December 31, 2011. In addition to the individual named above, Anne K. Johnson, Assistant Director; Robin Ghertner; Cathy Hurley; Esther Toledo; and Lisa van Arsdale made key contributions to this report. Important contributions were also made by Kevin Bray, Michele Fejfar, Dan C. Royer, Carol Herrnstadt Shulman, and Kiki Theodoropoulos. | Dietary supplements, such as vitamins and botanical products, are a multibillion dollar industry; national data show that over half of all U.S. adults consume them. FDA regulates dietary supplements and generally relies on postmarket surveillance, such as monitoring AERs, to identify potential concerns. Since December 2007, firms receiving a serious AER have had to report on it to FDA within 15 days. In January 2009, GAO reported that FDA had taken several steps to implement AER requirements and had recommended actions to help FDA identify and act on safety concerns for dietary supplements. GAO was asked to examine FDA's use of AERs in overseeing dietary supplements. This report examines the (1) number of AERs FDA has received since 2008, their source, and types of products identified; (2) actions FDA has taken to ensure that firms are complying with AER requirements; (3) extent to which FDA is using AERs to initiate and support its consumer protection efforts; and (4) extent to which FDA has implemented GAO's 2009 recommendations. GAO analyzed FDA data, reviewed FDA guidance, and interviewed FDA officials. From 2008 through 2011, the Department of Health and Human Services' Food and Drug Administration (FDA) received 6,307 reports of health problems--adverse event reports (AER)--for dietary supplements; 71 percent came from industry as serious adverse events as required by law, and most of these AERs were linked with supplements containing a combination of ingredients, such as vitamins and minerals or were otherwise not classified within FDA's product categories. However, FDA may not be receiving information on all adverse events because consumers and others may not be voluntarily reporting these events to FDA, although they may be contacting poison centers about some of these events. From 2008 to 2010, these centers received over 1,000 more reports of adverse events linked to dietary supplements than did FDA for the same period. FDA officials said that they are interested in determining whether the poison center data could be useful for their analysis and have held discussions with American Association of Poison Control Centers representatives, but cost is a factor. To help ensure firms are complying with AER requirements (i.e., submitting serious AERs, maintaining AER records, and including firms' contact information on product labels), FDA increased its inspections of supplement firms and took some actions against noncompliant firms. Specifically, FDA increased firm inspections from 120 in 2008 to 410 from January 1 to September 30, 2012. Over this period, FDA took the following actions: 3 warning letters, 1 injunction, and 15 import refusals related to AER violations, such as not including contact information on the product label or submitting a serious AER. FDA has used AERs for some consumer protection actions (e.g., inspections and warning letters) but may be able to expand their use. FDA officials said that most AERs do not initiate or support such actions because it is difficult to establish causality between the product and the health problem based on the limited information in an AER. However, FDA does not systematically collect information on how it uses AERs for consumer protection actions; by collecting this information, it may be able to assess whether AERs are being used to their fullest extent. In addition, FDA is not required to provide information to the public about potential safety concerns from supplement AERs as it does for drugs. Making such information public, if consistent with disclosure provisions in existing law, could expand FDA's use of AERs and improve consumer awareness and understanding of potential health events associated with dietary supplements. FDA has partially implemented all of GAO's 2009 recommendations, such as issuing guidance for new dietary ingredients, clarifying the boundary between dietary supplements and conventional foods, and expanding partnerships to improve consumer understanding. Specifically, FDA developed draft guidance in 2009, 2011, and 2012 to address three GAO recommendations about dietary supplement oversight and formed new partnerships to conduct consumer outreach. However, FDA has not issued final guidance in two cases. FDA officials said that they plan to complete implementation, but they have provided no time frame to do so. With final guidance in place, firms may be able to make more informed product development and marketing decisions, which could ultimately reduce FDA's enforcement burden in these areas. GAO recommends, among other things, that FDA explore options to obtain poison center data, if determined to be useful; collect information on how it uses AERs; provide more information to the public about AERs; and establish a time frame to finalize guidance related to GAO's 2009 recommendations. FDA generally concurred with each of GAO's recommendations. |
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